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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2004

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to ______________

Commission file number 333-102511

BRAND INTERMEDIATE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
13-3909682
(State or other jurisdiction of incorporation or organization)
(I.R.S. employer identification no.)
   
15450 South Outer 40, #270, Chesterfield, MO
63017
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (636) 519-1000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: o 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: o No: x

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock as of the latest practicable date.

Class of Common Stock
Outstanding at October 31, 2004
$.01 Par Value
1,000 shares


  
   
 

INDEX


     
Page
PART I
-
FINANCIAL INFORMATION
  
       
      Item 1.
  
Financial Statements
  
   
Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2003 and 2004
3
       
   
Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004
4-5
       
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2004
6-7
       
   
Notes to the Consolidated Financial Statements
8-20
       
      Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21-25
       
      Item 3.
  
Quantitative and Qualitative Disclosures About Market Risk
25
       
      Item 4.
  
Controls and Procedures
25
       
       
PART II
-
OTHER INFORMATION
  
       
      Item 1.
  
Legal Proceedings
26
       
      Item 2.
  
Changes in Securities and Use of Proceeds
26
       
      Item 3.
  
Defaults Upon Senior Securities
26
       
     Item 4.
  
Submission of Matters to a Vote of Security Holders
26
       
      Item 5.
  
Other Information
26
       
      Item 6.
  
Exhibits and Reports on Form 8-K
26
       
       
SIGNATURES
27
   

  
  -2-  
Index


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands)
(Unaudited)

   
For the Three Months Ended September 30,
  
For the Nine Months Ended September 30,
  
     
2003
    
2004
    
2003
    
2004
  
Revenues:
                          
Labor
  
$
61,307
  
$
54,587
  
$
206,627
  
$
193,171
  
Equipment rental
    
16,573
    
15,148
    
54,504
    
48,674
  
Equipment sales
    
1,647
    
1,695
    
5,079
    
4,709
  
Total revenues
    
79,527
  
$
71,430
    
266,210
    
246,554
  
Operating expenses:
                          
Labor
    
50,880
    
44,501
    
170,176
    
158,286
  
Equipment rental
    
8,185
    
6,672
    
28,206
    
20,686
  
Equipment sales
    
1,249
    
1,133
    
3,573
    
3,201
  
Divisional operating expenses
    
3,662
    
4,089
    
11,776
    
12,433
  
Total operating expenses
    
63,976
    
56,395
    
213,731
    
194,606
  
Gross profit
    
15,551
    
15,035
    
52,479
    
51,948
  
Selling and administrative expenses
    
10,586
    
10,998
    
33,655
    
33,728
  
Operating income
    
4,965
    
4,037
    
18,824
    
18,220
  
Interest expense
    
8,180
    
8,804
    
24,322
    
25,209
  
Interest income
    
(93
)
  
(87
)
  
(198
)
  
(188
)
Loss before benefit for income tax
    
(3,122
)
  
(4,680
)
  
(5,300
)
  
(6,801
)
Income tax benefit
    
(1,062
)
  
(1,549
)
  
(1,802
)
  
(1,711
)
Net loss
  
$
(2,060
)
$
(3,131
)
$
(3,498
)
$
(5,090
)

The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements.

 
  -3-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)

   
December 31,
  
September 30,
 
   
2003
  
2004
  
       
(unaudited)
  
ASSETS
              
               
CURRENT ASSETS:
              
Cash and cash equivalents
 
$
23,100
  
$
25,452
  
Trade accounts receivable, net of allowance for doubtful accounts of $1,377 in 2003 and $1,561 in 2004
    
54,005
    
48,448
  
Accrued revenue
    
3,137
    
5,642
  
Notes receivable
   
621
    
176
  
Other current assets
   
9,421
    
6,924
  
               
Total current assets
   
90,284
    
86,642
  
               
PROPERTY AND EQUIPMENT:
              
Land
   
1,237
    
1,258
  
Buildings and leasehold improvements
    
3,354
    
3,473
  
Vehicles and other equipment
   
25,736
    
27,250
  
Scaffolding equipment
   
188,489
    
196,102
  
               
Total property and equipment, at cost
   
218,816
    
228,083
  
               
Less-Accumulated depreciation and amortization
   
39,857
    
56,658
  
               
Total property and equipment, net
   
178,959
    
171,425
  
               
GOODWILL
    
248,347
    
248,521
  
               
CUSTOMER RELATIONSHIPS
    
48,286
    
44,917
  
               
OTHER ASSETS AND INTANGIBLES
    
24,783
    
24,928
  
               
TOTAL ASSETS
  
$
590,659
  
$
576,433
  

(Continued on following page)

 
  -4-  
Index

 BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands except share and per share amounts)


   
December 31,
  
September 30,
  
   
2003
  
2004
  
       
(unaudited)
  
LIABILITIES AND STOCKHOLDER’S EQUITY
             
               
CURRENT LIABILITIES:
              
Current maturities of long-term debt
 
$
1,250
  
$
1,047
  
Notes payable and capital lease obligations, current portion
   
660
    
507
  
Accounts payable and accrued expenses
    
33,302
    
41,508
  
Deferred revenue
    
1,448
    
1,525
  
               
Total current liabilities
   
36,660
    
44,587
  
               
LONG-TERM DEBT
   
305,282
    
289,137
  
               
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
   
165
    
421
  
               
DEFERRED INCOME TAXES
   
29,173
    
27,439
  
               
               
STOCKHOLDER’S EQUITY:
              
Common stock, $0.01 par value, 1,000 shares authorized, issued and outstanding
    
-
    
-
  
Paid-in capital
   
224,212
    
224,357
  
Cumulative translation adjustment
   
2,853
    
3,268
  
Accumulated deficit
   
(7,686
)
  
(12,776
)
               
Total stockholder’s equity
   
219,379
    
214,849
  
               
Total liabilities and stockholder’s equity
 
$
590,659
  
$
576,433
  
               

The accompanying notes to the consolidated financial statements are an integral part of the consolidated balance sheets.

 
  -5-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
For the Nine Months Ended September 30,
  
   
2003
  
2004
  
           
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net loss
 
$
(3,498
)
$
(5,090
)
Adjustments to reconcile net loss to net
cash from operating activities:
              
Depreciation and amortization
   
30,069
    
21,440
  
Deferred income taxes
    
(1,802
)
  
(1,734
)
Non-cash interest
    
4,495
    
5,522
  
Non-cash compensation
    
-
    
145
  
Gain on sale of scaffolding equipment
    
(525
)
  
(831
)
Changes in operating assets and liabilities:
              
Trade accounts receivable, net
   
6,213
    
5,704
  
Accrued revenue
    
(2,502
)
  
(2,505
)
Notes receivable
   
(31
)
  
463
  
Other current assets
    
5,221
    
2,497
  
Accounts payable and accrued expenses
   
(1,106
)
  
8,206
  
Deferred revenue
    
38
    
77
  
Other
   
54
    
17
  
Net cash flows from operating activities
   
36,626
    
33,911
  
               
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Purchase of property and equipment
   
(9,446
)
  
(9,920
)
Proceeds from sale of property and equipment
    
1,263
    
1,624
  
Payments for acquisitions
    
-
    
(951
)
Net cash flows from investing activities
   
(8,183
)
  
(9,247
)
               
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Repayments of long-term debt
    
(975
)
  
(20,836
)
Payments of deferred financing fees
    
-
    
(927
)
Payments on capital lease obligations
    
(1,261
)
  
(549
)
Net cash flows from financing activities
   
(2,236
)
  
(22,312
)
               
NET INCREASE IN CASH
AND CASH EQUIVALENTS
    
26,207
    
2,352
  
               
CASH AND CASH EQUIVALENTS,
beginning of period
   
4,817
    
23,100
  
               
CASH AND CASH EQUIVALENTS, end of period
 
$
31,024
  
$
25,452
  
(Continued on following page)

 
  -6-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

   
For the Nine Months Ended September 30,
  
   
2003
  
2004
  
SUPPLEMENTAL CASH FLOW DISCLOSURES:
              
Interest paid
  
$
15,597
  
$
14,645
  
Income taxes paid
    
1,179
    
1,977
  
NON-CASH TRANSACTIONS:
              
Capital Lease obligations
    
-
    
259
  
Note payable issued for acquisition
    
-
    
393
  





The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements.

 
  -7-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES

Notes to the Consolidated Financial Statements
(Unaudited)

The accompanying unaudited interim financial statements included herein for the periods ended September 30, 2003 and 2004 have been prepared by the Company. In the opinion of management, all adjustments have been made which are of a normal recurring nature necessary to present fairly the Company’s financial position as of September 30, 2004, and the results of operations and cash flows for the three months and nine months ended September 30, 2003 and 2004. Certain information and footnote disclosures have been condensed or omitted for these periods. The results for interim periods are not necessarily indicative of results for the entire year. Reference is made to the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission.

1. Organization and Business

Brand Intermediate Holdings, Inc. and its subsidiaries ("Brand") are 100% owned by Brand Holdings LLC (the "LLC"). As of September 30, 2004, the voting equity interests of the LLC are owned 74.2% by J.P. Morgan Partners and its affiliates ("JPMP") and 25.8% by other equity investors on a fully diluted basis. Brand Services, Inc. is a wholly owned subsidiary of Brand Intermediate Holdings, Inc. All references to "the Company", "we", "us", or "our" mean Brand Intermediate Holdings, Inc. and its subsidiaries.

The Company operates in one segment and provides scaffolding services primarily to refining, petrochemical, chemical, utility and pulp and paper industries, and to a lesser extent general commercial clients. Scaffolding services are typically provided in connection with periodic, routine maintenance of refineries, chemical plants and utilities, as well as for new construction and renovation projects. The Company provides personnel to erect and dismantle scaffolding structures, transport scaffolding to project sites and supervise and manage such activities. In addition, the Company rents and occasionally sells scaffolding that is classified as property and equipment on the consolidated balance sheets. The Company maintains a substantial inventory of scaffolding in the United States and Canada.

2. Summary of Significant Accounting Policies

The accompanying financial statements are prepared on a consolidated basis and include those assets, liabilities, revenues and expenses directly attributable to the operations of the Company. All significant intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. Stock Based Employee Compensation

Effective January 1, 2004, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". The Company selected the modified prospective transition method under the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which requires expensing options prospectively, beginning in the year of adoption. The Company expensed $56,000 and $145,000, respectively, for the three and nine-month periods ended September 30, 2004, recorded in the caption Selling and Administrative expenses.

Prior to 2004, the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation expense was reflected in 2003, as all options granted under those plans had an exercise price greater than the fair market value of the underlying equity on the date of grant.

 
  -8-  
Index


The following table illustrates the effect on net loss if the fair value based method had been applied to all outstanding and unvested awards in each period (in thousands):

   
Three Months Ended September 30, 2003 (unaudited)
 
Three Months Ended September 30, 2004 (unaudited)
 
Nine Months Ended September 30, 2003 (unaudited)
  
Nine Months Ended September 30, 2004 (unaudited)
 
Net loss as reported
  
$
(2,060
)
$
(3,131
)
$
(3,498
)
$
(5,090
)
Add: stock based compensation expense included in reported net loss
    
-
    
56
    
-
    
145
  
                           
Less: stock-based compensation expense determined under fair value method for all awards
    
84
    
56
    
708
    
145
  
Pro forma net loss
  
$
(2,144
)
$
(3,131
)
$
(4,206
)
$
(5,090
)

4. Accrued Revenue

Accrued revenue represents work performed which either due to billing cycles, contract stipulations or lacking contractual documentation requirements, could not be billed. Substantially all unbilled amounts are expected to be billed and collected within one year.

5. Debt and Borrowing Arrangements

At December 31, 2003 and September 30, 2004, long-term debt consisted of the following (in thousands):


       
September 30,
  
   
December 31,
  
2004
  
   
2003
  
(unaudited)
  
Credit Facility, due 2009
  
$
123,713
  
$
102,877
  
12% Senior Subordinated Notes, due 2012
    
150,000
    
150,000
  
13% Intermediate Subordinated Notes, due 2013
    
40,638
    
44,786
  
     
314,351
    
297,663
  
Less
              
Current portion
    
1,250
    
1,047
  
Unamortized discount
    
7,819
    
7,479
  
   
$
305,282
  
$
289,137
  

The Credit Facility contains financial and operating covenants, including among other things, that the Company maintain certain financial ratios, and imposes limitations on the Company’s ability to make capital expenditures, to incur indebtedness, and to pay dividends. The Company obtained a waiver from the lenders under the Credit Facility from compliance with the minimum interest coverage ratio and the maximum leverage ratio covenants for the period ended September 30, 2004; absent such waiver, the Company would have violated the covenants for this period. The Credit Facility was amended effective November 9, 2004, to reset the minimum interest coverage ratio and maximum leverage ratio covenants through December 31, 2006, and to allow the Company to borrow an additional $25 million in term debt to be used to finance a potential acquisition, if necessary. The Company projects that it will be in complian ce with the reset covenants.

For the three months and nine months ended September 30, 2003, the weighted-average interest rate of loans outstanding under the Credit Facility was 5.1% and 5.3%, respectively. For the three months and nine months ended September 30, 2004, the weighted-average interest rate of loans outstanding under the Credit Facility was 4.8% and 4.6%, respectively. The Credit Facility was amended on February 3, 2004. The amendment added an additional $15 million letter of credit facility to total $35 million and lowered the interest rate margin on the term debt by 0.75%.

As of September 30, 2004, JPMP holds $19.2 million of the $44.8 million Intermediate Subordinated Notes.
 

 
  -9-  
Index


6. Deferred Revenue

Deferred revenue represents amounts collected from customers at a faster rate than work was performed on these contracts. Substantially all of the costs related to these amounts will be incurred within one year.
 
7. Commitments and Contingencies

In the ordinary course of conducting its business, the Company becomes involved in various pending claims and lawsuits. These primarily relate to employee matters. The outcome of these matters is not presently determinable. However, in the opinion of management, based on the advice of legal counsel, the resolution of these matters is not anticipated to have a material adverse effect on the financial position or results of operations of the Company.

8. Comprehensive Loss

For the three months ended September 30, 2003 and 2004, comprehensive loss was $2.0 million and $2.3 million, respectively. For the nine months ended September 30, 2003 and 2004, comprehensive loss was $1.3 million and $4.7 million, respectively. The difference between comprehensive loss and net loss is entirely related to currency translation.

9. Income Taxes

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating losses. For the nine months ended September 30, 2004, the effective tax rate benefit of 25% is less than the federal statutory rate of 35% primarily due to permanent tax items, the largest of which is a portion of the interest expense on the 13% Intermediate Notes which is not deductible for tax purposes. For the three months ended September 30, 2004, the Company adjusted its effective tax rate from an annualized benefit of 8% to an annualized benefit of 25% due to a revision in the 2004 forecast. This resulted in additional benefit of approximately $0.4 million for the three month period ended September 30, 2004. For the nine months ended September 30, 2004, the benefit for income taxes is prima rily attributable to deferred income taxes.

10. Acquisitions

On June 1, 2004, the Company purchased the assets of Levitator, Inc., a commercial scaffolding company, for an aggregate purchase price of approximately $1.0 million in cash and a $0.4 million note payable. The price was allocated to the assets and liabilities assumed, based on relative fair values. In connection with the acquisition, the Company recorded goodwill of approximately $0.2 million based upon the allocation of the purchase price. The acquisition was accounted for using the purchase method of accounting, and accordingly has been included in the financial statements from the date of the acquisition.

11. Supplemental Consolidating Information
 
The 12% Senior Notes, which are an obligation of Brand Services, Inc. are fully and unconditionally guaranteed on a senior subordinated, joint, and several basis by the other domestic subsidiaries of Brand Intermediate Holdings (which are all 100% owned by Brand Intermediate Holdings) and by Brand Intermediate Holdings, Inc. Supplemental consolidating information of Brand Intermediate Holdings, Inc., Brand Services, Inc., the guarantor subsidiaries, and its foreign non-guarantor subsidiary is presented below. Investments in subsidiaries are presented on the equity method of accounting. Separate financial statements are not provided because management has concluded that the summarized financial information below provides sufficient information to allow investors to separately determine the nature of the assets held by and the operations of the guarantor and non-guarantor subsidiaries.
 

 
  -10-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Brand Intermediate Holdings, Inc.
Condensed Consolidating Balance Sheet
December 31, 2003
 
Assets
  
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Current Assets:
                                      
Cash and cash equivalents
  
$
21,154
  
$
-
  
$
2,236
  
$
-
  
$
(290
)
$
23,100
  
Trade accounts receivable
    
-
    
52,383
    
1,622
    
-
    
-
    
54,005
  
Accrued revenue
    
-
    
3,102
    
35
    
-
    
-
    
3,137
  
Notes receivable, current portion
    
27
    
594
    
-
    
-
    
-
    
621
  
Other current assets
    
2,491
    
6,672
    
608
    
-
    
(350
)
  
9,421
  
Due from affiliates
    
44,139
    
1,409
    
207
    
-
    
(45,755
)
  
-
  
Total current assets
    
67,811
    
64,160
    
4,708
    
-
    
(46,395
)
  
90,284
  
Property and Equipment:
                                      
Land
    
-
    
855
    
382
    
-
    
-
    
1,237
  
Buildings and leasehold improvements
    
11
    
2,953
    
390
    
-
    
-
    
3,354
  
Vehicles and other equipment
    
6,202
    
15,618
    
3,916
    
-
    
-
    
25,736
  
Scaffolding equipment
    
174,752
    
-
    
13,737
    
-
    
-
    
188,489
  
Total property and equipment, at cost
    
180,965
    
19,426
    
18,425
    
-
    
-
    
218,816
  
Less accumulated depreciation and
amortization
    
26,066
    
8,681
    
5,110
    
-
    
-
    
39,857
  
Total property and equipment, net
    
154,899
    
10,745
    
13,315
    
-
    
-
    
178,959
  
Due from affiliates
    
9,750
    
-
    
-
    
40,894
    
(50,644
)
  
-
  
Deferred tax asset
    
-
    
-
    
-
    
2,375
    
(2,375
)
  
-
  
Investment in subsidiaries
    
-
    
-
    
-
    
211,900
    
(211,900
)
  
-
  
Goodwill
    
248,347
    
-
    
-
    
-
    
-
    
248,347
  
Customer relationships
    
48,286
    
-
    
-
    
-
    
-
    
48,286
  
Intangibles and other assets
    
23,828
    
-
    
-
    
955
    
-
    
24,783
  
Total assets
  
$
552,921
  
$
74,905
  
$
18,023
  
$
256,124
  
$
(311,314
)
$
590,659
  
 

 
  -11-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Balance Sheet
  
December 31, 2003 (continued)
  
Liabilities and Stockholder’s Equity
(Deficit)
    
Brand Services, Inc.
Guarantor Subsidiaries
Non-Guarantor Subsidiary
Brand Intermediate Holdings, Inc.
Adjustments and Eliminations
Brand Intermediate Holdings, Inc. Consolidated
  
Current Liabilities:
                                      
Current maturities of long-term debt
  
$
1,250
  
$
-
  
$
-
  
$
-
  
$
-
  
$
1,250
  
Notes payable and capital lease
obligations, current portion
    
660
    
-
    
-
    
-
    
-
    
660
  
Accounts payable and accrued expenses
    
26,075
    
7,553
    
314
    
-
    
(640
)
  
33,302
  
Deferred revenue
    
-
    
1,448
    
-
    
-
    
-
    
1,448
  
Due to affiliates
    
1,409
    
37,519
    
6,827
    
-
    
(45,755
)
  
-
  
Total current liabilities
    
29,394
    
46,520
    
7,141
    
-
    
(46,395
)
  
36,660
  
Long-term debt
    
268,537
    
-
    
-
    
36,745
    
-
    
305,282
  
Notes payable and capital lease obligations
    
165
    
-
    
-
    
-
    
-
    
165
  
Deferred income taxes
    
29,076
    
-
    
2,472
    
-
    
(2,375
)
  
29,173
  
Due to affiliates
    
40,894
    
-
    
9,750
    
-
    
(50,644
)
  
-
  
                                       
Total stockholder’s equity (deficit)
    
184,855
    
28,385
    
(1,340
)
  
219,379
    
(211,900
)
  
219,379
  
Total liabilities and stockholder’s equity
 
$
552,921
  
$
74,905
  
$
18,023
  
$
256,124
  
$
(311,314
)
$
590,659
  


 
  -12-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Balance Sheet
  
September 30, 2004
  
   
Assets
  
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Current Assets:
                                      
Cash and cash equivalents
  
$
24,457
  
$
-
  
$
1,093
  
$
-
  
$
(98
)
$
25,452
  
Trade accounts receivable
    
-
    
44,979
    
3,469
    
-
    
-
    
48,448
  
Accrued revenue
    
-
    
5,227
    
415
    
-
    
-
    
5,642
  
Notes receivable, current portion
    
15
    
161
    
-
    
-
    
-
    
176
  
Other current assets
    
959
    
5,639
    
326
    
-
    
-
    
6,924
  
Due from affiliates
    
26,435
    
1,605
    
-
    
-
    
(28,040
)
  
-
  
Total current assets
    
51,866
    
57,611
    
5,303
    
-
    
(28,138
)
  
86,642
  
Property and Equipment:
                                      
Land
    
-
    
866
    
392
    
-
    
-
    
1,258
  
Buildings and leasehold improvements
    
13
    
3,060
    
400
    
-
    
-
    
3,473
  
Vehicles and other equipment
    
6,404
    
16,695
    
4,151
    
-
    
-
    
27,250
  
Scaffolding equipment
    
181,575
    
-
    
14,527
    
-
    
-
    
196,102
  
Total property and equipment, at cost
    
187,992
    
20,621
    
19,470
    
-
    
-
    
228,083
  
Less accumulated depreciation and amortization
    
39,911
    
10,705
    
6,042
    
-
    
-
    
56,658
  
Total property and equipment, net
    
148,081
    
9,916
    
13,428
    
-
    
-
    
171,425
  
Due from affiliates
    
9,750
    
-
    
-
    
45,221
    
(54,971
)
  
-
  
Deferred tax asset
    
-
    
-
    
-
    
2,375
    
(2,375
)
  
-
  
Investment in subsidiaries
    
-
    
-
    
-
    
207,733
    
(207,733
)
  
-
  
Goodwill
    
248,521
    
-
    
-
    
-
    
-
    
248,521
  
Customer relationships
    
44,917
    
-
    
-
    
-
    
-
    
44,917
  
Intangibles and other assets
    
24,007
    
-
    
-
    
921
    
-
    
24,928
  
Total assets
  
$
527,142
  
$
67,527
  
$
18,731
  
$
256,250
  
$
(293,217
)
$
576,433
  
 

 
  -13-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Balance Sheet
  
September 30, 2004 (Continued)
  
   
Liabilities and Stockholder’s Equity (Deficit)
  
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Current Liabilities:
                                      
Current maturities of long-term debt
  
$
1,047
  
$
-
  
$
-
  
$
-
  
$
-
  
$
1,047
  
Notes payable and capital lease obligations, current portion
    
423
    
84
    
-
    
-
    
-
    
507
  
Accounts payable and accrued expenses
    
32,265
    
8,412
    
929
    
-
    
(98
)
  
41,508
  
Deferred revenue
    
-
    
1,525
    
-
    
-
    
-
    
1,525
  
Due to affiliates
    
1,605
    
20,834
    
5,601
    
-
    
(28,040
)
  
-
  
Total current liabilities
    
35,340
    
30,855
    
6,530
    
-
    
(28,138
)
  
44,587
  
Long-term debt
    
248,100
    
-
    
-
    
41,037
    
-
    
289,137
  
Notes payable and capital lease obligations
    
308
    
113
    
-
    
-
    
-
    
421
  
Deferred income taxes
    
26,896
    
4
    
2,914
    
-
    
(2,375
)
  
27,439
  
Due to affiliates
    
45,221
    
-
    
9,750
    
-
    
(54,971
)
  
-
  
                                       
Total stockholder’s equity (deficit)
    
171,277
    
36,555
    
(463
)
  
215,213
    
(207,733
)
  
214,849
  
Total liabilities and stockholder’s equity
 
$
527,142
  
$
67,527
  
$
18,731
  
$
256,250
  
$
(293,217
)
$
576,433
  


 
  -14-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Operations
  
For the Three Months Ended September 30, 2003
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Revenue:
                                      
Labor
  
$
-
  
$
58,394
  
$
2,913
  
$
-
  
$
-
  
$
61,307
  
Equipment rental
    
-
    
15,987
    
586
    
-
    
-
    
16,573
  
Equipment sales
    
-
    
1,991
    
15
    
-
    
(359
)
  
1,647
  
Intercompany revenue
    
3,297
    
22
    
-
    
-
    
(3,319
)
  
-
  
Total revenues
    
3,297
    
76,394
    
3,514
    
-
    
(3,678
)
  
79,527
  
Operating expenses:
                                      
Labor
    
-
    
48,608
    
2,575
    
-
    
(303
)
  
50,880
  
Equipment rental
    
6,693
    
1,093
    
399
    
-
    
-
    
8,185
  
Equipment sales
    
-
    
1,796
    
9
    
-
    
(556
)
  
1,249
  
Divisional operating expenses
    
55
    
3,490
    
117
    
-
    
-
    
3,662
  
Intercompany operating expenses
    
-
    
3,297
    
22
    
-
    
(3,319
)
  
-
  
Total operating expenses
    
6,748
    
58,284
    
3,122
    
-
    
(4,178
)
  
63,976
  
Gross profit
    
(3,451
)
  
18,110
    
392
    
-
    
500
    
15,551
  
Selling and administrative expenses
    
3,708
    
6,548
    
330
    
-
    
-
    
10,586
  
Operating income (loss)
    
(7,159
)
  
11,562
    
62
    
-
    
500
    
4,965
  
Interest expense
    
6,963
    
22
    
-
    
1,195
    
-
    
8,180
  
Interest income
    
(87
)
  
(1
)
  
(5
)
  
-
    
-
    
(93
)
Intercompany interest
    
1,195
    
-
    
-
    
(1,195
)
  
-
    
-
  
Equity in loss (income) of subsidiaries
    
-
    
-
    
-
    
2,060
    
(2,060
)
  
-
  
                                       
Income (loss) before provision for income tax
                                      
     
(15,230
)
  
11,541
    
67
    
(2,060
)
  
2,560
    
(3,122
)
 
Provision (benefit) for income tax
    
(3,101
)
  
1,801
    
238
    
-
    
-
    
(1,062
)
                                       
Net income (loss)
  
$
(12,129
)
$
9,740
  
$
(171
)
$
(2,060
)
$
2,560
  
$
(2,060
)
 

 
  -15-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Operations
  
For the Three Months Ended September 30, 2004
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Revenue:
                                      
Labor
  
$
-
  
$
50,763
  
$
3,824
  
$
-
  
$
-
  
$
54,587
  
Equipment rental
    
-
    
14,402
    
746
    
-
    
-
    
15,148
  
Equipment sales
    
-
    
1,550
    
361
    
-
    
(216
)
  
1,695
  
Intercompany revenue
    
4,721
    
32
    
-
    
-
    
(4,753
)
  
-
  
Total revenues
    
4,721
    
66,747
    
4,931
    
-
    
(4,969
)
  
71,430
  
Operating expenses:
                                      
Labor
    
-
    
42,441
    
3,420
    
-
    
(1,360
)
  
44,501
  
Equipment rental
    
5,252
    
1,052
    
368
    
-
    
-
    
6,672
  
Equipment sales
    
-
    
1,207
    
376
    
-
    
(450
)
  
1,133
  
Divisional operating expenses
    
59
    
3,892
    
138
    
-
    
-
    
4,089
  
Intercompany operating expenses
    
-
    
4,721
    
32
    
-
    
(4,753
)
  
-
  
Total operating expenses
    
5,311
    
53,313
    
4,334
    
-
    
(6,563
)
  
56,395
  
Gross profit (loss)
    
(590
)
  
13,434
    
597
    
-
    
1,594
    
15,035
  
Selling and administrative expenses
    
3,414
    
7,256
    
328
    
-
    
-
    
10,998
  
Operating income (loss)
    
(4,004
)
  
6,178
    
269
    
-
    
1,594
    
4,037
  
Interest expense
    
7,387
    
(24
)
  
-
    
1,441
    
-
    
8,804
  
Interest income
    
(84
)
  
-
    
(3
)
  
-
    
-
    
(87
)
Intercompany interest
    
1,441
    
-
    
-
    
(1,441
)
  
-
    
-
  
Equity in loss (income) of subsidiaries
    
-
                
3,131
    
(3,131
)
  
-
  
                                       
Income (loss) before provision for
                                      
income tax
    
(12,748
)
  
6,202
    
272
    
(3,131
)
  
4,725
    
(4,680
)
 
Provision (benefit) for income tax
    
(4,151
)
  
2,481
    
121
    
-
    
-
    
(1,549
)
                                       
Net income (loss)
  
$
(8,597
)
$
3,721
  
$
151
  
$
(3,131
)
$
4,725
  
$
(3,131
)

 
  -16-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Operations
  
For the Nine Months Ended September 30, 2003
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Revenue:
                                      
Labor
  
$
-
  
$
199,022
  
$
7,605
  
$
-
  
$
-
  
$
206,627
  
Equipment rental
    
-
    
52,809
    
1,695
    
-
    
-
    
54,504
  
Equipment sales
    
-
    
6,387
    
78
    
-
    
(1,386
)
  
5,079
  
Intercompany revenue
    
7,310
    
43
    
-
    
-
    
(7,353
)
  
-
  
Total revenues
    
7,310
    
258,261
    
9,378
    
-
    
(8,739
)
  
266,210
  
Operating expenses:
                                      
Labor
    
-
    
163,869
    
6,912
    
-
    
(605
)
  
170,176
  
Equipment rental
    
21,636
    
3,132
    
3,438
    
-
    
-
    
28,206
  
Equipment sales
    
-
    
5,266
    
67
    
-
    
(1,760
)
  
3,573
  
Divisional operating expenses
    
207
    
11,226
    
343
    
-
    
-
    
11,776
  
Intercompany operating expenses
    
-
    
7,310
    
43
    
-
    
(7,353
)
  
-
  
Total operating expenses
    
21,843
    
190,803
    
10,803
    
-
    
(9,718
)
  
213,731
  
Gross profit
    
(14,533
)
  
67,458
    
(1,425
)
  
-
    
979
    
52,479
  
Selling and administrative expenses
    
12,224
    
20,515
    
916
    
-
    
-
    
33,655
  
Operating income (loss)
    
(26,757
)
  
46,943
    
(2,341
)
  
-
    
979
    
18,824
  
Interest expense
    
20,758
    
23
    
-
    
3,541
    
-
    
24,322
  
Interest income
    
(176
)
  
(3
)
  
(19
)
  
-
    
-
    
(198
)
Intercompany interest
    
3,541
    
-
    
-
    
(3,541
)
  
-
    
-
  
Equity in loss (income) of subsidiaries
    
-
    
-
    
-
    
3,498
    
(3,498
)
  
-
  
                                       
Income (loss) before provision for
                                      
income tax
    
(50,880
)
  
46,923
    
(2,322
)
  
(3,498
)
  
4,477
    
(5,300
)
 
Provision (benefit) for income tax
    
(16,967
)
  
15,954
    
(789
)
  
-
    
-
    
(1,802
)
                                       
Net income (loss)
  
$
(33,913
)
$
30,969
  
$
(1,533
)
$
(3,498
)
$
4,477
  
$
(3,498
)


 
  -17-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Operations
  
For the Nine Months September 30, 2004
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
Revenue:
                                      
Labor
  
$
-
  
$
181,692
  
$
11,479
  
$
-
  
$
-
  
$
193,171
  
Equipment rental
    
-
    
46,561
    
2,113
    
-
    
-
    
48,674
  
Equipment sales
    
-
    
4,794
    
702
    
-
    
(787
)
  
4,709
  
Intercompany revenue
    
14,801
    
71
    
-
    
-
    
(14,872
)
  
-
  
Total revenues
    
14,801
    
233,118
    
14,294
    
-
    
(15,659
)
  
246,554
  
Operating expenses:
                                      
Labor
    
-
    
152,006
    
10,345
    
-
    
(4,065
)
  
158,286
  
Equipment rental
    
16,485
    
3,148
    
1,053
    
-
    
-
    
20,686
  
Equipment sales
    
-
    
3,887
    
562
    
-
    
(1,248
)
  
3,201
  
Divisional operating expenses
    
115
    
11,907
    
411
    
-
    
-
    
12,433
  
Intercompany operating expenses
    
-
    
14,801
    
71
    
-
    
(14,872
)
  
-
  
Total operating expenses
    
16,600
    
185,749
    
12,442
    
-
    
(20,185
)
  
194,606
  
Gross profit (loss)
    
(1,799
)
  
47,369
    
1,852
    
-
    
4,526
    
51,948
  
Selling and administrative expenses
    
11,757
    
20,933
    
1,038
    
-
    
-
    
33,728
  
Operating income (loss)
    
(13,556
)
  
26,436
    
814
    
-
    
4,526
    
18,220
  
Interest expense
    
20,849
    
33
    
-
    
4,327
    
-
    
25,209
  
Interest income
    
(172
)
  
0
    
(16
)
  
-
    
-
    
(188
)
Intercompany interest
    
4,327
    
-
    
-
    
(4,327
)
  
-
    
-
  
Equity in loss (income) of subsidiaries
    
-
                
5,090
    
(5,090
)
  
-
  
                                       
Income (loss) before provision for income tax
    
(38,560
)
  
26,403
    
830
    
(5,090
)
  
9,616
    
(6,801
)
                                       
 
Provision (benefit) for income tax
    
(12,638
)
  
10,562
    
365
    
-
    
-
    
(1,711
)
                                       
Net income (loss)
  
$
(25,922
)
$
15,841
  
$
465
  
$
(5,090
)
$
9,616
  
$
(5,090
)


 
  -18-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Cash Flows
  
For the Nine Months Ended September 30, 2003
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc.
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                                      
                                       
Net cash provided by (used for) operating activities
  
$
34,444
  
$
1,619
  
$
158
  
$
-
  
$
405
  
$
36,626
  
                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                                      
                                       
Purchases of property and equipment
    
(7,592
)
  
(1,619
)
  
(235
)
  
-
    
-
    
(9,446
)
Proceeds from sales of property and equipment
    
1,263
    
-
    
-
    
-
    
-
    
1,263
  
Net cash used for investing activities
    
(6,329
)
  
(1,619
)
  
(235
)
  
-
    
-
    
(8,183
)
                                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                                      
                                       
Payments of long-term debt
    
(975
)
  
-
    
-
    
-
    
-
    
(975
)
Payments on capital lease obligations
    
(1,261
)
  
-
    
-
    
-
    
-
    
(1,261
)
Net cash used for financing activities
    
(2,236
)
  
-
    
-
    
-
    
-
    
(2,236
)
                                       
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
25,879
    
-
    
(77
)
  
-
    
405
    
26,207
  
                                       
CASH AND CASH EQUIVALENTS, beginning of period
    
3,931
    
-
    
1,480
    
-
    
(594
)
  
4,817
  
                                       
CASH AND CASH EQUIVALENTS, end of period
  
$
29,810
  
$
-
  
$
1,403
  
$
-
  
$
(189
)
$
31,024
  


 
  -19-  
Index

BRAND INTERMEDIATE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Brand Intermediate Holdings, Inc.
  
Condensed Consolidating Statement of Cash Flows
  
For the Nine Months Ended September 30, 2004
  
   
   
Brand Services, Inc.
  
Guarantor Subsidiaries
  
Non-Guarantor Subsidiary
  
Brand Intermediate Holdings, Inc..
  
Adjustments and Eliminations
  
Brand Intermediate Holdings, Inc. Consolidated
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                                      
                                       
Net cash provided by (used for) operating activities
  
$
32,637
  
$
1,724
  
$
(642
)
  
-
  
$
192
  
$
33,911
  
                                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                                      
                                       
Purchases of property and equipment
    
(7,749
)
  
(1,670
)
  
(501
)
  
-
    
-
    
(9,920
)
Proceeds from sales of property and equipment
    
1,624
    
-
    
-
    
-
    
-
    
1,624
  
Payments for acquisitions
    
(951
)
  
-
    
-
    
-
    
-
    
(951
)
Net cash used for investing activities
    
(7,076
)
  
(1,670
)
  
(501
)
  
-
    
-
    
(9,247
)
                                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                                      
                                       
Payments of long-term debt
    
(20,836
)
  
-
    
-
    
-
    
-
    
(20,836
)
Payments of deferred financing fees
    
(927
)
  
-
    
-
    
-
    
-
    
(927
)
Payments on capital lease obligations
    
(495
)
  
(54
)
  
-
    
-
    
-
    
(549
)
Net cash used for financing activities
    
(22,258
)
  
(54
)
  
-
    
-
    
-
    
(22,312
)
                                       
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
3,303
    
-
    
(1,143
)
  
-
    
192
    
2,352
  
                                       
CASH AND CASH EQUIVALENTS, beginning of period
    
21,154
    
-
    
2,236
    
-
    
(290
)
  
23,100
  
                                       
CASH AND CASH EQUIVALENTS, end of period
  
$
24,457
  
$
-
  
$
1,093
    
-
  
$
(98
)
$
25,452
  


 
  -20-  
Index
 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The matters discussed in this Form 10-Q of Brand Intermediate Holdings, Inc. and subsidiaries (the "Company") contain forward looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the industrial and commercial scaffolding industry in general and in the Company’s specific market areas; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company’s business; inflation; changes in costs of goods and services; economic conditions in general and in the Company’s specific market areas; demographic chang es; changes in or failure to comply with federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the significant indebtedness of the Company; labor disturbances; changes in the Company’s acquisition and capital expenditure plans; and other factors referenced herein. The forward looking statements contained herein reflect the Company’s current beliefs and specific assumptions with respect to future business decisions and are based on information currently available. Accordingly, the statements are subject to significant risks, uncertainties and contingencies, which could cause the Company’s actual operating results, performance or business prospects to differ from those expressed in, or implied by, these statements.

The following discussion and analysis should be read in conjunction with the attached condensed consolidated financial statements and notes thereto.

Overview
 
The Company is the largest North American provider of industrial scaffolding services which facilitate access to tall structures for maintenance, turnarounds and capital projects, principally in the refining, petrochemical, chemical, utility and pulp and paper industries. The Company provides turnkey services, which include equipment rental, labor for the erection and dismantlement of the scaffolding and scaffolding design services. The Company also provides scaffolding services to the commercial market (primarily nonresidential construction and renovation) and sells a small amount of scaffolding.

The Company typically provides on-going maintenance services under long-term contracts; the duration of these contracts is usually one to five years. Turnarounds occur every one to four years depending on the industry and the type of turnaround being performed. Although some turnarounds may be postponed for a period of time, they are a necessary component of maintaining industrial facilities and are required to ensure the safe and efficient operation of such facilities. While the postponement of scheduled turnarounds causes fluctuations in the Company’s quarterly and annual results, the Company believes the necessity for on-going maintenance and turnarounds provides a stable, recurring revenue base.

The Company’s business is seasonal. End-use industries such as the refining and utility industries experience increased demand for their products during the summer months. Consequently, turnarounds are generally scheduled during the first and fourth quarters of the year.
 
The Company has in the past completed strategic acquisitions and it intends to continue to pursue complementary acquisitions where significant consolidation savings and economies of scale can be achieved. The scaffolding industry is characterized by single-office or regional companies, many of which are undercapitalized and have limited scaffolding inventories. The Company intends to focus its acquisition strategy on companies that have an expertise in a certain industry or scaffolding applications.
 
Brand Intermediate Holdings, Inc. and its subsidiaries ("Brand") are 100% owned by Brand Holdings LLC (the "LLC"). As of September 30, 2004, the voting equity interests of the LLC are owned 74.2% by J.P. Morgan Partners and its affiliates ("JPMP") and 25.8% by other equity investors on a fully diluted basis. Brand Services, Inc. is a wholly owned subsidiary of Brand Intermediate Holdings, Inc. and its subsidiaries.


Results of Operations

Revenue - Total revenue for the three months ended September 30, 2004 decreased by $8.1 million or 10.2% as compared to the similar prior year period, primarily due to a decrease in the Refinery and Chemical sector of $11.6 million. This decrease is primarily due to some refineries delaying maintenance work to take advantage of high gasoline prices in the marketplace. This decrease was slightly offset by small increases in the commercial and other industrial sectors. Total revenue for the nine months ended September 30, 2004 decreased by $19.7 million or 7.4% compared to the nine months ended September 30, 2003. The biggest factor in the decrease was a $28.5 million decrease in the utility capital sector, much of which was anticipated, due to large projects in the Northeast and West Coast that were completed in the first half of 2003. This decrease was partially offset by increases in the commercial and other indu strial sectors.

 
  -21-  
Index

Gross profit - Gross profit decreased by $0.5 million, or 3.3% in the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. Labor gross profit declined $0.3 million primarily due to a $6.7 million decrease in labor revenues. The percentage of labor gross profit to labor revenues increased to 18.4% for the three months ended September 30, 2004 compared to 17.0% for the similar prior year period, primarily due to lower insurance claims costs. Equipment rental gross profit increased $0.1 million, despite a $1.4 million decrease in rental revenue. The primary reason for this is a $1.6 million decrease in depreciation expense that resulted from groups of assets that became fully depreciated at the end of 2003. An increase in divisional operating expenses of $0.4 million also contributed to the decline in gross profit for the quarter. For the nine months ended September 30, 2004 , gross profit decreased by $0.5 million as compared to the nine months ended September 30, 2003. Labor gross profit declined $1.6 million primarily due to a $13.5 million decrease in labor revenues. The percentage of labor gross profit to labor revenues improved to 18.0% for the nine months ended September 30, 2004 compared to 17.6% for the similar prior year period. Equipment rental gross profit increased $1.7 million despite a $5.8 million decrease in rental revenue. The primary reason for the increase is due to a $7.6 million decrease in depreciation expense that resulted from groups of assets that became fully depreciated at the end of 2003. An increase in divisional operating expenses of $0.7 million accounts for the remainder of the decrease in gross profit.

Selling and administrative expenses - Selling and administrative expenses increased by $0.4 million and $0.1 million, respectively, in the three- and nine-month periods ended September 30, 2004 as compared to the similar prior year periods. For both periods the increase is primarily due to higher salaries and benefits expense as well as small increases in a number of miscellaneous areas, partially offset by lower depreciation expense.

Operating income - As a result of the above events, operating income decreased by $0.9 million, or 18.6%, when comparing the three-month period ended September 30, 2004 with the similar prior year period. Operating income decreased by $0.6 million, or 3.2%, when comparing the nine-month period ended September 30, 2004 with the similar prior year period.

Interest expense - Interest expense increased by $0.6 million and $0.9 million, respectively, in the three- and nine-month periods ended September 30, 2004 as compared to the similar prior year periods. For both periods the increase was primarily due to the impact of bank fees paid associated with obtaining waivers and amendments to our credit agreement debt covenants and the compounding effect of interest on the 13% pay-in-kind notes. These increases were partially offset by the impact of lower senior debt levels due to debt prepayments made in December of 2003 and March of 2004.

Income tax provision - The income tax benefit of $1.7 million for the nine months ended September 30, 2004, represents an effective rate of 25%. This effective rate is the result of the blended net losses at our domestic subsidiaries and net income at our foreign subsidiary. The rate is less than the federal statutory rate of 35% primarily due to permanent tax items, the largest of which is a portion of the interest expense on the 13% Intermediate Notes which is not deductible for tax purposes. For the three months ended September 30, 2004, the Company adjusted its effective tax rate from an annual benefit of 8% to an annual benefit of 25% due to a revision in the 2004 forecast. This resulted in additional benefit of approximately $0.4 million for the three month period ended September 30, 2004.


Liquidity and Capital Resources

The Company has historically utilized internal cash flow from operations and borrowings under its Credit Facility to fund its operations, capital expenditures and working capital requirements. As of December 31, 2003 and September 30, 2004, the Company had cash of $23.1 million and $25.5 million, respectively.
 
The Company believes that its existing working capital, borrowings available under its Credit Facility and internal cash flow from operations should provide sufficient resources to support current business activities. To the extent the Company accelerates its growth plans, consummates acquisitions or has lower than anticipated sales or increases in expenses, it may also need to raise additional capital. In particular, increased working capital needs occur whenever the Company consummates acquisitions or experiences strong incremental demand.
 
One of the Company’s major uses of cash is capital expenditures. The Company’s capital expenditure requirements are comprised of maintenance and expansion expenditures. The Company’s maintenance capital expenditure requirements are generally for scaffolding planks and other items used in the business, such as trucks and equipment. Expansion capital expenditures are for new scaffolding and vehicles, are discretionary and vary annually based on the Company’s level of scaffolding rental activity and management’s growth expectations. During the nine months ended September 30, 2003 and 2004, capital expenditures were $9.4 million and $9.9 million, respectively.


 
  -22-  
Index

Our Credit Facility (the "Credit Facility") provides for $130.0 million of term loans, a $50.0 million revolving loan facility and $35.0 million letter of credit facilities. Up to $20.0 million of the $50.0 million revolving loan facility may be used for letters of credit. The Credit Facility was amended on February 3, 2004. The amendment increased the letter of credit facilities from $20 million to $35 million and lowered the interest rate margin on the term loans by 0.75%. As of September 30, 2004, the Company had no borrowings outstanding under the revolving credit facility and had total outstanding letters of credit of $35.1 million.

The Credit Facility contains financial and operating covenants, including among other things, that the Company maintain certain financial ratios, and imposes limitations on the Company’s ability to make capital expenditures, to incur indebtedness, and to pay dividends. The Company obtained a waiver from the lenders under the Credit Facility from compliance with the minimum interest coverage ratio and the maximum leverage ratio covenants  for the period ended September 30, 2004; absent such waver, the Company would have violated the covenants for this period. The Credit Facility was amended effective November 9, 2004, to reset the minimum interest coverage ratio and maximum leverage ratio covenants through December 31, 2006, and to allow the Company to borrow an additional $25 million in term debt to be used to finance a potential acquisition, if necessary. The Company projects that it will be in compliance with the reset covenants.

The interest rate on the $103.1 million of term loans currently outstanding under the Credit Facility is variable. For the three months and nine months ended September 30, 2004, the weighted average interest rate on the term loans was 4.8% and 4.6%, respectively.

We are required to make semi-annual interest payments on our 12%, $150.0 million Senior Subordinated Notes in the amount of $9.0 million in April and October of every year until the Senior Notes mature in October 2012. We are also required to make quarterly interest payments on loans under our Credit Facility, which bears interest at a floating rate based upon either the base rate (as defined in our credit agreement, for base rate loans) or the LIBOR rate (for LIBOR loans) plus a spread of 2.5% to 4.0%, depending on the ratio of our consolidated debt to EBITDA. As of September 30, 2004, the interest rate on our term loans was 4.9%. We are not required to make interest payments on our 13%, $35.0 million Intermediate Notes until 2008, as these notes are pay-in-kind notes.
 
A summary of the sources and uses of cash for the nine months ended September 30, 2003 and 2004, follows:

   
Nine Months Ended September 30,
  
   
2003
  
2004
  
Net cash provided by (used for):
             
Operating activities
  
$
36,626
  
$
33,911
  
Investing activities
    
(8,183
)
  
(9,247
)
Financing activities
    
(2,236
)
  
(22,312
)


 
  -23-  
Index

Contractual Obligations

The following is a summary of contractual cash obligations as of September 30, 2004 (dollars in thousands):

Payments due in:

 
   
Total
  
2004
  
2005
  
2006
  
2007
  
2008
  
After 2008
  
Term Loan
 
$
102,877
  
$
262
  
$
1,047
  
$
1,047
  
$
1,047
  
$
1,047
  
$
98,427
  
Expected Interest Payments
on Term Loan (1)
   
24,326
    
1,310
    
5,207
    
5,153
    
5,100
    
5,046
    
2,510
  
Senior Notes
    
150,000
    
-
    
-
    
-
    
-
    
-
    
150,000
  
Expected Interest Payments
on Senior Notes
    
153,000
    
9,000
    
18,000
    
18,000
    
18,000
    
18,000
    
72,000
  
Intermediate Notes
   
44,786
    
-
    
-
    
-
    
-
    
-
    
44,786
  
Expected Interest Payments
on Intermediate Notes (2)
    
72,895
    
-
    
-
    
-
    
-
    
8,674
    
64,221
  
Capital Leases
    
221
    
29
    
95
    
92
    
5
    
-
    
-
  
Operating Leases
    
8,167
    
752
    
2,553
    
2,118
    
1,529
    
874
    
341
  
Notes Payable
    
725
    
165
    
244
    
79
    
79
    
79
    
79
  
Total Contractual Cash Obligations
  
$
556,997
  
$
11,518
  
$
27,146
  
$
26,489
  
$
25,760
  
$
33,720
  
$
432,364
  

(1) The interest rate on the Term Loan is floating. For purposes of this schedule, we are using the prevailing interest rates at 9/30/04 to calculate the estimated interest payments for all future periods.

(2) The Intermediate Notes are pay-in-kind notes; interest payments are not required to be made in cash until 2008.

Critical Accounting Policies

Certain of our accounting policies as discussed below require the application of significant judgement by management in selecting the appropriate assumptions for calculating amounts to record in our financial statements. By their nature, these judgements are subject to an inherent degree of uncertainty.

Labor revenues are recognized when the services are performed. Equipment rental revenue is recognized based on the number of days the equipment is rented beginning with the first day the equipment is under rental. The Company periodically sells new scaffolding directly to third parties. The Company recognizes revenue upon shipment and records as operating expense, the average cost of the scaffolding sold. The Company periodically sells scaffolding to third parties, primarily to its rental customers. The Company recognizes revenue for the proceeds of such sales and records as operating expense, the net book value of the scaffolding. Net book value is determined assuming the oldest scaffolding is sold first, as the Company maintains inventory records on a group basis.

As part of our ongoing business, we make payments for workers’ compensation and health benefit claims. We have purchased insurance coverage for large claims. Our workers’ compensation and health benefit liabilities are developed using actuarial methods based upon historical data for payment patterns, cost trends, utilization of healthcare services and other relevant factors. These estimates take into account incurred but not reported (IBNR) claims. While we believe our liabilities for workers’ compensation, general liability, automobile, and health benefit claims of $14.3 million as of September 30, 2004, are adequate and that the judgement applied is appropriate, such estimated liabilities could differ materially from what will actually transpire in the future.

The Company accounts for its long-lived assets excluding goodwill and tradenames, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, which requires the Company to assess the recoverability of these assets when events or changes in circumstances indicate that the carrying amount of the long-lived asset (group) might not be recoverable. If impairment indicators exist, the Company determines whether the projected undiscounted cash flows will be sufficient to cover the carrying value of such assets. This requires the Company to make significant judgements about the expected future cash flows of the asset group. The future cash flows are dependent on general and economic conditions and are subject to change.


 
  -24-  
Index

The Company accounts for its goodwill and tradenames in accordance with SFAS No. 142, which requires the Company to test goodwill and tradenames for impairment annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. For purposes of applying the provisions, the Company has determined that it will perform its impairment analysis on a consolidated enterprise level. Because quoted market prices do not exist for the Company, management uses the present value of expected future cash flows to estimate fair value. Management must make significant judgements and estimates about future conditions to estimate future cash flows. Unforeseen events and changes in circumstances and market conditions including general economic and competitive c onditions, could result in significant changes in those estimates and material charges to income.

Change in Accounting Principle

Effective January 1, 2004, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation". The Company selected the modified prospective transition method under the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," which requires expensing options prospectively, beginning in the year of adoption. The Company expensed $56,000 and $145,000, respectively, for the three- and nine-month periods ended September 30, 2004, recorded in the caption Selling and Administrative expenses.

Prior to 2004, the Company accounted for stock-based compensation under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation expense was reflected in 2003, as all options granted under those plans had an exercise price greater than the fair market value of the underlying equity on the date of grant.

Acquisitions

On June 1, 2004, the Company purchased the assets of Levitator, Inc., a commercial scaffolding company, for an aggregate purchase price of $1.0 million in cash and a $0.4 million note payable. The price was allocated to the assets and liabilities assumed, based on relative fair values. In connection with the acquisition, the Company recorded goodwill of $0.2 million based upon the allocation of the purchase price. The acquisition was accounted for using the purchase method of accounting, and accordingly has been included in the financial statements from the date of the acquisition

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company is exposed to market risk from changes in interest rates and foreign exchange rates. The Company’s net exposure to interest rate risk consists of variable-rate instruments based on LIBOR.
 
ITEM 4. CONTROLS AND PROCEDURES

An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the quarter covered by this report. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed by our company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in the internal control over financial reporting that occurred during the second quarter of 2004 that h ave materially affected, or are likely to materially affect, our internal control over financial reporting.

 
  -25-  
Index

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is subject to legal proceedings and other claims arising in the ordinary course of its business. There are no material pending legal proceedings, other than routine litigation incidental to the business, to which the Company is a party or of which any of the Company’s property is the subject.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits
       
 
10.1 Amendment No. 2 and Limited Waiver No. 3 to Credit Agreement, dated as of November 9, 2004, and entered into by and among Brand Services, Inc., the guarantors party thereto, the lenders party thereto, and Credit Suisse First Boston Corporation, as Administrative Agent.

31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

None.

 
  -26-  
Index

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
     
  BRAND INTERMEDIATE HOLDINGS, INC.
 
 		  
 		  
 
Date: November 15, 2004 By:   /s/ John M. Monter
 
  Title:  Chief Executive Officer, President
 
     
  BRAND INTERMEDIATE HOLDINGS, INC.
 
 		  
 		  
 
Date: November 15, 2004     By:   /s/ Jeffrey W. Peterson
 
  Title:  Chief Financial Officer and Vice President, Finance