UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

ý		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
Commission File No. 1280191

 

 

NES Rentals Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

DELAWARE		20-0664255
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

8770 W. Bryn Mawr, 4^th Floor
Chicago, Illinois 60631
(Address of principal executive offices)

 

(773) 695-3999

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ý No o

 

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

 

There were 18,992,000 shares of Common Stock ($.01 par value) outstanding as of November 2, 2004.

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended

September30, 2004

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets (Unaudited)
	Consolidated Statements of Operations (Unaudited)
	Consolidated Statements of Cash Flows (Unaudited)
	Notes to Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
SIGNATURE
Index of Exhibits

 

2

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors

NES Rentals Holdings, Inc.:

 

We have reviewed the consolidated balance sheet of NES Rentals Holdings, Inc. and subsidiaries (the Company or the Successor) as of September 30, 2004, the related consolidated statements of operations for the three- and eight-month periods ended September 30, 2004 and the related consolidated statement of cash flows for the eight-month period ended September 30, 2004 and the related consolidated statements of operations and cash flows of National Equipment Services, Inc. (the Predecessor) for the one-month period ended January 31, 2004. These consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Predecessor and subsidiaries as of December 31, 2003, and the related consolidated statements of operations and comprehensive loss, stockholders’ equity (deficit) and cash flows for the year then ended (not presented herein); and in our report dated March 29, 2004, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

	(signed)  KPMG LLP
Chicago, IL
November 12, 2004

 

3

Forward Looking Statements

 

Note: This report contains forward-looking statements as encouraged by the Private Securities Litigation Reform Act of 1995. All statements contained in this document, other than historical information, are forward-looking statements. These statements represent management’s current judgment on what the future holds. A variety of factors could cause business conditions and the Company’s actual results to differ materially from those expected by the Company or expressed in the Company’s forward-looking statements. These factors include, without limitation, changes in market price or market demand; loss of business from customers; general declines in rental rates in the market; pricing pressure from competitors; unanticipated expenses; changes in financial markets; the Company’s substantial leverage; potential defaults in the Company’s indebtedness; ability to make scheduled principal amortization payments on indebtedness; and other factors discussed in the Company’s filings with the Securities and Exchange Commission.

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports are available on our internet website free of charge.  These reports are available as soon as practicable after we electronically file these reports with the Securities and Exchange Commission.  Our website address is www.nesrentals.com.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

		Successor			Predecessor
		September 30, 2004			December 31, 2003
		(Unaudited)
Assets
Cash and cash equivalents		$	7,530		$	50,251
Trade accounts receivable, net of allowance for doubtful accounts of $4,924 and $5,689, respectively		142,593			126,775
Inventory, net		19,665			13,928
Prepaid expenses and other assets		45,083			38,109
Rental equipment, net		415,639			407,362
Property and equipment, net		34,465			35,728
Unamortized debt issuance costs		14,011			—
Unamortized intangible assets		10,965			1,010
Total assets		$	689,951		$	673,163
Liabilities
Book overdraft (checks yet to clear)		$	12,262		$	17,487
Trade accounts payable		30,669			4,846
Accrued expenses and other liabilities		48,100			36,915
Debt		487,612			1,714
Liabilities subject to compromise		—			897,380
Total liabilities		578,643			958,342
Commitments and contingencies		—			—
Stockholders’ equity (deficit)
Successor common stock, $0.01 par, 25,000 shares authorized; 18,931 shares issued, 18,931 shares outstanding		189			—
Predecessor common stock, $0.01 par, 100,000 shares authorized; 24,170 shares issued, 21,151 shares outstanding		—			241
Successor additional paid-in capital		151,642			—
Predecessor additional paid-in capital		—			123,887
Accumulated deficit		(40,748		)	(391,896		)
Predecessor treasury stock at cost, 3,019 shares		—			(19,062		)
Accumulated other comprehensive income		225			1,651
Total stockholders’ equity (deficit)		111,308			(285,179		)
Total liabilities and stockholders’ equity (deficit)		$	689,951		$	673,163

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

4

 

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands)

 

		Successor				Predecessor			Successor				Predecessor
		For the three  months ended September 30,  2004				For the three  months ended September 30,  2003			For the eight months ended September 30, 2004				For the one month ended January 31, 2004			For the nine months ended September 30, 2003
Revenues
Rental and service revenues		$	138,536			$	131,880		$	327,732			$	33,068		$	365,185
New equipment sales		6,414				8,146			19,263				3,318			26,658
Rental equipment sales		8,757				7,452			25,733				2,120			24,921
Other revenues		5,542				5,244			13,962				1,424			16,168
Total revenues		159,249				152,722			386,690				39,930			432,932
Cost of revenues
Cost of rental and service revenues		67,832				64,080			168,641				17,454			184,065
Rental equipment depreciation		39,335				26,206			89,355				8,138			79,761
Cost of new equipment sold		5,470				6,570			15,832				2,802			22,451
Cost of rental equipment sold		6,925				6,293			19,088				1,328			18,308
Other operating expenses		6,220				5,319			14,420				1,498			16,443
Total cost of revenues		125,782				108,468			307,336				31,220			321,028
Gross profit		33,467				44,254			79,354				8,710			111,904
Selling, general and administrative expenses		33,382				32,777			84,725				9,670			104,769
Reorganization expenses		—				2,644			—				1,973			2,644
Fresh start accounting adjustments		—				—			—				(50,667		)	—
Goodwill impairment		—				—			—				—			138,115
Non-rental depreciation and amortization		1,626				1,515			9,531				858			4,967
Operating (loss) income		(1,541			)	7,318			(14,902			)	46,876			(138,591		)
Other income, net		209				118			344				80			517
(Loss) gain on discharge of debt		(5,468			)	—			(5,468			)	241,128			—
Interest expense		8,351				9,026			20,722				2,629			51,493
(Loss) income from continuing operations before income taxes		(15,151			)	(1,590		)	(40,748			)	285,455			(189,567		)
Income tax expense		—				—			—				—			—
(Loss) income from continuing operations		(15,151			)	(1,590		)	(40,748			)	285,455			(189,567		)
Loss from discontinued operations, net of tax		—				—			—				—			(518		)
Net (loss) income		(15,151			)	(1,590		)	(40,748			)	285,455			(190,085		)
Other comprehensive (loss) income		539				57			225				(279		)	5,895
Comprehensive (loss) income		$		(14,612	)	$	(1,533	)	$		(40,523	)	$	285,176		$	(184,190	)
Basic loss per common share		$		(0.80	)				$		(2.15	)
Diluted loss per common share		$		(0.80	)				$		(2.15	)
Weighted average shares outstanding:
Basic calculation		18,931							18,931
Diluted calculation		18,931							18,931

 

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

 

5

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

 

		Successor			Predecessor
		For the eight months ended September 30, 2004			For the one month ended January 31, 2004			For the nine  months ended September 30, 2003
Cash flows from operating activities:
Net (loss) income		$	(40,748	)	$	285,455		$	(190,085	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		98,886			8,996			84,728
Goodwill impairment		—			—			138,115
Amortization of debt issuance costs and debt discount		1,128			—			5,891
Loss on discharge of debt		5,468			—			—
Gain on sale of equipment		(6,210		)	(861		)	(6,845		)
Changes in operating assets and liabilities:
Trade accounts receivable		(18,605		)	2,787			(11,579		)
Inventory		(5,251		)	(61		)	2,596
Prepaid expenses and other assets		(3,843		)	(2,745		)	(11,922		)
Trade accounts payable		3,954			(583		)	1,086
Accrued expenses and other liabilities		9,459			1,857			9,383
Chapter 11 items:
Fresh start accounting adjustments		—			(50,667		)	—
Gain on discharge of debt		—			(241,128		)	—
Net cash flows provided by operating activities		44,238			3,050			21,368
Cash flows from investing activities:
Purchases of rental equipment		(82,566		)	(4,362		)	(26,103		)
Proceeds from sale of rental equipment		23,438			2,120			24,921
Purchases of property and equipment		(10,442		)	(819		)	(6,387		)
Proceeds from sale of property and equipment		4,599			111			1,411
Net cash flows used in investing activities		(64,971		)	(2,950		)	(6,158		)
Cash flows from financing activities:
Proceeds from debt		475,000			481,172			—
Payments on debt		(477,146		)	(482,363		)	(1,700		)
Net proceeds under revolving credit facility		7,085			—			—
Payments of debt issuance costs		(14,333		)	(6,278		)	(600		)
(Decrease) increase in book overdraft (checks yet to clear)		(3,905		)	(1,320		)	9,111
Net cash (used in) provided by financing activities		(13,299		)	(8,789		)	6,811
Net (decrease) increase in cash and cash equivalents		(34,032		)	(8,689		)	22,021
Cash and cash equivalents at beginning of period		41,562			50,251			15,184
Cash and cash equivalents at end of period		$	7,530		$	41,562		$	37,205
Supplemental Cash Flow Information:
Cash paid for interest		$	18,407		$	2,663		$	37,903
Cash paid for income taxes		242			49			884

 

See accompanying notes to consolidated financial statements and review report of KPMG LLP.

6

NES RENTALS HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Amounts in thousands, except per share amounts)

 

1.  Organization

 

NES Rentals Holdings, Inc. (the “Company” or the “Successor”) is principally a holding company organized under the laws of Delaware. The Company conducts its operations through its wholly-owned subsidiaries. The Company operates equipment rental, sales and service facilities primarily located throughout the United States of America. The Company rents various types of general rental and traffic safety equipment to a diverse customer base, including construction, governmental and industrial users. The Company also sells new equipment and used equipment from its rental fleet, sells related parts and provides other services. The nature of the Company’s business is such that short-term obligations are met typically by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying consolidated balance sheets are presented on an unclassified basis.

 

2.  Reorganization

 

On June 27, 2003, National Equipment Services, Inc. (the “Predecessor Company”) and its U.S. subsidiaries (collectively, the “Debtors”) filed for voluntary reorganization under Chapter 11 (the “Reorganization”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the Northern District of Illinois (“Bankruptcy Court”).  The Canadian subsidiary, which represents less than 2% of total revenues and total assets of the Predecessor Company, was not included in the petition.  Due to the size of the Canadian subsidiary, the consolidated financial statements of the Predecessor Company presented herein are essentially equivalent to the consolidated financial statements of the Debtors.

 

The initial plan of reorganization was filed on October 17, 2003.  On January 23, 2004, the Debtors filed a fourth amended plan of reorganization (the “Plan of Reorganization”), which received the requisite support from the creditors authorized to vote thereon.  The Plan of Reorganization was confirmed by the Bankruptcy Court on January 23, 2004, and the Debtors emerged from bankruptcy on February 11, 2004 (the “Effective Date”).

 

On the Effective Date, the Company entered into a new senior secured credit facility (the “New Credit Facility”).  The New Credit Facility consisted of $285,000 of term loan facilities and a $205,000 revolving credit facility.  There were quarterly scheduled principal repayments on the term loan facilities through the May 15, 2007 maturity date of the New Credit Facility.

 

From June 27, 2003 through February 11, 2004, the Debtors continued to operate as debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.  National Equipment Services, Inc. obtained Debtor-in-Possession financing which provided up to $30,000 of availability to fund operations during the bankruptcy period.  The Debtors did not borrow any funds from this financing source during the period it was in place.

 

The Plan of Reorganization provided for the cancellation of all of the issued and outstanding shares of common stock, par value $0.01 per share, of the Predecessor Company (the “Old Common Stock”), all of the issued and outstanding shares of preferred stock of the Predecessor Company, and all other outstanding securities of the Predecessor Company, including common stock options as of the Effective Date.

 

On the Effective Date, National Equipment Services, Inc. merged into NES Rentals, Inc.  NES Rentals, Inc. was the surviving company in the merger and was renamed National Equipment Services, Inc.  NES Rentals, Inc. was a subsidiary of both NES IT Services, Inc. and NES Real Estate Management, Inc., which are subsidiaries of the newly formed NES Rentals

Holdings, Inc., which is the successor to National Equipment Services, Inc.  The Company is the new public company parent of National Equipment Services, Inc. and has 25,000 authorized shares of common stock (the “New Common Stock”).

 

In accordance with the Plan of Reorganization, (i) holders of general unsecured claims, including the holders of the Company’s Senior Subordinated Notes due 2004, Series B (the “Series B Notes”) and Senior Subordinated Notes due 2004, Series D (the “Series D Notes”), received 97.5% of the New Common Stock of the Company, (ii) the holders of the Company’s preferred stock received 2.0% of the New Common Stock of the Company, and (iii) the holders of the Company’s Old Common Stock received 0.5% of the New Common Stock of the Company.

 

7

3.  Basis of Presentation

 

As a result of the Company’s Reorganization as described in Note 2, the Company has applied fresh start reporting pursuant to the American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) as of January 31, 2004.  As a result of the application of fresh start reporting on January 31, 2004, the post-emergence financial results of the Company for the three- and eight-month periods ended September 30, 2004 are presented as the results of the “Successor” and the pre-emergence financial results for the month ended January 31, 2004 and the three- and nine-month periods ended September 30, 2003 are presented as the results of the “Predecessor.”  Per share and share information for the Predecessor Company for all periods presented herein have been omitted as such information is deemed to be not meaningful.  Refer to Note 4 for further discussion regarding the application of fresh start reporting.

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for annual financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation, consisting only of normal recurring adjustments, except as described in Note 4 related to the application of fresh start reporting, have been included.  For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of the Predecessor Company for the year ended December 31, 2003.

 

                The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates relate to useful lives and recoverability of long-lived assets, residual values of rental equipment and reserves and allowances for trade accounts receivable, inventory and deferred tax assets. Actual results could differ from those estimates.

 

Results of operations for the interim periods are not necessarily indicative of the results that may be expected for a full year.  Due to the seasonality that impacts a significant portion of the Company’s locations, the second and third quarters are typically the most active quarters for the Company.  The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

 

The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets, and payment of liabilities in the ordinary course of business.  While the Company’s history of significant losses and the Reorganization discussed herein raise doubt about the Company’s ability to continue as a going concern, the recent refinancing (see Note 9) substantially reduces the Company’s debt reduction requirements in effect under its previous credit facility, resulting in significantly improved liquidity to meet on-going obligations as they become due and to continue investing in the Company’s rental equipment.

 

Rental equipment — Rental equipment is recorded at cost.  Depreciation of rental equipment is computed using the straight-line method over one to fifteen year estimated useful lives.

 

Book overdraft (checks yet to clear) — The book overdraft consists of checks issued but not yet presented to banks for payment.

 

Interest expense — Contractual interest expense was $15,901, $4,921 and $58,368 for the three months ended September 30, 2003, the one month ended January 31, 2004 and the nine months ended September 30, 2003, respectively.

 

Changes in estimates — In conjunction with the application of fresh start accounting in the first quarter (see Note 4), certain depreciable assets were revalued and estimated useful lives were assigned.  In the second quarter, the Company reassessed the depreciable lives of these assets and determined that the useful lives should be decreased.  The impact was to increase depreciation expense for the three-month period ended June 30, 2004 by approximately $4,700 or $0.25 per share.  In the third quarter, the Company finalized its assessment of these depreciable assets revalued in conjunction with the application of fresh start accounting and determined that the useful lives should be decreased.  The impact was to increase depreciation expense for the three-month period ended September 30, 2004 by approximately $4,300 or $0.23 per share.

 

8

Comprehensive (loss) income — Unrealized foreign currency translation gains (losses) are included in other comprehensive (loss) income for the periods presented herein.  In addition, the change in the fair value of a derivative instrument of $4,609 was included in other comprehensive income for the nine-month period ended September 30, 2003.  The contract for the derivative instrument expired in April 2003.

 

Stock-Based Compensation—The Company accounts for its stock-based employee compensation plan, which is described more fully in Note 11, under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations.  In accordance with the intrinsic value method, no compensation expense is recognized for the Company’s stock option plan.  Had compensation expense been determined based on the fair value at the grant date for awards under this plan consistent with the method of SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company’s net loss and net loss per share would have been as follows for the three and eight months ended September 30, 2004:

 

 

                The determination of compensation expense for the pro forma information was based upon the estimated fair value of the options granted on the date of their grant using the Black-Scholes option pricing model and the following weighted average assumptions:

 

 

                The weighted average fair value of options granted was $3.97 in 2004. The number of options exercisable at September 30, 2004 was 280.  These disclosures are omitted for 2003 as all previously issued options were cancelled upon the Company’s emergence from bankruptcy on February 11, 2004 and thus this information is deemed to be not meaningful.

 

4.  Fresh Start Reporting

 

Pursuant to SOP 90-7, the accounting for the effects of the Company’s reorganization occurred once the Plan of Reorganization was confirmed by the Bankruptcy Court and there were no remaining contingencies material to completing the implementation of the Plan of Reorganization.  As discussed in Note 2, the Company’s Plan of Reorganization was approved on January 23, 2004, and the Company emerged from bankruptcy on February 11, 2004.  For financial reporting purposes, fresh start reporting was applied on January 31, 2004.

 

In accordance with SOP 90-7, the results of operations for the month ended January 31, 2004 include a pre-emergence gain of $241,128 resulting from the discharge of debt and other liabilities under the Plan of Reorganization and a pre-emergence gain of $50,667 resulting from the aggregate remaining changes to the net carrying value of the Company’s pre-emergence assets and liabilities to reflect the fair values under fresh start reporting.  The Company’s estimated reorganization value at January 31, 2004, which approximates the amount a willing buyer would pay for the assets of the Company immediately after the Reorganization, was $716,252.  The Company estimated the reorganization value for purposes of fresh start reporting utilizing the estimated value of the Company on an enterprise basis (the “Enterprise Value”), adjusting to exclude known liabilities other than the New Credit Facility at January 31, 2004.

 

The Enterprise Value was determined by valuation specialists using the following three methodologies:  (a) the application of public market valuation multiples to the Predecessor Company’s recent historical financial results, (b) the

9

application of completed merger and acquisition transaction valuation multiples to the Predecessor Company’s recent historical financial results, and (c) a calculation of the present value of the debt-free cash flows on management’s projections, including an assumption for a terminal value (the “DCF Analysis”).  The DCF Analysis involves deriving the debt-free cash flows that the Company would generate assuming the projections developed by management are realized.  These cash flows and an estimated value of the Company at the end of the projected period (the “Terminal Value”) are discounted at the Company’s estimated post-Reorganization weighted average cost of capital.  The financial projections utilized in the DCF analysis were developed by management and are based on estimates and assumptions, which include, but are not limited to, estimates and assumptions with respect to pricing by market, capital spending and working capital levels, and the development of a discount rate that is utilized to convert future projected cash flows to their estimated present value.  The estimated projections and assumptions, while considered reasonable by management, may not be realized and are inherently subject to uncertainties and contingencies, which could significantly affect the measurement of the Enterprise Value and the reorganization value.  Based on the above methodologies, the Enterprise Value was determined to be $633,000.

 

Under fresh start reporting, the estimated reorganization value has been allocated to the Company’s assets based on their respective fair values in conformity with the purchase method of accounting for business combinations in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations.”  Valuations performed by valuation specialists were required to determine the fair value of certain of the Company’s assets as presented below.  The consolidated balance sheet presented below gives effect to the Plan of Reorganization and the application of fresh start reporting at January 31, 2004.

 

		Predecessor January 31, 2004			Discharge of Debt and Exit Financing			Cancellation of Old Equity			Fresh Start Adjustments			Successor January 31, 2004
Assets
Cash and cash equivalents		$	47,840		$	(6,278)	(a)	$	—		$	—		$	41,562
Trade accounts receivable		123,988			—			—			—			123,988
Inventory		13,989			—			—			425		(g)	14,414
Unamortized debt issuance costs		—			6,278		(b)	—			—			6,278
Prepaid expenses and other assets		40,854			—			—			386		(h)	41,240
Rental equipment		402,911			—			—			25,306		(i)	428,217
Property and equipment		35,050			—			—			9,330		(i)	44,380
Unamortized intangible assets		953			—			—			15,220		(j)	16,173
Total assets		$	665,585		$	—		$	—		$	50,667		$	716,252
Liabilities
Liabilities not subject to compromise
Book overdraft		$	16,167		$	—		$	—		$	—		$	16,167
Trade accounts payable		4,263			22,268		(c)	—			—			26,531
Accrued interest		184			—			—			—			184
Accrued expenses and other liabilities		38,866			—			—			—			38,866
New credit facility		—			481,172		(d)	—			—			481,172
Capital leases		1,501			—			—			—			1,501
Liabilities subject to compromise		896,399			(896,399)		(e)	—			—			—
Total liabilities		957,380			(392,959)			—			—			564,421
Stockholders’ equity (deficit):
Successor common stock		—			189		(e)	—			—			189
Predecessor common stock		241			—			(241)		(f)	—			—
Successor additional paid-in capital		—			151,642		(e)	—			—			151,642
Predecessor additional paid-in capital		123,887			—			(123,887)		(f)	—			—
Accumulated deficit		(398,233		)	241,128		(e)	105,066		(f)	52,039		(k)	—
Predecessor treasury stock		(19,062		)	—			19,062		(f)	—			—
Accumulated other comprehensive income		1,372			—			—			(1,372)		(k)	—
Total stockholders’ equity (deficit)		(291,795		)	392,959			—			50,667			151,831
Total liabilities and stockholders’ equity (deficit)		$	665,585		$	—		$	—		$	50,667		$	716,252

 

 

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Adjustments reflected in the consolidated balance sheet are as follows:

 

(a)          Represents payment of debt issuance costs for the New Credit Facility.

(b)         Represents recognition of debt issuance costs consisting of fees and expenses of the New Credit Facility.

(c)          Represents the accrual of liabilities upon emergence under the Plan of Reorganization related to priority, administrative and vendor claims.

(d)         Represents the proceeds under the New Credit Facility which were used to repay the existing indebtedness.

(e)          Represents the elimination of pre-petition liabilities discharged under the Plan of Reorganization as follows:

 

 

(f)            Represents cancellation of Predecessor Company common stock under fresh start reporting.

(g)         Represents adjustment to reflect the Company’s estimated fair value of inventory held for sale to third parties under fresh start reporting.

(h)         Represents adjustment to reflect the increase in the fair value of capitalized software development costs under fresh start reporting based on the results of valuation procedures performed by valuation specialists.

(i)             Represents adjustment to reflect rental equipment and property and equipment at fair values under fresh start reporting based on the results of valuation procedures performed by valuation specialists.

(j)             Represents adjustment to reflect the fair value of identified intangible assets under fresh start reporting based on results of valuation procedures performed by valuation specialists.  See Note 6 for additional information.

(k)          Represents the elimination of pre-emergence equity accounts under fresh start reporting.

 

5.  Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets consist of the following:

 

 

Deposits consist primarily of cash collateral related to performance bonding requirements and insurance. 

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6.  Intangible Assets

 

Intangible assets, net of accumulated amortization, consist of the following:

 

 

Non-compete agreements and customer relationships are amortized on a straight-line basis over five years.  Backlog is amortized on a straight-line basis over one year.

 

7.  Accrued Expenses and Other Liabilities

 

Accrued expenses and other liabilities consist of the following:

 

 

8.  Liabilities Subject to Compromise

 

Liabilities subject to compromise consist of the following as of December 31, 2003:

 

 

As a result of the Reorganization, no principal or interest payments were made after November 2002 on the Company’s Series B Notes and Series D Notes.  As a result, interest on the Series B Notes and the Series D Notes was not accrued or recorded after June 27, 2003.

 

9.  Debt and Liquidity

 

As of December 31, 2002, the Company was in default under the financial covenants governing its credit facility.  As of January 23, 2003, the Company and the lenders under the credit facility entered in a forbearance agreement with an initial expiration of March 14, 2003.  As of March 14, 2003, the Company and the lenders under the credit facility entered into a second forbearance agreement which extended the forbearance period until May 14, 2003, subject to earlier expiration upon the occurrence of certain circumstances.  This forbearance period was subsequently extended to June 15, 2003.

 

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The Company also had $100,000 of Senior Subordinated Notes due 2004 (the “Series B Notes”) and $175,000 of Senior Subordinated Notes due 2004 (the “Series D Notes”) outstanding prior to the Reorganization.  In accordance with the Plan of Reorganization, the holders of the Company’s Series B Notes and Series D Notes received 97.5% of the new common stock of the Company created upon emergence from bankruptcy.  The Company ceased accruing interest on the Series B Notes and the Series D Notes upon filing for bankruptcy protection.

 

Prior to seeking protection in bankruptcy on June 27, 2003, the Company obtained Debtor-in-Possession financing which provided up to $30,000 of availability to the Company to fund operations during the bankruptcy period.  The financing required that the Company meet certain financial tests monthly during the period that the facility was in place.  The Company did not borrow any funds from this financing source during the period it was in place.

 

In connection with the Company’s emergence from bankruptcy on February 11, 2004, the Company entered into a new senior secured credit facility (the “New Credit Facility”).  The New Credit Facility consisted of $285,000 of term loan facilities and a $205,000 revolving credit facility.

 

On August 17, 2004, the Company entered into a new senior secured credit facility (the “2004 Credit Facility”).  The 2004 Credit Facility consists of a $300,000 first lien credit facility, comprised of a $200,000 term loan and a $100,000 revolving loan, and a $275,000 second lien term loan.  Proceeds under the 2004 Credit Facility were used to repay the balance outstanding under the New Credit Facility.  The Company has scheduled principal repayments of $500 quarterly on the first lien credit facility through the August 17, 2009 maturity date.  The interest rate on the 2004 Credit Facility averages base rate plus 0.5% or LIBOR plus 2.5%.  The second lien term loan expires on August 17, 2010 and the interest rate is base rate plus 5% or LIBOR plus 6%.  The Company has scheduled principal repayments of $688 quarterly on the second lien credit facility through the maturity date.  As of September 30, 2004, the average LIBOR-based interest rates on the 2004 Credit Facility and on the second lien term loan were 4.4% and 7.9%, respectively.

 

The 2004 Credit Facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to fixed charge coverage ratios and debt leverage ratios.  The credit facility also contains various other covenants that restrict the Company’s ability to, among other things, 1) incur additional indebtedness, 2) permit liens to attach to its assets and 3) pay dividends or make other restricted payments on its common stock and certain other securities unless certain financial conditions are satisfied. The 2004 Credit Facility is collateralized by substantially all of the Company’s assets.  The Company is currently in compliance with all covenants governing the 2004 Credit Facility.

 

The Company is a holding company with no independent operations, and the Company’s assets (excluding the intercompany receivables and common stock of its subsidiaries) are insignificant. All of the Company’s subsidiaries are directly or indirectly wholly owned by the Company.  There are no restrictions on the Company’s ability to obtain funds from its subsidiaries by dividend or loan.  The separate financial statements of each of these wholly owned subsidiaries are not presented as management believes that separate financial statements and other disclosures concerning these subsidiaries are not individually meaningful for presentation or material to investors. In addition, the Company has pledged the stock of each of its subsidiaries as further security for the Company’s obligations under the 2004 Credit Facility.

 

10.  Reorganization Expenses

 

Expenses incurred as a result of the Reorganization have been segregated from normal operations and are disclosed separately.  These expenses consist primarily of professional fees incurred for financial advisors, legal counsel and consultants during the Reorganization.  These professional fees were cash charges.

 

11. Stock Option Plan

 

                During 2004, the Company established a plan in which options to purchase shares of Common Stock can be granted to directors, officers and key employees of the Company, and other individuals.  Up to 1,400 shares of Common Stock may be issued under this plan. During the third quarter of 2004, 1,400 options were granted under the plan at an exercise price of $7.80.  These options vest over four years from the grant date and expire seven years from the grant date. At September 30, 2004, 280 stock options are exercisable.  The Company’s stock options were excluded from the computation of diluted loss per share in the periods presented herein because inclusion would be anti-dilutive by reducing the loss per share.

 

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12.  Director’s deferred compensation plan

 

During 2004, the Company established a plan in which each of the new directors received 20 deferred compensation units, with each unit equivalent to one share of common stock.  The deferred compensation units generally vest over time.  In the event of a “change of control” (as defined in the plan) of the Company, the deferred compensation units will immediately vest in full, and provide that any payment to the new directors, in respect of their units will be equal to the per share amount received by holders of common stock, with a minimum payment equal to $250 for each director.

 

13.  Segment information

 

All operations are managed on a branch basis. The Company has two reporting segments: General Rental and Other and Traffic Safety. The General Rental and Other operations are primarily involved in the rental and sale of various types of lift and specialty equipment to construction, automotive and other industrial users. The Traffic Safety operations are primarily involved in the rental of traffic safety equipment and providing the related services to manage traffic flow during construction.  The Traffic Safety operations have different contractual, regulatory and capital requirements than the General Rental and Other operations. The accounting policies for these segments are the same as those described in Note 3.

 

The Company’s operations in Canada represent less than 2% of total revenues and total assets of the Company.  Due to the size of the Company’s Canadian operations, these operations are considered insignificant for separate geographical segment reporting.  The Company has no single customer that represents greater than 10% of the Company’s consolidated revenues. Identifiable assets are those used in the Company’s operations in each segment.  Inter-segment revenues are not material.

 

The following table presents financial information for the reporting segments:

 

 

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(a)          Includes goodwill impairment charges of $39,644 and $98,471 for Traffic Safety and General Rental and Other operations, respectively.

(b)         Includes $50,667 of fresh start accounting adjustments.

(c)          Includes $50,667 of fresh start accounting adjustments and a $241,128 gain on the discharge of debt.

 

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