10-Q 1 c65871e10-q.txt QUARTERLY REPORT 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, 2001 OR [ ] 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 333-56817 BRAND SERVICES, INC. (Exact name of registrant as specified in its charter) Delaware 13-3909681 (State or other jurisdiction of (I.R.S. employer incorporation or organization) 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: [ ] 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, 2001 $.01 Par Value 100 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, 2001 and 2000 2 Consolidated Balance Sheets at September 30, 2001 and 2000 3-4 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 5-6 Notes to the Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-16 PART II - OTHER INFORMATION Item 2. Exhibits and Reports on Form 8-K 17 SIGNATURES 17 Page -1- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands)

~~PAGE~~Three Months Ended Nine Months Ended September 30 September 30 (unaudited) (unaudited) ---------------------------- ~~Item~~---------------------------- 1.2001 ~~Financial~~2000 ~~Statements~~2001 ~~Consolidated~~2000 ~~Statements~~------------- of-------------- ~~Operations~~-------------- ~~for~~------------- ~~the~~Revenues: ~~Three~~Labor ~~Months~~$54,126 ~~and~~$40,094 ~~Six~~$163,077 ~~Months~~$139,834 ~~Ended~~Equipment ~~June~~rental 3016,507 ~~2001~~16,061 ~~and~~50,854 ~~2000...............~~50,102 Equipment sales 2,179 ~~Consolidated~~1,603 ~~Balance~~6,987 ~~Sheets~~4,718 at------------- ~~June~~-------------- 30-------------- ------------- Total revenues 72,812 ~~2001~~57,758 ~~and~~220,918 ~~2000.......~~194,654 Operating expenses: Labor 44,621 32,851 132,056 114,114 Equipment rental 5,754 5,612 17,582 19,068 Equipment sales 1,288 1,071 4,151 3,259 ~~Consolidated~~Divisional ~~Statements~~operating ofexpenses ~~Cash~~4,231 ~~Flows~~3,761 ~~for~~12,538 ~~the~~11,572 ~~Six~~------------- ~~Months~~-------------- ~~Ended~~-------------- ~~June~~------------- 30Total operating expenses 55,894 ~~2001~~43,295 166,327 148,013 ------------- -------------- -------------- ------------- Gross profit 16,918 14,463 54,591 46,641 Selling and ~~2000..............................~~administrative expenses 9,954 9,752 30,933 28,076 ------------- -------------- -------------- ------------- Operating income 6,964 4,711 ~~Notes~~23,658 to18,565 ~~Consolidated~~Interest ~~Financial~~expense ~~Statements..................~~5,022 5,673 15,682 15,190 Interest income (137) (55) (257) (85) -7------------ ~~Item~~-------------- -------------- ------------- Pretax income 2.,079 ~~Management's~~(907) ~~Discussion~~8,233 ~~and~~3,460 ~~Analysis~~Provision offor ~~Financial~~income ~~Condition~~tax ~~and~~- ~~Results~~- of- ~~Operations.................................~~- 8-11------------ ~~PART~~-------------- II-------------- ------------- ~~OTHER~~Net ~~INFORMATION~~income ~~Item~~(loss) 6.2,079 (a907) ~~Exhibits................................................~~8,233 113,460 Less accretion of preferred stock dividends (b1,881) ~~Reports~~(1,574) on(5,404) ~~Form~~(4,630) 8-K------------ ~~SIGNATURES.............................................................~~-------------- 12-------------- ------------- Net income applicable to common stock $ 198 $ (2,481) $2,829 $(1,170) ============= ============== ============== =============

The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements. Page -2- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands)

~~THREE~~September ~~MONTHS ENDED SIX MONTHS ENDED JUNE~~ 30, ~~JUNE~~2001 30December ~~(UNAUDITED)~~31, (~~UNAUDITED~~unaudited) 2000* ------------------ -------------------- ~~2001~~ASSETS ~~2000~~CURRENT ~~2001~~ASSETS: ~~2000~~Cash ~~----~~and ~~----~~cash ~~----~~equivalents ~~---- Revenues: Labor...............................................~~ $5310,~~816~~465 $493,~~745~~139 ~~$108,951~~Trade $accounts 99receivable,~~740~~ ~~Equipment~~net ~~rental....................................~~of ~~17,051~~allowance ~~17,880~~for ~~34,347~~doubtful ~~34,041~~accounts ~~Equipment~~of ~~sales..................................... 2,660~~ $1,~~461~~074 ~~4,807~~in ~~3,115~~2001 ~~-------~~and ~~-------~~$913 ~~--------~~in ~~--------~~2000 ~~Total revenues................................... 73~~45,~~527~~944 6946,~~086~~016 ~~148,105~~Costs ~~136,896~~and ~~-------~~estimated ~~-------~~earnings ~~--------~~in ~~--------~~excess ~~Operating~~of ~~expenses:~~billings ~~Labor...............................................~~on ~~43,879~~uncompleted ~~40,734~~contracts 873,~~435~~638 813,~~263~~218 ~~Equipment~~Notes ~~rental.................................... 6~~receivable,~~209~~ ~~7,191~~current ~~11,829~~portion ~~13,456~~219 ~~Equipment~~218 ~~sales.....................................~~Other ~~1,573~~current ~~996~~assets 27,~~862~~712 ~~2,188 Divisional operating expenses....................... 3,950 4,246 8,306~~ 7,~~811~~554 ------- ----------- -------- ----------- Total ~~operating~~current ~~expenses.........................~~assets 5567,~~611~~978 5360,~~167~~145 ~~110,432 104,718~~ ------- ----------- -------- ----------- ~~Gross~~PROPERTY ~~profit........................................~~AND 17EQUIPMENT: Land 1,~~916~~719 151,~~919~~716 37Buildings 3,~~673~~606 323,~~178~~227 ~~Selling~~Vehicles and ~~administrative~~other ~~expenses...................~~equipment 935,~~910~~773 933,~~334~~076 20Scaffolding equipment 211,~~979~~139 18201,~~324~~825 Leasehold improvements 884 893 ------- ----------- -------- ----------- ~~Operating~~Total ~~income....................................~~property ~~8,006~~and 6equipment,~~585~~ 16at cost 253,~~694~~121 13240,~~854~~737 ~~Interest~~Less-Accumulated ~~expense......................................~~depreciation ~~5,643~~and ~~4,813~~amortization 1079,~~660~~293 965,~~517~~170 ~~Interest income....................................... (111) (3) (120) (30)~~ ------- ----------- -------- ----------- ~~Pretax~~Total ~~income.......................................~~property ~~2,474~~and 1equipment,~~775~~ 6net 173,~~154~~828 4175,~~367~~567 ~~Provision for income tax..............................~~ -- -- -- -- ------- --- ---- -------- -------- ~~Net~~OTHER ~~income..........................................~~ASSETS 29,~~474~~563 110,~~775~~537 ~~6,154 4,367 Less accretion of preferred stock dividends........... (1,794) (1,555) (3,524) (3,056)~~ ------- ----------- -------- ----------- ~~Net~~TOTAL ~~income~~ASSETS ~~applicable to common stock...............~~ $ ~~680 $ 220 $ 2~~251,~~630~~369 $ 1246,~~311~~249 ======= =========== ======== ===========

(Continued on following page) ------------ *Agrees with the audited consolidated balance sheet included in the Company's Form 10-K for the year ended December 31, 2000. Page -3- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share and per share amounts)

~~JUNE~~September 30, 2001 ~~DECEMBER 31,~~ (~~UNAUDITED~~unaudited) 2000*December ~~----------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 8~~31,~~025~~ ~~$ 3,139 Trade accounts receivable, net of allowance for doubtful accounts of $958 in 2001 and $913 in~~ 2000~~..............~~* 46,428 46,016 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 1,956 3,218 Notes receivable, current portion......................... 216 218 Other current assets...................................... 8,219 7,554 -------- -------- ~~Total current assets................................... 64,844 60,145~~ ---~~-----~~ -------- PROPERTY AND EQUIPMENT: Land...................................................... 1,720 1,716 Buildings................................................. 3,460 3,227 Vehicles and other equipment.............................. 34,992 33,076 Scaffolding equipment..................................... 208,324 201,825 Leasehold improvements.................................... 883 893 -------- ---~~-----~~ Total property and equipment, at cost.................. 249,379 240,737 Less -- Accumulated depreciation and amortization......... 74,479 65,170 -------- -------- Total property and equipment, net...................... 174,900 175,567 -------- -------- OTHER ASSETS................................................ 10,221 10,537 -------- -------- TOTAL ASSETS......................................... $249,965 $246,249 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) CURRENT LIABILITIES: Revolving loan~~............................................~~ $ -- $ 4,125 Current maturities of long-term debt~~......................~~ 1415,650 8,800 Notes payable and capital lease obligations, current portion~~................................................~~ ~~953~~1,705 1,145 Accounts payable and accrued expenses~~.....................~~ 2729,~~558~~871 34,473 Billings in excess of costs and estimated earnings on uncompleted contracts~~..................................~~ ~~1,196~~273 1,845 ------------------- ------------------- Total current liabilities~~..............................~~ 4447,~~357~~499 50,388 ------------------- ------------------- LONG-TERM DEBT~~..............................................~~ ~~173~~170,~~488~~375 168,525 ------------------- ------------------- NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS~~.................~~ 43,~~522~~116 5,131 ------------------- ------------------- DEFERRED INCOME TAXES~~.......................................~~ 1,~~655~~441 1,662 ------------------- ------------------- 14.5% ~~Senior~~SENIOR ~~Exchangeable~~EXCHANGEABLE ~~Preferred~~PREFERRED ~~Stock~~STOCK, $0.01 par value, 1,250,000 shares authorized, 1,042,460 issued and outstanding~~...............................................~~ 5153,~~266~~146 47,742 ------------------- ------------------- STOCKHOLDER'S EQUITY (DEFICIT): Common stock, $0.01 par value, 100 shares authorized, issued and outstanding~~.................................~~ -- -- Paid-in capital~~...........................................~~ 20,~~136~~083 19,723 Receivables from sale of Holding's common stock~~...........~~ (1,427) (1,097) Predecessor basis adjustment~~..............................~~ (13,038) (13,038) Cumulative translation adjustment~~.........................~~ (21,~~476~~507) (1,639) Accumulated deficit~~.......................................~~ (28,~~518~~319) (31,148) ------------------- ------------------- Total stockholder's deficit~~............................~~ (2524,~~323~~208) (27,199) ------------------- ------------------- Total liabilities and stockholder's deficit~~............~~ $~~249~~251,~~965~~369 $246,249 =================== ===================

The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements. ------------ *Agrees with the audited consolidated balance sheet included in the Company's Form 10-K for the year ended December 31, 2000. Page -4- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)

~~SIX~~Nine ~~MONTHS~~months ~~ENDED~~ended ~~JUNE~~September 30 (~~UNAUDITED~~unaudited) -------------------------------- 2001 2000 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income~~..................................................~~ $ 68,~~154~~233 $ 43,~~367~~460 Adjustments to reconcile net income to net cash ~~provided~~from by operating activities: Depreciation and amortization~~.............................~~ 1117,~~510~~139 1217,~~268~~556 Changes in operating assets and liabilities: -- Trade accounts receivable, net~~.........................~~ ~~(412)~~72 (72,~~757~~763) Costs and estimated earnings in excess of billings on uncompleted contracts~~.................................~~ ~~1,262~~(420) (~~625~~448) Notes receivable~~.......................................~~ ~~117~~174 56210 Scaffolding equipment~~..................................~~ ~~413~~2,235 12,~~474~~256 Accounts payable and accrued expenses~~..................~~ (64,~~915~~602) 2(4,~~959~~062) Billings in excess of costs and estimated earnings on uncompleted contracts~~.................................~~ (~~649~~1,572) ~~538~~241 Other~~.......................................................~~ (1,~~560~~278) (13,~~404~~057) --------------- ---------------- Net cash ~~provided~~flows byfrom operating activities~~.........~~ 919,~~920~~981 1113,~~876~~393 --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment~~..........................~~ (1115,~~012~~834) (2127,~~562~~887) Payments for acquisitions~~...................................~~ -- (45,~~200~~882) Proceeds from sales of property and equipment other than scaffolding~~...............................................~~ 829 3342 --------------- ---------------- Net cash ~~used~~flows byfrom investing activities~~.............~~ (1115,~~004~~805) (2533,~~729~~727) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: ~~Proceeds~~Borrowings ~~from~~of long-term debt~~................................~~ 15,000 530,000 ~~Payments~~Repayments of long-term debt~~..................................~~ (46,~~187~~300) (34,~~025~~600) Redemption of parent company stock~~..........................~~ -- (~~167~~168) Capital contributions from Holdings~~.........................~~ 8330 ~~244~~254 ~~Borrowings~~Payments ~~(payments)~~ of revolving loans~~....................~~ (4,125) 13(3,~~340~~960) Payments on capital lease obligations~~.......................~~ (~~801~~1,455) (~~588~~751) --------------- ---------------- Net cash ~~provided~~flows byfrom financing activities~~.........~~ 53,~~970~~150 1420,~~804~~775 --------------- ---------------- NET INCREASE IN CASH AND CASH EQUIVALENTS~~.......................~~ 47,~~886~~326 ~~951~~441 CASH AND CASH EQUIVALENTS, beginning of period~~..............~~ 3,139 244 -------- -------- ~~CASH AND CASH EQUIVALENTS, end of period.................... $ 8,025 $ 1,195 ======== ======== SIX MONTHS ENDED JUNE 30 (UNAUDITED)~~ ----------------~~----~~ ~~2001~~CASH ~~2000~~AND ~~---- ---- SUPPLEMENTAL~~ CASH ~~FLOW~~EQUIVALENTS, ~~DISCLOSURES:~~end ~~Interest~~of ~~paid...............................................~~period $ 910,~~161~~465 $685 ~~9,633~~ ======== ======== ~~NONCASH TRANSACTIONS: Paid in-kind accretion of preferred stock dividends......... $ 3,524 $ 3,056~~ ======== ========

(Continued on following page) Page -5- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)

~~THREE~~Nine ~~MONTHS~~months ~~ENDED~~ended ~~SIX~~September ~~MONTHS ENDED JUNE~~ 30, ~~2000~~(unaudited) ~~JUNE 30, 2000~~ ------------------------------ 2001 2000 -------------- --------------- ~~Revenues....................................~~SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid $7016,~~260~~961 $~~140~~18,~~683~~550 ~~Net~~============== ~~income..................................~~=============== 1NON-CASH TRANSACTIONS: Paid in-kind accretion of preferred stock dividends $5,~~800~~404 $4,~~261~~630 ============== ===============

The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements. Page -6- BRAND SERVICES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The financial statements included herein for the periods ended September 30, 2001 and 2000 have been prepared by the Company without audit. 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, 2001, and the results of operations for the three and nine months ended September 30, 2001 and 2000, and cash flows for the nine months ended September 30, 2001 and 2000. 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. 1. Organization and Business Brand Services, Inc. and its subsidiaries ("Brand") are 100% owned by DLJ Brand Holdings, Inc. ("Holdings"). Holdings is owned 60.0% by Credit Suisse First Boston (USA), Inc. ("CSFB"), 8.6% by Carlisle Enterprises, L.P. ("Carlisle"), 17.1% by Rust International, Inc. ("Rust International"), and 14.3% by the directors, officers and employees of the Company. Rust International is a subsidiary of Waste Management, Inc. ("WMI"). All references to "the Company", "we", "us", or "our" mean Brand Services, Inc. and its subsidiaries. We operate in one segment and provide scaffolding services primarily to refining, chemical, petrochemical, utility and pulp and paper industries, and to a lesser extent, general commercial clients. Scaffolding services are typically provided in connection with periodic, routine cleaning and maintenance of refineries, chemical plants and utilities, as well as for new construction 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 sheet. 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 Page -7- and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Acquisitions During 2000, the Company acquired four companies in four separate transactions for an aggregate purchase price of $11.0 million in cash, $3.3 million in notes payable and $3.0 million of possible future payments conditioned upon the operating results of two of the acquired companies. The purchase prices, allocated to assets and liabilities assumed, were based on relative fair values. In connection with the acquisitions, the Company recorded goodwill in the amount of $6.0 million based upon the allocation of the purchase prices of the acquisitions. All of the above acquisitions were accounted for using the purchase method of accounting and accordingly have been included in the financial statements from their respective dates of acquisition. The operating results of the Company summarized below are on a pro forma basis as if the acquisitions made during 2000 had occurred as of January 1, 2000. Pro forma adjustments include only the effects of events directly attributable to the transactions that are expected to have a continuing impact and that are factually supportable. The pro forma amounts contained in the table below include adjustments for amortization, interest expense, and certain other adjustments (in thousands):

~~JUNE~~Three months ended Nine months ended September 30, ~~DECEMBER~~2000 31September 30, ~~2001~~ 2000 -------- ------------ ~~Revolving loans......................................... $~~ -- ~~$ 4,125 Term loans.............................................. 58,138 47,325 10 1/4% Senior Notes.................................... 130,000 130,000~~ ---- ---- -------- ~~188,138 181,450 Less~~-~~Current portion.................................... 14,650 12,925~~ -------- -------- ~~Long-term~~Revenues ~~debt........................................~~ $~~173~~58,~~488~~565 $~~168~~199,~~525~~248 ~~========~~Net ~~========~~income (loss) (901) 3,360

The unaudited pro forma financial information does not purport to be indicative of the consolidated results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 4. Debt and Borrowing Arrangements At September 30, 2001 and December 31, 2000 long-term debt consisted of the following (in thousands):

~~SIX~~September ~~MONTHS~~December ~~ENDED~~31, ~~JUNE~~ 30, 2001 2000 ------------------ ~~2001 2000~~ ---- --------------- ~~Net~~Revolving ~~Income..................................................~~loans $ ~~6,154~~- $ 4,~~367~~125 ~~Depreciation~~Term ~~and~~loans ~~Amortization~~56,025 ~~Expense.......................~~47,325 1110 1/4% Senior Notes 130,~~510~~000 12130,~~268~~000 ~~Interest~~------------------ ~~Expense............................................~~------------------- 10$186,~~660~~025 9$181,~~517~~450 ~~Interest~~Less-Current ~~Income.............................................~~portion ~~(120)~~15,650 ~~(30)~~12,925 ------------------ ------------------- ~~EBITDA.................................................~~Long-term debt $28170,~~204~~375 $26168,~~122~~525 ================== ===================

Page -8- In April 2001, the Company borrowed $10.0 million under the Term B Loan facility and in May 2001, the Company borrowed an additional $5.0 million under the Term B Loan facility. The proceeds of these loans were used to repay the revolving loans and for working capital needs. The Company is advised that certain investors who acquired 10 1/4% Senior Notes in market transactions in May, 2001 may be entitled to recover possible losses or seek rescission under the Securities Act of 1933, as amended, and that the Company could become subject to claims for loss or damage in connection therewith. If rescission were to be ordered against the Company, the Company's maximum potential cash obligation is estimated at $3.7 million as of September 30, 2001, and an amount equal thereto has been classified as "current maturities of long-term debt" on the consolidated balance sheet. Since the investors acquired the shares at market prices below the face value of the 10 1/4% Senior Notes, the Company would recognize a gain upon any such rescission. The rescission rights, or associated rights arising from any loss on a resale of the 10 1/4% Senior Notes involved in such transactions, expire one year after the dates of the May, 2001 transactions. If such rights have not been exercised prior to the expiration, the Company will reclassify the respective amounts to "long-term debt". For the three months ended September 30, 2001 and 2000, the weighted average interest rate on loans outstanding under the term loan facility, the revolving loan and the Senior Notes was 9.4% and 10.2%, respectively, and for the nine months ended September 30, 2001 and 2000, the weighted average interest rate was 9.8% and 10.2%, respectively. 5. 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. 6. Comprehensive Income For the three months ended September 30, 2001 and 2000, comprehensive income (loss) was $3.0 million and $(1.5) million, respectively, and for the nine months ended September 30, 2001 and 2000, comprehensive income was $8.4 million and $2.7 million, respectively. 7. Recent Accounting Pronouncement The Company has adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") which establishes accounting and reporting standards for derivative instruments and hedging activities in 2001. SFAS 133 did not have a material impact on the Company's results of operations or financial position. Page -9- 8. New Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. SFAS No. 141 is required to be implemented for all acquisitions initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 will not impact the consolidated financial statements of the Company. Under SFAS No. 142, goodwill is no longer subject to amortization over its useful life; rather, it is subject to at least annual assessments of impairment. Also, under SFAS No. 142, an intangible asset can be sold, transferred, licensed, rented or exchanged. Such intangibles will be amortized over their useful lives. Certain intangibles that have indefinite useful lives will not be amortized. SFAS No. 142 will be implemented by the Company on January 1, 2002. All goodwill and intangible assets acquired after June 30, 2001 will be immediately subject to the provisions of SFAS No. 142. The Company is currently in process of assessing the future impact of adoption of SFAS No. 142. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be implemented by the Company on January 1, 2002. Adoption of SFAS No. 143 will not have a material impact on the consolidated financial statements of the Company. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 will be implemented by the Company on January 1, 2002. Adoption of SFAS No. 144 will not have a material impact on the consolidated financial statements of the Company. Page -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The matters discussed in this Form 10-Q of Brand Services, 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 changes; 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 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 Page -11- 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. Results of Operations Revenues - Revenues for the three months ended September 30, 2001 increased 26.1% to $72.8 million from $57.8 million for the same period in 2000. Revenues for the nine months ended September 30, 2001 increased 13.5% to $220.9 million from $194.7 million for the same period in 2000. Labor revenue increased 35.0% to $54.1 million for the three months ended September 30, 2001 as compared to the same period in 2000 and 16.6% to $163.1 million for the nine months ended September 30, 2001 as compared to the same period in 2000. Rental revenue increased 2.8% to $16.5 million for the three months ended September 30, 2001 as compared to the same period in 2000, and 1.5% to $50.9 million for the nine months ended September 30, 2001 as compared to the same period in 2000. The increase in revenue relates primarily to increases in our industrial work, both through increased work on existing contracts as well as new work from recently awarded contracts. Much of this work is weighted heavily towards labor, resulting in high labor revenue and relatively flat rental revenue. Gross Profit - Gross profit for the three months ended September 30, 2001 increased 17.0% to $16.9 million from $14.5 million for the same period in 2000. Gross profit for the nine months ended September 30, 2001, also increased 17.0% to $54.6 million from $46.6 million for the same period in 2000. Labor gross profit (labor revenue less labor cost) increased 31.2% to $9.5 million for the three months ended September 30, 2001 as compared to the same period in 2000 and 20.6% to $31.0 million for the nine months ended September 30, 2001 as compared to the same period in 2000. Gross profit as a percentage of revenue decreased for the three months ended September 30, 2001 as compared to the same period in 2000, decreasing to 23.2% from 25.0%. The decrease in gross profit as a percentage of revenue for the quarter reflects the higher volume of industrial work requiring a high percentage of labor, thus causing overall profit margins to decline. Gross profit as a percentage of revenue for the nine months ended September 30, 2001, increased to 24.7% from 24.0% for the same period in 2000. The improvement in labor gross profit on a year-to-date basis in 2001 over 2000 has caused the overall gross profit percentage to increase. Selling and Administrative Expenses - Selling and administrative expenses for the three months ended September 30, 2001 increased 2.1% to $10.0 million from $9.8 million for the same period in 2000. Selling and administrative expenses for the nine months ended September 30, 2001 increased 10.2% to $30.9 million from $28.1 million for the same period in 2000. Selling and administrative expenses as a percentage of revenue for the three months ended September 30, 2001 decreased to 13.7% from 16.9% for the same period in 2000. Selling and administrative expenses as a percentage of revenue for the nine months ended September 30, Page -12- 2001 decreased to 14.0% from 14.4% for the same period in 2000. The company has continued to show improvement in its management of selling and administrative expenses, as the rate of increase in selling and administrative expenses is less than the rate of revenue growth. Operating Income - As a result of the above, operating income for the three months ended September 30, 2001 increased 47.8% to $7.0 million from $4.7 million for the same period in 2000 and increased 27.4% for the nine months ended September 30, 2001 to $23.7 million from $18.6 million for the same period in 2000. Interest Expense - Interest expense for the three months ended September 30, 2001 decreased 11.5% to $5.0 million from $5.7 million for the same period in 2000. The decrease in interest expense in the quarter was primarily due to lower interest rates. Interest expense for the nine months ended September 30, 2001 increased 3.2% to $15.7 million from $15.2 million for the same period in 2000. The increase in the interest expense when comparing the first nine months of 2001 with the first nine months of 2000 is due to a higher outstanding debt balance from term borrowings made in the second quarter of 2001. For the quarters ended September 30, 2001 and 2000, the weighted average interest rate was 9.4% and 10.2%, respectively and for the nine months ended September 30, 2001 and 2000, the weighted average interest rate was 9.8% and 10.2%, respectively. Net Income (Loss) - Net income (loss) for the three months ended September 30, 2001 and 2000 was $2.1 million and $(0.9) million, respectively and was $8.2 million and $3.5 million for the nine months ended September 30, 2001 and 2000, respectively. Accretion of Preferred Stock Dividends - Accretion of preferred stock dividends for the three months ended September 30, 2001 and 2000 was $1.9 million and $1.6 million, respectively, and was $5.4 million and $4.6 million for the nine months ended September 30, 2001 and 2000, respectively. Net Income (Loss) Applicable to Common Stock - Net income (loss) applicable to common stock for the three months ended September 30, 2001 and 2000 was $0.2 million and $(2.5) million, respectively, and was $2.8 million and $(1.2) million for the nine months ended September 30, 2001 and 2000, respectively. Liquidity and Capital Resources The Company has historically utilized internal cash flow from operations and borrowings under the bank facility to fund its operations, capital expenditures and working capital requirements. As of September 30, 2001 and 2000, the Company had working capital of $20.5 million and $17.3 million and cash of $10.5 million and $0.7 million, respectively. Page -13- In April 2001, the Company borrowed $10.0 million under the Term B Loan facility and in May 2001, the Company borrowed an additional $5.0 million under the Term B Loan facility. The proceeds of these loans were used to repay the revolving loans and for working capital needs. The Company is advised that certain investors who acquired 10 1/4% Senior Notes in market transactions in May, 2001 may be entitled to recover possible losses or seek rescission under the Securities Act of 1933, as amended, and that the Company could become subject to claims for loss or damage in connection therewith. If rescission were to be ordered against the Company, the Company's maximum potential cash obligation is estimated at $3.7 million as of September 30, 2001, and an amount equal thereto has been classified as "current maturities of long-term debt" on the consolidated balance sheet. Since the investors acquired the shares at market prices below the face value of the 10 1/4% Senior Notes, the Company would recognize a gain upon any such rescission. The rescission rights, or associated rights arising from any loss on a resale of the 10 1/4% Senior Notes involved in such transactions, expire one year after the dates of the May, 2001 transactions. If such rights have not been exercised prior to the expiration, the Company will reclassify the respective amounts to "long-term debt". 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. Expansion capital expenditures are for new scaffolding, 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, 2001, gross capital expenditures were $15.8 million. Dividends on our preferred stock accrue at the rate of 14.5% and were payable on September 30, 2001 or the date when we are permitted to pay cash dividends on the preferred stock under the terms of our bank facility at that time. The current bank facility restricts the Company from making dividend payments. Therefore, we were unable to pay cash dividends on the preferred stock on September 30, 2001 and do not expect to pay any dividends during 2001. The other major uses of cash are the payments of interest on long-term debt and the payments of principal on term loans. For the nine months ended September 30, 2001 interest payments were $17.0 million and principal payments were $6.3 million. Interest payments and principal payments for the remaining three months of 2001 are estimated to be $1.2 million and $2.6 million, respectively. Other Data EBITDA is defined as earnings before interest income, cash interest expense, income taxes, depreciation and amortization. EBITDA is commonly used to analyze companies on the basis of operating performance, leverage and liquidity. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating Page -14- performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States.

~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended ~~JUNE~~September 30 ----------------- ---------------- 2001 2000 ----------------- ---------------- Net Income $ 8,233 $ 3,460 Depreciation and Amortization Expense 17,139 17,556 Interest Expense 15,682 15,190 Interest Income (257) (85) ----------------- ---------------- EBITDA $40,797 $36,121 ----------------- ---------------- Nine Months Ended September 30 ----------------- ---------------- 2001 2000 ----------------- ---------------- Net cash provided by (used for): Operating activities~~........................................~~ $ 919,~~920~~981 $11 13,~~876~~393 Investing activities~~........................................~~ (1115,~~004~~805) (2533,~~729~~727) Financing activities~~........................................~~ 53,~~970~~150 1420,~~804~~775

New Accounting Standards In July 2001, the Financial Accounting Standards Board issued SFAS No. 141 "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method of accounting. SFAS No. 141 is required to be implemented for all acquisitions initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. Adoption of SFAS No. 141 will not impact the consolidated financial statements of the Company. Under SFAS No. 142, goodwill is no longer subject to amortization over its useful life; rather, it is subject to at least annual assessments of impairment. Also, under SFAS No. 142, an intangible asset can be sold, transferred, licensed, rented or exchanged. Such intangibles will be amortized over their useful lives. Certain intangibles that have indefinite useful lives will not be amortized. SFAS No. 142 will be implemented by the Company on January 1, 2002. All goodwill and intangible assets acquired after June 30, 2001 will be immediately subject to the provisions of SFAS No. 142. The Company is currently in process of assessing the future impact of adoption of SFAS No. 142. Under SFAS No. 143, the fair value of a liability for an asset retirement obligation is required to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be implemented by the Company on January 1, 2002. Adoption of SFAS No. 143 will not have a material impact on the consolidated financial statements of the Page -15- Company. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.." SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and resolves implementation issues related to SFAS No. 121. SFAS No. 144 will be implemented by the Company on January 1, 2002. Adoption of SFAS No. 144 will not have a material impact on the consolidated financial statements of the Company. Page -16- PART II - OTHER INFORMATION ITEM 2. EXHIBITS AND REPORTS ON FORM 8-K (b) No reports were filed on Form 8-K during the period for which this report is filed. 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 SERVICES, INC. Date: November 9, 2001 /s/ John M. Monter -------------------------------- John M. Monter Chief Executive Officer, President Date: November 9, 2001 /s/ Jeffrey W. Peterson -------------------------------- Jeffrey W. Peterson Chief Financial Officer, Vice President, Finance Page -17-

Filing Compare · BRAND SERVICES