10-Q 1 c71330e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 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 June 30, 2002 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 (I.R.S. employer of 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 July 31, 2002 $.01 Par Value 100 shares INDEX

Page -1- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands)

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)

(Continued on following page) Page -3- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands except share and per share amounts)

The accompanying notes to the consolidated financial statements are an integral part of the consolidated financial statements. Page -4- BRAND SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands)

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

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 June 30, 2002 and 2001 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 June 30, 2002, the results of operations for the three and six months ended June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and 2001. 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 59.9% by Credit Suisse First Boston (USA), Inc. ("CSFB"), 8.6% by Carlisle Enterprises, L.P. ("Carlisle"), 17.0% by Rust International, Inc. ("Rust International"), and 14.5% 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. Our services facilitate access to tall structures for on-going maintenance, turnarounds (major maintenance projects which require the complete or partial shutdown of a facility) and new construction projects. Our turnkey services include equipment rental, labor for the erection and dismantlement of scaffolding and scaffolding design services. In addition, the Company periodically sells scaffolding directly to third parties. The Company maintains a substantial inventory of scaffolding within 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. Page -7- 3. Accrued Revenue Accrued revenue represents work performed which either due to contract stipulations or lacking contractual documentation needed, could not be billed. Substantially all unbilled amounts are expected to be billed and collected within one year. 4. Debt and Borrowing Arrangements At June 30, 2002 and December 31, 2001, long-term debt consisted of the following (in thousands):

In addition to scheduled payments, the Company made additional payments of $17.0 million under the term debt during the six months ended June 30, 2002. The Company was 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 was estimated at $3.7 million, and an amount equal thereto had been classified as current maturities of long-term debt on the consolidated balance sheet as of December 31, 2001. The rescission rights, or associated rights arising from any loss on a resale of the 10 1/4% Senior Notes involved in such transactions, expired unexercised in May, 2002. Accordingly, the Company reclassified the respective amount to long-term debt at that time. For the three months ended June 30, 2002 and 2001, the weighted average interest rate on loans outstanding under the term loan facility, the revolving loan and the Senior Notes was 9.2% and 9.9% respectively, and for the six months ended June 30, 2002 and 2001, the weighted average interest rate was 9.0% and 10.0%, respectively. 5. Deferred Revenue Deferred revenue represent amounts collected from customers in advance of the work performed on these contracts. Substantially all of the costs related to these amounts will be incurred within one year. Page -8- 6. 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. 7. Comprehensive Income For the three months ended June 30, 2002 and 2001, comprehensive income was $3.8 million and $2.4 million, respectively, and for the six months ended June 30, 2002 and 2001, comprehensive income was $14.3 million and $5.3 million, respectively. 8. Income Taxes For the six months ended June 30, 2002, the Company reduced the valuation allowance on deferred tax assets by $4,683 and recorded an income tax provision of $2,069. During the six months ended June 30, 2002, the valuation allowance on deferred tax assets was reduced to $0 as the Company determined that it was more likely than not that all deferred tax assets would be realized based upon year-to-date operating results for the three months ended March 31, 2002 and anticipated operating results for future periods. The effective tax rate of 40% is greater than the federal statutory rate of 35% primarily due to state income taxes for the three months ended June 30, 2002.

9. Non-cash Compensation During the six months ended June 30, 2002, Holdings granted certain members of management options to acquire 291,000 shares of common stock with an exercise price of $5.80 per share and permitted others to purchase 11,350 shares of common stock at $5.80 per share. The Company uses the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock issued to Employees," to account for stock compensation plans. Non-cash compensation expense of $2.5 million for the three and six months ended June 30, 2002 was recorded in the consolidated statements of operations since the exercise prices of certain stock compensation awards were less than the estimated fair values of the underlying Page -9- stock on the date of the grant. Estimated fair values were determined by using the valuation inherent in the proposed sale of the Company to JPMorgan Partners. (see Note 11). 10. New Accounting Standards Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer subject to amortization over its useful life; rather, it is subject to at least annual assessments of impairment and accordingly, amortization of goodwill ceased. The Company has completed the required transitional impairment test as of January 1, 2002, and in doing so has determined that goodwill is not impaired. The following table shows a reconciliation between reported net income and adjusted net income had SFAS No. 142 been implemented by the Company as of January 1, 2001:

Under SFAS No. 143, Accounting for Asset Retirement Obligations, 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 was implemented by the Company on January 1, 2002 with no material impact on the Company's financial statements. 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 was implemented by the Company on January 1, 2002 with no impact on the Company's financial statements. In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of several Page -10- previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be adopted by the Company beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be adopted for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the condensed financial statements of the Company. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity. SFAS No. 146 also establishes that fair value be the objective for initial measurement of the liability. SFAS No. 146 will be adopted by the Company for exit or disposal activities that are initiated after December 31, 2002. Adoption will not have a material impact on the consolidated financial statements of the Company. 11. Subsequent event On August 9, 2002, J.P. Morgan Partners, the private equity affiliate of JPMorgan Chase, announced that it has entered into a definitive agreement to acquire Brand Services from DLJ Merchant Banking for approximately $500 million. The transaction is subject to customary closing conditions, including receipt of financing, and is scheduled to close in the fall of 2002. The merger agreement contemplates that, promptly after closing, Brand will notify the holders of its 14.5% preferred stock of the redemption of all shares of preferred stock in accordance with the terms of the certificate of designation thereof. The merger agreement further contemplates that Brand will commence a tender offer prior to closing for all of its issued and outstanding 10 1/4% senior notes due 2008, to be consummated at closing subject to the satisfaction of the conditions thereof. It is currently contemplated that the consideration for the senior notes tendered pursuant to the offer will be the prevailing market for such a transaction at the time it takes place. Page -11- 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 consolidated financial statements and notes thereto. Overview The Company is the largest North American provider of industrial scaffolding services. Our services facilitate access to tall structures for on-going maintenance, major maintenance projects that require the complete or partial shutdown of a facility, or turnarounds, and capital projects, principally in the refining, petrochemical, chemical, utility and pulp and paper industries. Our turnkey services include equipment rental, labor for the erection and dismantlement of scaffolding and scaffolding design services. We also provide scaffolding services to the commercial market (primarily nonresidential construction) and sell a small amount of scaffolding. We typically provide on-going maintenance services under contracts, with a duration ranging from two to five years. These contracts generally do not provide for minimum levels of maintenance services, as our services are provided to our customers based on individual projects under the long-term maintenance contract. Pricing under our contracts are generally negotiated on an annual basis, and a Page -12- majority of projects are priced either on a time and material basis or on a per-unit basis rate. Turnarounds are typically performed every one to four years depending on the industry and the type of turnaround being performed. 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 our quarterly and annual results, we believe the necessity for on-going maintenance and turnarounds provides us with 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 June 30, 2002 increased 21.2% to $89.1 million from $73.5 million for the same period in 2001. Revenues for the six months ended June 30, 2002 increased 24.3% to $184.1 million from $148.1 million for the same period in 2001. Labor revenue increased 26.2% to $67.9 million for the three months ended June 30, 2002 as compared to the same period in 2001 and 29.2% to $140.8 million for the six months ended June 30, 2002 as compared to the same period in 2001. Equipment rental revenue increased 8.9% to $18.6 million for the three months ended June 30, 2002 as compared to the same period in 2001, and increased 10.6% to $38.0 million for the six months ended June 30, 2002 as compared to the same period in 2001. Equipment sales revenue decreased 2.4% to $2.6 million for the three months ended June 30, 2002 as compared to the same period in 2001, but increased 11.5% to $5.4 million for the six months ended June 30, 2002 as compared to the same period in 2001. Industrial revenues accounted for the majority of the revenue growth as the Company was awarded new refinery contracts and new power plant construction contracts. The nature of these work opportunities caused labor revenues to grow at a faster rate than equipment rental revenue, as this type of work is more labor intensive than commercial work. The commercial sector also showed some improvement as we experienced an increase in commercial construction and renovation work. Equipment sales increased slightly in the first six months of the year as we increased the amount of new equipment sold directly to customers. Gross Profit - Gross profit for the three months ended June 30, 2002 increased 25.7% to $22.5 million from $17.9 million for the same period in 2001. Gross profit for the six months ended June 30, 2002, increased 24.3% to $46.8 million from $37.7 million for the same period in 2001. Labor gross profit (labor revenue less labor cost) increased 41.4% to $14.1 million for the three months ended June 30, 2002 as compared to the same period in 2001 and 30.5% to $28.1 million for the six months ended June 30, 2002 as compared to the same period in 2001. Gross profit as a percentage of revenue increased to 25.3% from 24.4% for the three months ended June 30, 2002 as compared to the same period in 2001 but remained unchanged at 25.4% for the six months ended June 30, 2002 and 2001. For the three months ended June 30, labor gross profit margins increased from Page -13- 18.5% to 20.7% when comparing 2001 to 2002, as more work was performed and priced on an individual project basis rather than on a time and material basis. This, in turn, improves profitability as it encourages the Company to actively manage its labor costs. Rental revenue profitability for the three months ended June 30, 2002 remained relatively constant as gross profit increased on revenue volume. Selling and Administrative Expenses - Selling and administrative expenses for the three months ended June 30, 2002 increased 1.5% to $10.1 million from $9.9 million for the same period in 2001. Selling and administrative expenses for the six months ended June 30, 2002 decreased 6.3% to $19.6 million from $21.0 million for the same period in 2001. Selling and administrative expenses as a percentage of revenue decreased to 11.3% from 13.5% for the three months ended June 30, 2002 as compared to the same period in 2001. Selling and administrative expenses as a percentage of revenue decreased to 10.7% from 14.2% for the six months ended June 30, 2002 as compared to the same period in 2001. Selling and administrative costs for the first six months of 2001 included $0.2 million of costs associated with integration of the four acquisitions made in 2000, which were eliminated before 2002. During 2002, certain activities were deferred from the first six months to the last six months due to scheduling changes necessitated from preparing the Company to be re-capitalized. As a result of both the deferred activities and active cost management, we reduced costs in the first six months of 2002 by $0.4 million as compared to the same period in the previous year. Finally, the six month period ended June 30, 2001 included $0.6 million of goodwill amortization which is not included in 2002 due to the adoption of SFAS 142. Selling and administrative expenses as a percent of revenue for the three and six months ended June 30, 2002, decreased due to increased leverage of fixed overhead costs over a higher revenue base. Non-cash Compensation - The Company uses the intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock issued to Employees," to account for stock compensation plans. Non-cash compensation expense of $2.5 million for the three and six months ended June 30, 2002 was recorded in the consolidated statements of operations since the exercise prices of certain stock compensation awards were less than the estimated fair values of the underlying stock on the date of the grant. Estimated fair values were determined by using the valuation inherent in the proposed sale of the Company to JPMorgan Partners as this transaction provides independent third party evidence of the fair value of the underlying stock. For periods prior to 2002, the fair value of the underlying stock was determined by the Board of Directors based upon a multiple of EBITDA, as this provided the best available evidence at that time. Operating Income - Operating income for the three months ended June 30, 2002 increased 24.7% to $10.0 million from $8.0 million for the same period in 2001 and increased 47.9% for the six months ended June 30, 2002 to $24.7 million from $16.7 million for the same period in 2001. Interest Expense - Interest expense for the three months ended June 30, 2002 decreased 20.4% to $4.5 million from $5.6 million for the same period in 2001. Page -14- Interest expense for the six months ended June 30, 2002 decreased 16.2% to $8.9 million from $10.7 million for the same period in 2001. The decrease in the interest expenses is due to a lower outstanding debt balance and a decline in the interest rate. In addition to scheduled payments, the Company made additional payments of $17.0 million under the term debt during the six months ended June 30, 2002. For the three months ended June 30, 2002 and 2001, the weighted average interest rate was 9.2% and 9.9%, respectively and for the six months ended June 30, 2002 and 2001, the weighted average interest rate was 9.0% and 10.0%, respectively. For the six months ended June 30, 2002, the Company reduced the valuation allowance on deferred tax assets by $4,683 and recorded an income tax provision of $2,069. During the six months ended June 30, 2002, the valuation allowance on deferred tax assets was reduced to $0 as the Company determined that it was more likely than not that all deferred tax assets would be realized based upon year-to-date operating results for the three months ended March 31, 2002 and anticipated operating results for future periods. The effective tax rate of 40% is greater than the federal statutory rate of 35% primarily due to state income taxes for the three months ended June 30, 2002.

For the three and six month periods ended June 30, 2001, the Company recorded a provision for income taxes of $0 primarily due to reductions in the valuation allowance on deferred tax assets during those periods. Net Income - Net income for the three months ended June 30, 2002 and 2001 was $3.3 million and $2.5 million, respectively and was $13.8 million and $6.2 million for the six months ended June 30, 2002 and 2001, respectively. Accretion of Preferred Stock Dividends - Accretion of preferred stock dividends for the three months ended June 30, 2002 and 2001 was $2.1 million and $1.8 million, respectively, and was $4.1 million and $3.5 million for the six months ended June 30, 2002 and 2001, respectively. Net Income Applicable to Common Stock - Net income applicable to common stock for the three months ended June 30, 2002 and 2001 was $1.3 million and $0.7 million, respectively, and was $9.7 million and $2.6 million for the six months ended June 30, 2002 and 2001, respectively. Page -15- 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 June 30, 2002 and 2001, the Company had working capital of $4.1 million and $24.2 million, respectively and cash of $4.5 million and $8.0 million, respectively. During the six months ended June 30, 2002, the Company made payments of $1.5 million to settle a general liability insurance claim in advance of the Company's settlement with the insurance company. The Company currently has a claim, deemed valid, against the assets of the insurance company in liquidation. In addition to scheduled payments, the Company made additional payments of $17.0 million under the term debt during the six months ended June 30, 2002. The Company was 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 was estimated at $3.7 million, and an amount equal thereto had been classified as current maturities of long-term debt on the consolidated balance sheet as of December 31, 2001. The rescission rights, or associated rights arising from any loss on a resale of the 10 1/4% Senior Notes involved in such transactions, expired unexercised in May, 2002. Accordingly, the Company reclassified the respective amount to long-term debt at that time. 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 six months ended June 30, 2002, capital expenditures were $7.6 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. The ability to make payments for future periods may depend upon retiring or refinancing such indebtedness or obtaining a waiver or amendment that would permit such cash dividends. 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 six months ended June 30, 2002 interest payments were $8.1 million and principal payments were $23.3 million. Page -16- Interest and principal payments on the debt for the next four quarters consist of the following (in millions):

On August 9, 2002, J.P. Morgan Partners, the private equity affiliate of JPMorgan Chase, announced that it has entered into a definitive agreement to acquire Brand Services from DLJ Merchant Banking for approximately $500 million. The transaction is subject to customary closing conditions, including receipt of financing, and is scheduled to close in the fall of 2002. The merger agreement contemplates that, promptly after closing, Brand will notify the holders of its 14.5% preferred stock of the redemption of all shares of preferred stock in accordance with the terms of the certificate of designation thereof. The merger agreement further contemplates that Brand will commence a tender offer prior to closing for all of its issued and outstanding 10 1/4% senior notes due 2008, to be consummated at closing subject to the satisfaction of the conditions thereof. It is currently contemplated that the consideration for the senior notes tendered pursuant to the offer will be the prevailing market for such a transaction at the time it takes place. Other Data EBITDA is defined as earnings before interest income, 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 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. Adjusted EBITDA is EBITDA plus non-cash compensation. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a company's ability to service its indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA also should not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Page -17-

New Accounting Standards In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. SFAS No. 145 will be adopted by the Company beginning January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13, which will be adopted for transactions occurring subsequent to May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the condensed financial statements of the Company. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," and requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity. SFAS No. 146 also establishes that fair value be the objective for initial measurement of the liability. SFAS No. 146 will be adopted by the Company for exit or disposal activities that are initiated after December 31, 2002. Adoption will not have a material impact on the consolidated financial statements of the Company. Page -18- PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On August 12, 2002, the Company issued a press release containing the following information: J.P. Morgan Partners, the private equity affiliate of JPMorgan Chase, announced that it has entered into a definitive agreement to acquire Brand Services from DLJ Merchant Banking for approximately $500 million. The transaction is subject to customary closing conditions, including receipt of financing, and is scheduled to close in the fall of 2002. The merger agreement contemplates that, promptly after closing, Brand will notify the holders of its 14.5% preferred stock of the redemption of all shares of preferred stock in accordance with the terms of the certificate of designation thereof. The merger agreement further contemplates that Brand will commence a tender offer prior to closing for all of its issued and outstanding 10 1/4% senior notes due 2008, to be consummated at closing subject to the satisfaction of the conditions thereof. It is currently contemplated that the consideration for the senior notes tendered pursuant to the offer will be the prevailing market for such a transaction at the time it takes place. The full text of the press release is included as Exhibit 99.3 to this report on Form 10-Q. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits - See Exhibit Index on page 21. Reports on Form 8-K - On July 8, 2002, the Company filed a current report on Form 8-K dated July 8, 2002 to report that the Company had changed its independent public accountant. Page -19- 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: August 14, 2002 /s/ John M. Monter ------------------------------------------ John M. Monter Chief Executive Officer, President Date: August 14, 2002 /s/ Jeffrey W. Peterson ------------------------------------------ Jeffrey W. Peterson Chief Financial Officer, Vice President, Finance Page -20- EXHIBIT INDEX

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BRAND SERVICES 10-Q