UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission file number: 333-128688

AHERN RENTALS, INC.

(Exact name of registrant as specified in its charter)

Nevada		88-0381960
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4241 South Arville Street Las Vegas, Nevada		89103
(Address of principal executive offices)		(Zip Code)

(702) 362-0623

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 12, 2010
Common Stock, no par value per share		1,000 shares

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Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this report under “Part II. Item 1A - Risk Factors.” You should carefully review the risks described in this report and in other documents we file from time to time with the Securities and Exchange Commission. When used in this report, the words “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this report.

AHERN RENTALS, INC.

INDEX

PART I	FINANCIAL INFORMATION	1

ITEM 1.	FINANCIAL STATEMENTS	1
	Balance Sheets September 30, 2010 (Unaudited) and December 31, 2009	1
	Statements of Operations and Retained Earnings (Deficit) (Unaudited) Three and Nine Months Ended September 30, 2010 and 2009	2
	Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2010 and 2009	3
	Condensed Notes to the Financial Statements (Unaudited)	4
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	5
	Overview	5
	Amendments to our Credit Facility
	Results of Operations — Comparative Three Months Ended September 30, 2010 and 2009	7
	Results of Operations — Comparative Nine Months Ended September 30, 2010 and 2009	8
	Recent Accounting Pronouncements	9
	Liquidity and Capital Resources	9
	Non-GAAP Financial Measures	11
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	12
ITEM 4.	CONTROLS AND PROCEDURES	12
	Evaluation of disclosure controls and procedures	12
	Changes in internal controls over financial reporting	12
PART II	OTHER INFORMATION	12

ITEM 1.	LEGAL PROCEEDINGS	12
ITEM 1A.	RISK FACTORS	12
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	18
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	18
ITEM 4.	(Removed and Reserved)	18
ITEM 5.	OTHER INFORMATION	18
ITEM 6.	EXHIBITS	18
SIGNATURES		19
CERTIFICATIONS

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AHERN RENTALS, INC.

Balance Sheets

September 30, 2010 and December 31, 2009

(In thousands, except share amounts)

	SEPTEMBER 30, 2010			DECEMBER 31, 2009
	(Unaudited)
ASSETS

Cash	$	1,677		$	1,085
Accounts receivable, net of allowance of $2,747 and $2,001	57,177			48,651
Inventories	22,452			29,154
Rental equipment, net	405,967			473,065
Other property and equipment, net	60,819			64,113
Debt issuance costs, net	7,351			6,026
Other	7,438			5,979
	$	562,881		$	628,073

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Liabilities

Revolving credit facility payable	$	285,788		$	316,338
Accounts payable	12,851			14,874
Accrued expenses	15,797			22,209
Second priority senior secured notes payable	237,870			291,858
Term loan payable	95,000			—
Other note payable	1,565			1,687
	648,871			646,966

Stockholders’ Equity (Deficit)

Common stock, no par or stated value, 25,000 shares authorized, 1,000 shares issued and outstanding	5,915			5,915
Deficit	(91,905		)	(24,808		)
	(85,990		)	(18,893		)
	$	562,881		$	628,073

See notes to financial statements.

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AHERN RENTALS, INC.

Statements of Operations and Retained Earnings (Deficit) (Unaudited)

Three and Nine Months Ended September 30, 2010 and 2009

(In thousands)

	Three Months						Nine Months
	2010			2009			2010			2009
REVENUES
Equipment rentals and related	$	68,087		$	65,039		$	179,130		$	189,980
Sales of rental equipment	6,277			2,336			16,825			8,185
Sales of new equipment and other	5,835			5,128			17,055			16,397
	80,199			72,503			213,010			214,562
COST OF REVENUES
Cost of equipment rental operations, excluding depreciation, including related party rent expense of $1,761, $1,712, $5,290, and $4,937	35,999			34,009			105,430			95,974
Depreciation, rental equipment	21,653			22,899			66,293			69,108
Cost of rental equipment sold	5,921			1,513			16,023			5,590
Cost of new equipment sold and other	4,444			4,190			13,600			13,843
	68,017			62,611			201,346			184,515

GROSS PROFIT	12,182			9,892			11,664			30,047

OPERATING EXPENSES
Selling, general, and administrative, including related party rent expense of $822, $848, $2,305, and $2,471	15,674			14,750			43,002			43,306
Other depreciation and amortization	2,611			2,514			7,785			7,371
	18,285			17,264			50,787			50,677

OPERATING LOSS	(6,103		)	(7,372		)	(39,123		)	(20,630		)

OTHER INCOME (EXPENSE)
Interest expense	(13,565		)	(9,212		)	(39,904		)	(27,607		)
Gain on debt exchange	—			—			11,929			—
Other, net	17			47			1			74

NET LOSS	$	(19,651	)	$	(16,537	)	$	(67,097	)	$	(48,163	)

RETAINED EARNINGS (DEFICIT), BEGINNING OF PERIOD	$	(72,254	)	$	14,453		$	(24,808	)	$	48,430

Net loss	(19,651		)	(16,537		)	(67,097		)	(48,163		)
Distributions	—			—			—			(2,351		)

RETAINED EARNINGS (DEFICIT), END OF PERIOD	$	(91,905	)	$	(2,084	)	$	(91,905	)	$	(2,084	)

See notes to financial statements.

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AHERN RENTALS, INC.

Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2010 and 2009

(In thousands)

	2010			2009
OPERATING ACTIVITIES:

Net loss	$	(67,097	)	$	(48,163	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gross profit on disposition of property and equipment	(693		)	(2,580		)
Depreciation and amortization of rental and other property and equipment	74,078			76,479
Gain on debt exchange	(11,929		)	—
Gain on insurance settlements	(544		)	—
Amortization of debt issuance costs	3,080			1,621
Amortization of premium on senior secured notes	(315		)	(385		)
Provision for bad debts	1,092			424
Changes in operating assets and liabilities:
Accounts receivable	(9,618		)	3,020
Inventories	6,702			4,033
Other	(1,579		)	(1,979		)
Accounts payable	(2,023		)	1,633
Accrued expenses	(6,412		)	(7,096		)
Net cash provided by (used in) operating activities	(15,258		)	27,007

INVESTING ACTIVITIES:
Purchases of rental equipment	(13,633		)	(22,157		)
Purchases of other property and equipment	(4,490		)	(10,292		)
Proceeds from sales of rental equipment and other property	14,622			8,228
Insurance proceeds from rental equipment and property claims	1,172			—
Net cash used in investing activities	(2,329		)	(24,221		)

FINANCING ACTIVITIES
Proceeds from borrowings	296,980			232,860
Repayment of borrowings	(272,652		)	(233,605		)
Debt issuance costs paid	(6,149		)	—
Distributions	—			(2,351		)
Net cash provided by (used in) financing activities	18,179			(3,096		)
NET INCREASE (DECREASE) IN CASH	592			(310		)
CASH, BEGINNING OF PERIOD	1,085			1,758
CASH, END OF PERIOD	$	1,677		$	1,448

See notes to financial statements.

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AHERN RENTALS, INC.

CONDENSED NOTES TO THE FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of presentation

The accompanying unaudited interim financial statements are prepared in accordance with the accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (“2009 Form 10-K”) and the interim reporting requirements applicable to Form 10-Q. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. Events subsequent to the latest balance sheet date were evaluated by management through the date of filing of this report to determine the need for any adjustments to, or disclosure in, the financial statements. In the opinion of the Company, all necessary adjustments have been made to present fairly, in all material respects, the financial position of the Company as of September 30, 2010, and its results of operations and cash flows for all the periods presented. These unaudited financial statements should be read in conjunction with the Company’s 2009 Form 10-K from which the balance sheet information as of December 31, 2009 is derived. Interim operating results for the current periods are not necessarily indicative of operating results to be expected for the full year.

2. Related party transactions

The Company purchases forklifts and certain other equipment from an entity controlled by the Company’s majority shareholder. During the three and nine months ended September 30, 2010 and 2009, the Company purchased approximately $1.0 and $1.8 million, and $4.4 and $6.9 million of equipment, respectively, from this affiliate, of which $0.7 and $0.6 million, and $3.7 and $1.6 million, respectively, were contemporaneously resold to unaffiliated parties.

3. Contingencies

In September 2010, the Company settled a lawsuit and paid the $1 million settlement. The Company is a defendant in certain other legal matters arising in the ordinary course of business. Based on available information, management is unable to estimate the minimum costs, if any, to be incurred upon disposition of these other matters, and therefore no provision for loss has been made. In the opinion of management, the outcome of these matters is not likely to have a material effect on the future financial position, results of operations or cash flows of the Company.

The equipment rental industry continues to experience reduced credit and capital financing availability and highly curtailed construction activities, all of which may continue to have adverse effects on economic conditions and the Company’s future operations and cash flows for an indeterminate period. The effects and duration of these circumstances and related risks and uncertainties cannot be estimated at this time but may be significant. In addition, the Company’s revolving credit facility matures August 21, 2011. While the Company believes that its future cash flows from operations and borrowings under its Credit Facility will be sufficient to satisfy its obligations when due until the maturity of the Credit Facility in August 2011, no assurance can be given. Prior to that date, we intend to either refinance the facility or arrange for an extension of the maturity, but we may be unable to do so.

4. Fair value of financial instruments

As of September 30, 2010, the estimated fair values of cash, accounts receivable, accounts payable and debt, other than the Company’s second priority senior secured notes payable, approximated their cost-based carrying amounts due to the short maturity of these instruments, or because the related interest rates approximate current market rates. The estimated fair value of the second priority senior secured notes payable, however, approximated $101.8 million based on reference to quoted market prices (“level 1 inputs”, as defined by GAAP) compared to their carrying amount of $236.7 million.

5. Reclassifications

Certain minor reclassifications have been made to the amounts in the 2009 Statements of Operations to conform to the 2010 presentation.

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

The following discussion should be read in conjunction with the financial statements and notes thereto included in Item 1 of Part I of this quarterly report and the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2009 contained in our Annual Report on Form 10-K for that year.

Overview

Through our network of 72 equipment rental branches, we rent a full range of equipment, sell our used rental equipment, new equipment, parts, supplies and related merchandise, and provide maintenance, repair and other services that supplement our rental activities. The types of equipment we rent range from a fleet of high reach and earth engaging units to hand tools. Accordingly, our business is capital intensive, and our profitability and cash flows depend significantly upon the level of construction activity in the economy and the availability and terms of financing. See “—Liquidity and Capital Resources.”

Our revenues are affected primarily by changes in the level of investment in new equipment for our rental fleet, openings of new branch locations and the relative strength of the economies in the geographic regions in which we operate. For financial reporting purposes, our revenues are divided into three categories:

· Equipment rentals and related includes revenues from renting equipment and related revenues such as the fees we charge for equipment delivery, damage waivers, repair of rental equipment and fuel. For the three and nine months ended September 30, 2010, revenues from equipment rentals and related accounted for approximately 85% and 84% of our total revenues. Of equipment rentals and related revenues for both periods, 60% was attributable to rentals of high reach equipment, 23% to rentals of general rental equipment, including ground engaging equipment, and 17% to rental related revenues.

· Sales of rental equipment represents revenues from the sale of our used rental equipment. For both the three and nine months ended September 30, 2010, these revenues accounted for approximately 8% of our total revenues.

· Sales of new equipment and other is primarily revenues from the sale of new equipment, merchandise and supplies. For the three and nine months ended September 30, 2010, these revenues accounted for approximately 7% and 8% of our total revenues.

Equipment rental revenues are affected by several factors including general economic conditions and conditions in the non-residential construction industry in particular, the amount and quality of equipment available for rent, rental rates, the mix and percentage of equipment rented, length of time the equipment is on rent, and weather. We use “dollar utilization” to measure the interaction of changes in rental rates, product mix, average length of rental, and time utilization. Dollar utilization is the annualized ratio of equipment rentals and related revenues on our entire fleet of rental equipment for a period to the average original cost of our rental fleet during that period. Revenues from the sale of used equipment are affected by equipment values, general economic conditions, the amount and type of equipment available in the marketplace, and the condition and age of the equipment. Consequently, the age and mix of equipment in our rental fleet has a direct impact on these revenues. Other revenues, including revenues from the sale of new equipment and from the sale of parts, supplies and maintenance and repair services, are affected by the price at which the applicable items can be sold and general economic conditions.

For financial reporting purposes, our cost of revenues is divided into four categories.

· Cost of equipment rental operations, excluding depreciation includes branch personnel costs, the cost of repairing and maintaining rental equipment and our service and delivery vehicles, fuel costs and other costs of transporting our rental equipment (excluding depreciation on our fleet of service and delivery vehicles), occupancy costs and supply costs for our rental locations.

· Depreciation on rental equipment.

· Cost of rental equipment sold represents the net book value of rental equipment sold.

· Cost of new equipment sold and other includes the cost of the items we sell, including new equipment, parts, merchandise and supplies.

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Operating expenses include all selling, general and administrative expenses (“SG&A”) and depreciation and amortization on non-rental property and equipment. Non-rental property and equipment mainly includes our fleet of service and delivery trucks, furniture and fixtures, and leasehold improvements. SG&A expenses include primarily sales force compensation, information technology costs, administrative payroll, marketing costs, professional fees, and property and casualty insurance. The Company recorded in SG&A a $1 million legal settlement in September 2010.

Our cost of revenues and operating expenses also include lease expenses for rental branches and other facilities, several of which we lease from affiliates.

Our operating results are subject to annual and seasonal variations resulting from a variety of factors, including overall economic conditions, construction activity in the geographic regions we serve, the competitive supply of rental equipment, the number of our significant competitors and, to a lesser extent, seasonal rental patterns resulting from lower activity by our customers during the winter. The expansion or contraction of our network of rental branches also causes fluctuations in our revenues and operating results, particularly as a result of the timing of new branch openings and expenditures related to those openings. Thus, the results of any period may not be indicative of the results for any future period.

In addition, our operating results have been highly dependent on the strength of the economy of Las Vegas, Nevada. For the three and nine months ended September 30, 2010 and 2009, the percentage of our total revenues attributable to our Las Vegas operations was 18% and 22%, and 19% and 26%, respectively. The rapid growth experienced by the Las Vegas area in past years has contributed significantly to our revenues. Based on recent trends and anticipated customer demand and market conditions, we do not believe that the strong operating results we have historically experienced in Las Vegas will continue at the same or similar levels during the remainder of 2010 or beyond. Because of this and also due to the slowdown in the construction industry in other markets we serve, we have employed and continue to employ several strategies:

· Redeploying unutilized rental fleet to existing branch locations with higher demand and also to new markets with high growth potential in an effort to improve the utilization of our rental fleet and continue to diversify our business. We opened 17 new rental branches in 2009 and have opened 7 more in 2010; we do not plan to open any more rental branches in 2010. We determine the markets to open branch locations through extensive economic and demographic research and also evaluate markets that may already be complementary to our existing branch locations. Opening new branch locations should not require significant capital because most of the fleet that will be deployed in a new branch will be moved from existing branches. This strategy has been particularly important as large projects with significant amounts of rental equipment, such as the City Center project in Las Vegas, Nevada were completed in mid to late 2009. We have been successful in redeploying equipment from Las Vegas into new branches.

· Significantly reducing our capital expenditures. In all of 2009, we spent $42 million on capital expenditures ($30 million net of equipment sold). In the third quarter of 2010, we had $6.0 million in capital expenditures (negative $0.4 million net of proceeds from equipment sales and insurance claims) and expect total 2010 net capital expenditures to be substantially less than 2009, mainly consisting of fleet maintenance, fill-in equipment to meet specific customer needs, and support of new branches. A consequence of reduced capital expenditures is that the average age of our rental fleet will likely increase, leading to increased repair, maintenance, and equipment replacement costs.

· Cost containment through reductions in personnel and some employee benefits, renegotiation of vendor pricing structures, reduced commissions and bonuses for senior management, and increased scrutiny of all operational and administrative processes to reduce expenses.

· Expanding our customer base into infrastructure related, alternative energy and other end-user markets distinct from the non-residential construction sector and entering into over 100 national account agreements with our customers, allowing us to better serve existing customers since moving from a regional to a national branch network structure and helping us to pursue new customers we did not previously have the branch infrastructure to serve.

· Selling excess rental fleet as market conditions warrant. This would generate cash and improve utilization, but could reduce liquidity if the cash generated from the sale was less than the value that asset contributes to the borrowing base under our revolving credit facility.

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Results of Operations

Comparative Three Months Ended September 30, 2010 and 2009

Revenues

Revenues in 2010 increased 11% compared to 2009. The primary factors contributing to the change are discussed below.

Equipment rentals and related revenues. Equipment rentals and related revenues in 2010 increased 5% compared to 2009. These revenues accounted for 85% and 90% of total revenues in 2010 and 2009, respectively. Same branch revenues decreased 3%, or $2.1 million; this decrease in revenues is offset by an approximate $5.1 million increase in revenues from thirteen new rental branches opened since the end of the third quarter of 2009. Additionally, the average original cost of our rental fleet decreased to $790 million in 2010 from $825 million in 2009 and average dollar utilization increased to 34.5% in 2010 from 31.5% in 2009. This increase in dollar utilization was caused mostly by an increase in our average time utilization of our high reach equipment to 63% from 56% for 2009 offset by a 4% decrease in average rental rates.

Sales of rental equipment. Sales of rental equipment in 2010 increased 169% from 2009 due mainly in 2010 to a 91% increase in equipment units sold and higher prices realized per unit. Consistent with our strategy to sell excess rental fleet as market conditions warrant, in 2010, we sold 6% more equipment units through retail channels and 255% more equipment units through auction channels.

Sales of new equipment and other revenues. Sales of new equipment and other revenues in 2010 increased 14% from 2009 due mainly to increased new equipment sales. We sold 14% more new equipment units in 2010 than 2009 due largely to new equipment sold at our thirteen new rental branches opened since the end of the third quarter of 2009..

Cost of Revenues

Cost of revenues in 2010 increased 9% from 2009. As a percentage of revenues, cost of revenues was 85% in 2010 and 86% in 2009. The primary factors contributing to the change are described below.

Cost of equipment rental operations, excluding depreciation. Cost of equipment rental operations, excluding depreciation, in 2010 increased 6% from 2009. Same branch costs decreased 1% in 2010 from 2009 due mainly to decreases in labor costs and property taxes. The opening of thirteen new rental branches since the end of the third quarter of 2009 contributed approximately $2.4 million to the cost of equipment rental operations. As a percentage of equipment rentals and related revenues, cost of equipment rental operations was 53% in 2010 and 52% in 2009.

Depreciation, rental equipment. Depreciation, rental equipment in 2010 decreased 5% compared to 2009 due to a decrease in the average original cost of our rental fleet as described previously under the caption “—Revenues —Equipment rentals and related revenues”.

Cost of rental equipment sold. Cost of rental equipment sold in 2010 increased 291% compared to 2009. The main cost of rental equipment sales is the net book value of the sold equipment, which averaged 94% of revenue in 2010 and 65% of revenue in 2009 thereby resulting in a lower gross margin on rental equipment sold in 2010. Although our profit margin on rental equipment sold at retail was 41% in 2010 compared to 38% in 2009, our profit margin on auction sales was negative 9% in 2010 compared to a positive 34% in 2009. As described above under the caption “—Revenues —Sales of rental equipment”, we sold substantially more equipment units at auction in 2010 than in 2009 in an effort to better balance our rental fleet by selling under-utilized equipment and using the proceeds to buy higher utilized equipment needed by our customers.

Cost of new equipment sold and other. Cost of new equipment sold and other in 2010 increased 6% from 2009 due mainly to the increase in sales of new equipment described under the caption “—Revenues —Sales of new equipment and other revenues.” Our profit margin on new equipment sales was 10.4% in 2010 and 8.8% in 2009.

Selling, General and Administrative

SG&A in 2010 increased 6% from 2009. Excluding the effects of a $1 million legal settlement in 2010, SG&A in 2010 increased less than 1% from 2009. Total payroll costs decreased 3% in 2010 in spite of the growth in our sales force related to opening thirteen new rental branches since the end of the third quarter of 2009. Excluding the effects of sales force payroll costs related to the new branches opened since the third quarter of 2009, total SG&A payroll costs decreased 10%. SG&A, as a percentage of total revenues, was 20% in both 2010 and 2009.

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Other Depreciation and Amortization

Other depreciation and amortization in 2010 increased 4% over 2009. This was due to an increased investment in non-rental property and equipment, primarily transportation equipment and leasehold improvements resulting from the opening of thirteen new rental branches since the end of the third quarter of 2009, to an average original cost of $113 million in 2010 compared to $105 million in 2009.

Interest Expense

Interest expense in 2010 increased 47% from 2009. Our average debt balance in 2010 increased to $616 million from $607 million in 2009. Also, our weighted average interest rate increased in 2010 to 8.0% from 5.7% in 2009, primarily due to the financing transaction the Company completed in the first quarter of 2010. See “—Liquidity and Capital Resources.”

Comparative Nine Months Ended September 30, 2010 and 2009

Revenues

Revenues in 2010 decreased 1% compared to 2009. The primary factors contributing to the change are discussed below.

Equipment rentals and related revenues. Equipment rentals and related revenues in 2010 decreased 6% compared to 2009. These revenues accounted for 84% and 89% of total revenues in 2010 and 2009, respectively. Same branch revenues decreased 11%, or $20.4 million; this decrease in revenues is offset by an approximate $9.5 million increase in revenues from thirteen new rental branches opened since the end of the third quarter of 2009. Additionally, the average original cost of our rental fleet decreased to $805 million in 2010 from $827 million in 2009, and average dollar utilization decreased to 29.7% in 2010 from 30.6% in 2009. This decrease in dollar utilization was caused mostly by an 8% decrease in average rental rates offset by an increase in our average time utilization of our high reach equipment to 56.1% from 55.8% for 2009.

Sales of rental equipment. Sales of rental equipment in 2010 increased 106% from 2009. Excluding $2.3 million recorded in 2010 related to an equipment trade transaction, sales of rental equipment in 2010 increased 77% from 2009 due mainly to a 54% increase in equipment units sold and higher prices realized per unit in 2010. Consistent with our strategy to sell excess rental fleet as market conditions warrant, in 2010, we sold 30% more equipment units through retail channels and 91% more equipment units through auction channels.

Sales of new equipment and other revenues. Sales of new equipment and other revenues in 2010 increased 4% from 2009 due mainly to sales of new equipment. However, in 2009 the Company sold at auction a group of new equipment units held for resale for $1.7 million. Excluding the revenue from this transaction, sales of new equipment increased 36% in 2010 due to selling 15% more new equipment units in 2010 at higher prices due to the mix of equipment sold compared to 2009.

Cost of Revenues

Cost of revenues in 2010 increased 9% from 2009. As a percentage of revenues, cost of revenues was 95% in 2010 and 86% in 2009. The primary factors contributing to the change are described below.

Cost of equipment rental operations, excluding depreciation. Cost of equipment rental operations, excluding depreciation, in 2010 increased 10% from 2009. Same branch costs increased 4% in 2010 from 2009 due largely to increases in fuel costs, rent and facilities costs, and freight costs offset by decreases in same branch labor costs and property taxes. The opening of thirteen new rental branches since the end of the third quarter of 2009 contributed approximately $6 million to the cost of equipment rental operations. As a percentage of equipment rentals and related revenues, cost of equipment rental operations was 59% in 2010 and 51% in 2009.

Depreciation, rental equipment. Depreciation, rental equipment in 2010 decreased 4% compared to 2009 due to a decrease in the average original cost of our rental fleet as described previously under the caption “—Revenues —Equipment rentals and related revenues”.

Cost of rental equipment sold. Cost of rental equipment sold in 2010 increased 187% compared to 2009. Excluding $3.4 million related to an equipment trade described under the caption “—Revenues —Sales of rental equipment.” cost of rental equipment sold in 2010 increased 125% compared to 2009. The main cost of rental equipment sales is the net book value of the sold equipment, which averaged 95% of revenue in 2010 and 68% of revenue in 2009, excluding the aforementioned trade transaction. thereby resulting in a lower gross margin on rental equipment sold in 2010. Although our profit margin on rental equipment sold at retail was 39% in both 2010 and 2009, our profit margin on auction sales was negative 7% in 2010 compared to a positive 24% in 2009. As described above under the caption “—Revenues —Sales of rental equipment”, we sold substantially more equipment units at auction in 2010 than in 2009 in an effort to better balance our rental fleet by selling under-utilized equipment and using the proceeds to buy higher utilized equipment needed by our customers.

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Cost of new equipment sold and other. Cost of new equipment sold and other in 2010 decreased 2% from 2009. However, in 2009, the Company sold at auction a group of new equipment units held for resale with a net book value of $2.6 million. Excluding the effects of this transaction, cost of new equipment sold and other increased 21% due mainly to the increase in sales of new equipment described under the caption “—Revenues —Sales of new equipment and other revenues.” Our profit margin on new equipment sales was 8% in 2010 and 11% in 2009; the lower profit margin in 2010 is due to general economic conditions.

Selling, General and Administrative

SG&A in 2010 decreased 1% over 2009. Excluding the effects of a $1 million legal settlement in 2010, SG&A in 2010 decreased 3% from 2009. Total payroll costs decreased 2% in 2010 in spite of the growth in our sales force related to opening thirteen new rental branches since the end of the third quarter of 2009. Excluding the effects of sales force payroll costs related to the new branches opened since the third quarter of 2009, total SG&A payroll costs decreased 7%. SG&A, as a percentage of total revenues, was 20% in both 2010 and 2009.

Other Depreciation and Amortization

Other depreciation and amortization in 2010 increased 6% over 2009. This was due to an increased investment in non-rental property and equipment, primarily transportation equipment and leasehold improvements resulting from the opening of thirteen new rental branches since the end of the third quarter of 2009, to an average original cost of $112 million in 2010 compared to $102 million in 2009.

Interest Expense

Interest expense in 2010 increased 45% from 2009. Our average debt balance increased in 2010 to $612 million compared to $609 million for 2009. Also, our weighted average interest rate increased in 2010 to 8.0% from 5.7% in 2009, primarily due to the financing transaction the Company completed in the first quarter of 2010. See “—Liquidity and Capital Resources.”

Recent Accounting Pronouncements

No recently issued accounting pronouncements not yet adopted are expected to have a material impact on our future financial position, results of operations, or cash flows.

Liquidity and Capital Resources

Our business is capital intensive and highly dependent upon the level of construction activity in the regions in which we operate. We purchase new equipment both to expand the size and maintain the age of our rental fleet. For the three and nine months ended September 30, 2010 and 2009, we had total expenditures on new rental equipment of $5 million and $6 million, and $16 million and $22 million, respectively. In response to the economic recession, in the third quarter of 2008, we began aggressively scaling back our capital expenditures. We expect rental equipment expenditures in 2010 to be lower than 2009 based on anticipated customer demand and market conditions. Additionally, the level of capital expenditures we may incur is restricted by our Second Amended and Restated Loan and Security Agreement dated as of January 8, 2010 among us and our lenders (the “Credit Facility”). However, if demand for rental equipment from our customers increases, expenditures to purchase new rental equipment, replace used rental equipment, and purchase transportation equipment could be higher than we currently expect, subject to the restrictions in our Credit Facility and availability and costs of financing.

We manage our liquidity using cash management practices that project our future sources and uses of cash taking into consideration the contractual requirements of our financing agreements. Our principal existing sources of cash are generated from operations and from the sale of rental equipment and borrowings under our Credit Facility. Our current and expected long-term cash requirements consist primarily of expenditures to fund operating activities and working capital, to purchase new rental equipment, and to meet debt service obligations.

The equipment rental industry continues to experience reduced credit and capital financing availability and highly curtailed construction activities, all of which may continue to have adverse effects on the industry for an indeterminate period. As disclosed in Part II, Item 1A.—Risk Factors, the rental equipment industry is experiencing reduced demand for equipment rentals and sales, which in turn has adversely affected, and may continue to have an adverse affect on, the value of our rental fleet, which could decrease our borrowing availability. Additionally, current or potential customers may delay or decrease equipment rentals and purchases, may be

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unable to pay us for prior equipment rentals, may delay paying us for prior equipment rentals and services, or may be unable to obtain financing for planned equipment purchases. Also, if the banking system or the financial markets deteriorate or become volatile again, the funding for and number of capital projects may continue to decrease, which may further impact the demand for our rental equipment and services. The effects and duration of such circumstances and related risks and uncertainties on the Company’s future operations and cash flows cannot be estimated at this time but may be significant.

As also disclosed in Part II, Item 1A.—Risk Factors, as of September 30, 2010, we had $286 million outstanding and $64 million of unused availability, but only $21 million of net borrowing availability, under the Credit Facility (because of the availability block and other reserves discussed below under “Indebtedness — Credit Facility and Term Loan”). Actual unused borrowing availability as of September 30, 2010 was $15 million due to additional restrictions on the incurrence of priority indebtedness imposed by the indenture governing our 9 ¼% Second Priority Senior Secured Notes (“Second Priority Notes”).

Many banks and other financial institutions have been adversely affected by conditions in the banking and financial markets during the past couple of years. If any of the lenders that are party to our Credit Facility experience difficulties that render them unable to fund otherwise available future draws, the lack of funding could have a material adverse effect on our business, results of operations or ability to maintain the overall quality of our rental fleet.

We believe that, subject to the effects of unknown future events such as further economic developments and the outcome of related uncertainties, our existing sources of liquidity will likely be sufficient to meet the cash requirements of our operations at least to the maturity of the Credit Facility in August 2011. However, our liquidity could also be adversely affected by decreases in equipment values, which is a primary factor in the calculation of our borrowing base. To the extent that equipment values adversely affect our borrowing base and the sources of liquidity described above are not sufficient to fund our operations, we may require additional debt or equity financing, access to which will be affected by prevailing economic conditions and financial, business, and other factors, some of which are beyond our control. In addition, the Company’s revolving credit facility matures August 21, 2011. Prior to that date, we intend to either refinance the facility or arrange for an extension of the maturity, but we may be unable to do so.

Indebtedness

As of September 30, 2010, the weighted average interest rate on our total debt of $619 million, described in more detail below, was approximately 8.0%.

Credit Facility and Term Loan. The Credit Facility is comprised of a $350 million revolving credit facility (“Revolver”) and a $95 million term-loan facility (“Term Loan”), both secured by a first priority interest in substantially all of our existing and future acquired assets. The Revolver provides for an aggregate commitment of $350 million subject to a borrowing base test of eligible accounts receivable, rental equipment, transportation equipment, and inventories (“Qualified Collateral”). The Revolver is used to finance working capital needs, capital expenditures, and general corporate purposes. Cash flow from operations and net proceeds from the sale of our used rental equipment are applied to reduce borrowings under the Revolver, and our expenditures for rental equipment and other property and equipment increase borrowings under the Revolver. The Revolver matures August 21, 2011.

The borrowing base under the Revolver is limited to the lesser of the aggregate commitment of $350 million or the Qualified Collateral, after reducing each by a $40 million availability block. As of September 30, 2010, our borrowing base was $310 million, we had $286 million outstanding and $64 million of unused availability, but only $21 million of borrowing availability, under the Revolver because of reserves required by the lenders under this facility. We are required to report on compliance with financial covenants quarterly. The financial covenants required to be maintained are (1) a net capital expenditure restriction that was fixed at $4.5 million for the first two quarters of 2010, and subsequently determined quarterly based on a performance grid that considers time utilization and dollar utilization, and (2) a minimum time utilization ratio of 45%. The net capital expenditure restriction for the three months ended September 30, 2010 was $3.25 million, however actual net capex for this period was a negative $382,500. According to the covenant, any amount not utilized in one fiscal quarter may be carried forward to the next quarter, but not beyond. The net capital expenditure restriction for the three months ending December 31, 2010 is $7.1 million and could be as much as $10.3 million with the carryover of the amount not utilized in the third quarter 2010.

Borrowings under the Revolver accrue interest at either (a) prime rate plus 250 to 300 basis points for prime rate loans, or at the Company’s option (b) LIBOR plus 350 to 400 basis points for LIBOR based loans; the rates charged fluctuate within these ranges depending on our fixed charge coverage ratio, as defined in the Credit Facility. As of September 30, 2010, the Revolver had a weighted average interest rate of 4.3% per annum.

The Term Loan bears interest at 16% per annum, payable monthly and matures December 15, 2012.

The Credit Facility contains other usual and customary covenants and default provisions.

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Second Priority Notes. At September 30, 2010, we had outstanding $236.7 million principal amount of Second Priority Notes. These notes are due August 15, 2013 and are secured on a second priority basis, behind the Revolver and Term Loan, by substantially all of our existing and future acquired assets.

Sources and uses of cash. Net cash provided by operating activities for the nine months ended September 30, 2010 was $42 million lower than for the same period in 2009 due primarily to a higher net loss in 2010 of about $31 million excluding the effects of the $12 million gain on debt exchange in 2010. Net cash used in investing activities for 2010 decreased $22 million due to significantly lower capital expenditures in 2010. Net cash provided by financing activities increased in 2010 by about $21 million primarily to fund operations and net capital expenditures.

Non-GAAP Financial Measures

The Company presents EBITDA because it believes EBITDA is a useful analytical tool routinely used as a valuation and financial performance measure by the financial and investment communities. The Company also uses EBITDA because EBITDA is a primary factor in the calculation of certain covenants in the Company’s credit agreements. See “—Liquidity and Capital Resources.” EBITDA is defined as earnings before interest, taxes, depreciation, and amortization (gain on debt exchange has also been included for this comparison). EBITDA is not, however, a measure of financial performance or liquidity under U.S. generally accepted accounting principles. Accordingly, EBITDA should not be considered a substitute for net income or cash flows as an indicator of the Company’s operating performance or liquidity. EBITDA margin is EBITDA as a percentage of total revenues. For purposes of the following, debt includes line of credit payable, term loans payable, other notes payable, and the Second Priority Notes.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)

EBITDA	$	18,178		$	18,088		$	34,956		$	55,923
EBITDA margin	22.7		%	24.9		%	16.4		%	26.1		%

	Twelve Months Ended September 30, 2010
	(In thousands)
EBITDA	$	46,753
EBITDA margin	16.5		%
Debt to EBITDA ratio	13.2		x

The tables below provide reconciliations of net loss (which includes a $1 million charge in settlement of a lawsuit in September 2010) and EBITDA for the periods indicated.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)
Net loss	$	(19,651	)	$	(16,537	)	$	(67,097	)	$	(48,163	)
Gain on debt exchange	—			—			(11,929		)	—
Interest expense	13,565			9,212			39,904			27,607
Depreciation, rental equipment	21,653			22,899			66,293			69,108
Other depreciation and amortization	2,611			2,514			7,785			7,371
EBITDA	$	18,178		$	18,088		$	34,956		$	55,923

	Twelve Months Ended September 30, 2010
	(In thousands)
Net loss	$	(89,821	)
Gain on debt exchange	(11,929		)
Interest expense	49,131
Depreciation, rental equipment	89,028
Other depreciation and amortization	10,344
EBITDA	$	46,753

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The fair value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of our long-term fixed interest rate debt (specifically, the Second Priority Notes) at September 30, 2010 was $101.8 million; its carrying value was $236.7 million. Estimated fair values were determined by reference to quoted market prices.

The interest on borrowings under our credit facility is at variable rates based on a financial performance test. Borrowings under the credit facility accrue interest at either (a) prime rate plus 250 to 300 basis points for prime rate loans, or at our option (b) LIBOR plus 350 to 400 basis points for LIBOR based loans; the rates charged will fluctuate within these ranges depending on our fixed charge coverage ratio. In addition, our credit facility has an annual unused line fee of 50 basis points for each lender’s unused commitments under the revolving credit line. An increase in the interest rate of 100 basis points would increase our annual interest expense by $2.8 million based on $286 million, which was the amount of outstanding debt under our credit facility as of September 30, 2010.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in internal controls over financial reporting.

There were no changes in our internal controls over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. See “We may be unable to maintain an effective system of internal control over financial reporting” in Part II, Item 1A, “Risk Factors.”

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are party to various litigation matters in the ordinary course of our business. We cannot estimate our ultimate legal and financial liability with respect to our pending litigation matters at this time. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our future financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Our business, our Second Priority Notes and our financial performance are subject to the following risks. If any of the circumstances described in these risk factors occurs, our business, results of operations or financial condition would likely suffer and the value of our outstanding notes could be adversely affected.

The effects of the economic recession have adversely affected our revenues and operating results and may further erode our revenues, operating results, or financial condition.

The recession has reduced demand for equipment rentals and sales, which in turn has adversely impacted, and may continue to adversely impact, the value of our rental fleet, which could decrease our borrowing availability. Additionally, current or potential customers may delay or decrease equipment rentals or purchases, may be unable to pay us for prior equipment rentals, may delay paying us for prior equipment rentals and services, or may be unable to obtain financing for planned equipment purchases. Also, if the banking system or the financial markets deteriorate or become volatile again, the funding for and number of capital projects may continue to decrease, which may further impact the demand for our rental equipment and services.

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Decreases in construction, industrial activities or the convention business could adversely affect our revenues and operating results by decreasing the demand for our equipment or the rental rates or prices we can charge.

Our products and services are used primarily in non-residential construction activity and, to a lesser extent, in residential construction activity, industrial activity and the convention business. The economic downturn and the resulting decreases in construction and industrial activities in the United States has adversely affected our revenues and operating results and may further decrease the demand for our equipment and the prices we can charge. By way of comparison, in 2002 and 2003, non-residential construction activity declined significantly from prior periods, which had an adverse effect on our results in 2002 and 2003. Because of the current economic environment, we have seen similar adverse effects on our results in 2009 and 2010 and expect this trend may continue into 2011.

Certain factors that may cause weakness in the construction industry include:

· weakness in the economy, the onset of a recession or a prolonged recession;

· an increase in interest rates;

· lack of available financing to fund development projects;

· reductions in corporate spending for plants and facilities or government spending for infrastructure projects;

· adverse weather conditions or natural disasters;

· terrorism or hostilities involving the United States; and

· an increase in the cost of construction materials.

Our operating results are highly dependent on the strength of the Las Vegas economy and that of the other principal market areas in which we operate. For the three months ended September 30, 2010, the percentage of revenues attributable to our Las Vegas operations was 18%, with an additional 27% generated in California and an additional 19% generated in Texas. Any future weakness in the Las Vegas, California or Texas economies could have a material adverse effect on our operations.

Our substantial debt exposes us to various risks.

Our total indebtedness was $619 million at September 30, 2010. Our substantial indebtedness has the potential to affect us adversely in many ways. For example, it will or could:

· increase our vulnerability to adverse economic, industry or competitive developments;

· require us to devote a substantial portion of our cash flow to debt service, reducing funds available for other purposes or otherwise constrain our financial flexibility;

· affect our ability to obtain financing, particularly because substantially all of our assets are subject to security interests relating to existing indebtedness; or

· decrease our profitability or cash flow.

Also, if we are unable to service our indebtedness and fund our operations, we will be forced to consider alternative strategies, which may include:

· reducing or delaying capital expenditures;

· limiting our growth;

· seeking additional capital;

· selling assets; or

· restructuring or refinancing our indebtedness.

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If we adopt an alternative strategy, it may not be successful and we may still be unable to service our indebtedness and fund our operations.

See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If we are unable to obtain additional capital as required, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment and to new rental branches. If we expand our operations, we may incur significant transaction expenses and experience additional risks associated with entering new markets.

Our ability to compete, sustain our growth and expand our operations through new branches largely depends on access to capital. If the cash we generate from our business, together with cash on hand and cash that we may borrow under our credit facility, is not sufficient to implement our growth strategy and meet our capital needs, we will require additional financing. However, we may not succeed in obtaining additional financing on terms that are satisfactory to us or at all. The revolving portion of our Credit Facility matures in August 2011. Due to recent developments and current conditions in the credit and capital markets, financing may not be available to us at acceptable rates or costs or otherwise on acceptable terms and we may not be able to extend the maturity of our revolver. In addition, our ability to obtain additional financing is restricted by both the indenture governing our Second Priority Notes and the agreements governing our Credit Facility. Although the terms of our existing debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. If we are unable to obtain sufficient additional capital in the future, we may be unable to fund the capital outlays required for the success of our business, including those relating to purchasing equipment and to new rental branches. Furthermore, any additional indebtedness that we do incur may make us more vulnerable to the risks described above relative to our substantial debt levels.

The opening of any new branches or the completion of any future acquisitions of other equipment rental companies may result in significant start-up or transaction expenses and risks associated with entering new markets in which we have limited or no experience. New rental branches, in particular, may require significant capital expenditures and may initially have a negative impact on our results of operations. New branches may not become profitable when projected or ever. Our ability to realize the expected benefits from any future acquisitions of other equipment rental companies depends in large part on our ability to integrate and consolidate the new operations with our existing operations in a timely and effective manner. In addition, we may fail or be unable to discover certain liabilities of any acquired business, including liabilities relating to noncompliance with environmental and occupational health and safety laws and regulations. Any significant diversion of management’s attention from our existing operations, the loss of key employees or customers of any acquired business, or any major difficulties encountered in opening new branches or integrating new operations could have a material adverse effect on our business, financial condition or results of operations.

The agreements governing our debt contain cross default or cross acceleration provisions that may cause all of the debt issued under such agreements to become immediately due and payable as a result of a default under one of our debt agreements.

Our failure to comply with the obligations contained in the indenture governing our Second Priority Notes and the agreements governing our Credit Facility or other instruments governing our indebtedness could result in an event of default under the applicable agreement, which could result in the related debt and the debt issued under other agreements becoming immediately due and payable. In that event, we would need to raise funds from alternative sources, which funds may not be available to us on favorable terms, on a timely basis or at all. Alternatively, a default could require us to sell our assets and otherwise curtail our operations in order to pay our creditors, or file for bankruptcy protection. Such alternative measures could harm our business, financial condition and results of operations.

Economic conditions, uncertainties and related risks could adversely affect the lenders that are parties to the revolver under our Credit Facility.

As of September 30, 2010, we had $286 million outstanding and $64 million of unused availability, but only $21 million of net borrowing availability, under the revolving portion of our Credit Facility because of reserves required by the lenders under this facility. Many banks and other financial institutions have been adversely affected by conditions in the banking and financial markets during the past two years. If any of the lenders that are parties to our Credit Facility experience difficulties that render them unable to fund future draws on the revolver, we may not be able to access all or a portion of these funds. The inability to make future draws could have a material adverse effect on our business, results of operations or ability to maintain the overall quality of our rental fleet.

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In addition, from time to time, the priority debt restriction under the indenture governing our Second Priority Notes may be more restrictive than the calculation of unused borrowing availability under the Credit Facility. As of September 30, 2010, the indenture covenant limiting priority indebtedness was more restrictive than the Credit Facility and, as a result, unused borrowing availability applying both restrictions was $15 million.

We depend on key personnel whom we may not be able to retain.

Our future performance depends on the continued contributions of key management personnel. A loss of one or more of these key people, our inability to attract and retain additional key management personnel, including qualified rental store managers, or the inability of these personnel to manage our operations successfully could harm our business and prevent us from implementing our business strategy. We do not maintain “key man” life insurance, and do not have employment agreements with any of our key employees.

The equipment rental industry is highly competitive, and competition could lead to a decrease in our market share or in the rental rates and prices we charge.

The equipment rental industry is highly fragmented and competitive. Our competitors include:

· small independent businesses with one or two rental locations;

· regional competitors that operate in one or more states;

· large national companies, including public companies and divisions of public companies; and

· equipment manufacturers and dealers that both sell and rent equipment directly to customers.

Many of our competitors are significantly larger and have greater financial and marketing resources than we have, are more geographically diverse than we are and have greater name recognition than we do. We may in the future encounter increased competition in the equipment rental market or in the equipment repair and services market from existing competitors or from new market entrants.

Competition could adversely affect our revenues and operating results by decreasing our market share or depressing the rental rates and prices we can charge. We believe rental rates are one of the primary competitive factors in the equipment rental industry. From time to time, we or our competitors may attempt to compete aggressively by lowering rental rates or prices. To the extent we lower rental rates or prices to attempt to increase or retain market share, our operating margins would be adversely impacted. In some cases, we may not be able to or may choose not to match a competitor’s rate or price reductions. If we do not, we may lose market share, resulting in decreased revenues and cash flow, which could have a material adverse effect on our business.

Disruptions in our information technology systems could adversely affect our operating results by limiting our capacity to effectively monitor and control our operations.

Our information technology systems help us monitor and control our operations to adjust to changing market conditions, including management of our floating fleet. Any disruptions in our information technology systems or the failure of these systems to operate as expected could adversely affect our operating results.

The nature of our business exposes us to liability claims, which may exceed the level of our insurance.

Our business exposes us to claims for personal injury, death or property damage resulting from the use of the equipment we rent, sell, service or repair and from injuries caused in motor vehicle accidents in which our personnel are involved. Our business also exposes us to worker compensation claims and other employment-related claims. We carry comprehensive insurance, subject to deductibles, at levels we believe are sufficient to cover existing and future claims. Other claims have been made against us that, on their face, far exceeded the level of our insurance. Future claims may exceed the level of our insurance, and our insurance may not continue to be available on economically reasonable terms, or at all. In addition, certain types of claims, such as claims for punitive damages, are not covered by our insurance. Whether we are covered by insurance or not, certain claims may generate negative publicity, which may lead to lower revenues, as well as additional similar claims being filed.

We must comply with numerous environmental and occupational health and safety regulations that may subject us to unanticipated liabilities.

Our facilities and operations are subject to federal, state and local environmental and occupational safety and health requirements, including those relating to discharges of substances into the air, water and land, the handling, storage, use and disposal of hazardous materials and wastes and the cleanup of properties affected by pollutants. We do not anticipate any material adverse effect on our business, financial condition or competitive position as a result of our efforts to comply with these requirements. However, if we violate environmental laws or regulations, we may be held liable for damages and the costs of remedial actions, and could be subject to fees and penalties. We may violate or incur liability under environmental laws and regulations in the future as a result of human error, newly discovered noncompliance, contamination or other causes. These violations or liabilities could have a material adverse effect on our business, financial condition and results of operations.

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Under some environmental laws and regulations, an owner or operator of a site or facility may be liable for the costs of removal or remediation of hazardous substances located on or emanating from the site or facility. These laws and regulations often impose strict and, under certain circumstances, joint and several liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous substances.

Some of our business operations at existing and former branches use, or have used, substances which are or may be considered hazardous or otherwise are subject to applicable environmental requirements. As a result, we may incur liability in connection with the use, management and disposal of these substances. We use hazardous materials such as petroleum products for fueling our rental equipment and vehicles and solvents to clean and maintain rental equipment and vehicles. We incur expenses associated with using, storing and managing these materials in compliance with environmental requirements. We also generate and must manage in accordance with applicable environmental laws and regulations certain used or spent materials such as used motor oil, radiator fluid and solvents. We often seek to reuse, recycle or dispose of these spent materials at offsite disposal facilities in accordance with environmental laws and regulations. We could become liable under various federal, state and local laws and regulations for environmental contamination at off-site facilities where our waste has been disposed of, regardless of whether the waste was disposed of in compliance with environmental requirements.

Environmental and safety requirements may become stricter or be interpreted and applied more strictly in the future. In addition, we may be required to indemnify other parties for adverse environmental conditions that are now unknown to us. These future changes or interpretations, or the indemnification for such adverse environmental conditions, could result in environmental compliance or remediation costs not anticipated by us, which could have a material adverse effect on our business, financial condition or results of operations.

We may encounter substantial competition in our efforts to expand our operations.

A key element of our growth strategy has been to continue to expand by opening new rental branches. The success of our growth strategy depends in part on identifying sites for new branches at attractive prices. Zoning restrictions often prevent us from being able to open new branches at sites we have identified. We may also encounter substantial competition in our efforts to acquire new sites or in any efforts we may make to acquire other equipment rental companies, which may limit the number of acquisition opportunities and lead to higher acquisition costs. We may not have the financial resources necessary to open any new branches or complete any acquisitions in the future or the ability to obtain the necessary funds on satisfactory terms or at all.

In the past when we have opened new branches, we have attracted talented salespeople who have terminated their employment with other rental companies to work for us. It has become industry practice for equipment rental companies to seek non-competition agreements when they hire salespeople. This practice may hinder our ability to attract talented salespeople to work at new branches, which could prevent us from opening new branches at sites we have identified or result in our failure to realize the expected benefits from any new branch we open.

We are controlled by one shareholder. His interests may conflict with the interests of the holders of our notes and other creditors .

Don F. Ahern, our President and Chief Executive Officer, beneficially owns 97% of our outstanding common stock; his brother, John Paul Ahern, Jr., owns the remaining 3% of our outstanding common stock. As a result, Don F. Ahern controls the outcome of matters submitted to a shareholder vote. Circumstances may occur in which the interests of Don F. Ahern, as our majority shareholder, could conflict with the interests of the holders of our Second Priority Notes and our other creditors.

We purchase a significant amount of our equipment from a small number of manufacturers. Termination of our relationship with any of those manufacturers could have a material adverse effect on our business because we may be unable to obtain adequate rental and sales equipment from other sources in a timely manner or at all.

We purchase most of our rental and sales equipment from a small number of original equipment manufacturers. Although we believe we have alternative sources of supply for the rental and sales equipment we purchase in each of our principal product categories, termination of our relationship with any of these major suppliers could have a material adverse effect on our business, financial condition or results of operations if we were unable to obtain adequate rental and sales equipment from other sources in a timely manner or at all.

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Our rental fleet is subject to residual value risk upon disposition.

The market value of any piece of rental equipment could be less than its depreciated value at the time it is sold, in which case, that sale would result in a loss. The market value of used rental equipment depends on several factors, including:

· the market price for new equipment of a like kind;

· wear and tear on the equipment relative to its age;

· the time of year that it is sold (generally prices are higher during the construction season);

· bankruptcy or insolvency of our competitors, which could lead to a larger than expected amount of used equipment for sale in the market, potentially adversely impacting used equipment values;

· worldwide and domestic demand for used equipment; and

· general economic conditions.

In addition, weakness in the non-residential construction market has caused, and may continue to cause, a decrease in the value of used rental equipment, which could negatively impact our borrowing availability. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

Fluctuations in fuel costs or reduced supplies of fuel could harm our business.

One of our competitive advantages is the mobility of our fleet. We could be adversely affected by limitations on fuel supplies or increases in fuel prices that result in higher costs of transporting equipment from one branch to another branch.

If our repair and maintenance and equipment replacement costs increase as our rental fleet ages and we are unable to recoup these costs, our earnings will decrease.

During the third quarter of 2008, we began aggressively scaling back our capital expenditures. In all of 2009, we had total capital expenditures for rental equipment of $27.7 million. During the three months ended September 30, 2010, we had total capital expenditures for rental equipment of $4.9 million. We expect total capital expenditures for rental equipment in 2010 to be less than the 2009 amount based on anticipated customer demand and market conditions. Because of these substantial reductions in capital expenditures for new rental fleet, the average age of our rental fleet will likely increase in 2010. The weighted average age of our fleet at September 30, 2010 was 45.9 months, and 36.2 months at September 30, 2009. Accordingly, we expect the cost of repairing and maintaining our rental fleet, which was approximately $4.5 million and $4.4 million for the three month periods ended September 30, 2010 and 2009, will likely increase. Additionally, if the cost of new equipment we use in our rental fleet increases, we may be required to spend more for replacement equipment. The cost of new equipment may increase due to increased material costs and increases in the cost of fuel, which is used in the manufacturing process and in delivering the equipment to us. Although such increases did not have a significant effect on our financial condition and results of operations in 2009 or 2010, any material increase in new equipment and repairs and maintenance costs could adversely affect our revenues, profitability and financial condition.

We may be unable to maintain an effective system of internal control over financial reporting.

We are required by the terms of the indenture governing our Second Priority Notes to file certain reports, including annual and quarterly periodic reports, under the Exchange Act. The economic downturn and business outlook may require us to cut staff in order to maintain our cash flow. If this occurs, our internal and disclosure controls and procedures could be adversely affected. To the extent we are unable to maintain effective internal control over financial reporting or disclosure controls and procedures, we may be unable to produce reliable financial reports and/or public disclosure, detect and prevent fraud or comply with our reporting obligations on a timely basis. Any such failure could harm our business. In addition, failure to maintain effective internal control over financial reporting or disclosure controls and procedures could result in the loss of investor confidence in the reliability of our financial statements and public disclosure and a loss of customers, which in turn could harm our business.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (Removed and Reserved)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.		Description

3.1		Amended and Restated Articles of Incorporation. (1)

3.2		Amended and Restated Bylaws. (1)

4.1		Second Amended and Restated Loan and Security Agreement. (2)

4.2		Indenture, dated as of August 18, 2005, between the Company, as Issuer, and Wells Fargo, N.A., as Trustee. (3)

4.3		Supplemental Indenture. (4)

4.4		Registration Rights Agreement, dated as of January 17, 2007, by and among the Company, CIBC World Markets Corp. and Banc of America Securities LLC. (5)

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated herein by reference to our Registration Statement on Form S-4, File No. 333-128688, filed with the SEC on September 29, 2005.

(2) Incorporated herein by reference to our Current Report on Form 8-K, filed with the SEC on January 12, 2010.

(3) Incorporated herein by reference to our Registration Statement on Form S-4, File No. 333-128688, filed with the SEC on September 29, 2005.

(4) Incorporated herein by reference to our Current Report on Form 8-K, filed with the SEC on December 30, 2009.

(5) Incorporated herein by reference to our Registration Statement on Form S-4, File No. 333-141011, filed with the SEC on March 1, 2007.

Table of Contents

SIGNATURES

Pursuant to the requirements 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, on November 12, 2010.

	AHERN RENTALS, INC.


	By:	/s/ Howard L. Brown
		Howard L. Brown
		Chief Financial Officer and Director
		(Principal Financial and Accounting Officer)

AHERN RENTALS INC 10-Q