<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-36341
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RENTX INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<C> <C> <C>
DELAWARE 7359 84-1336248
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
6000 EAST EVANS AVENUE
SUITE 2-300
DENVER, COLORADO 80222
(303) 512-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ARNOLD A. BERNSTEIN
6000 EAST EVANS AVENUE, SUITE 2-300
DENVER, COLORADO 80222
(303) 512-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<C> <C>
ANDREW L. BLAIR, JR., ESQ. THERESE A. MROZEK, ESQ.
SHERMAN & HOWARD L.L.C. BROBECK, PHLEGER & HARRISON LLP
3000 FIRST INTERSTATE TOWER NORTH 2200 GENG ROAD
633 SEVENTEENTH STREET TWO EMBARCADERO PLACE
DENVER, COLORADO 80202 PALO ALTO, CALIFORNIA 94303
(303) 297-2900 (650) 424-0160
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share................... $43,125,000 $13,069(2)
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) $11,616 previously paid and $1,453 paid herewith.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 3, 1997
RENTX LOGO
3,750,000 SHARES
COMMON STOCK
All of the shares of Common Stock offered hereby are being issued and sold by
RentX Industries, Inc. ("RentX" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price will be between $8.00 and
$10.00 per share. See "Underwriting" for information relating to the method of
determining the initial public offering price.
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(2)................... $ $ $
==================================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $1,800,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 562,500 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS BT ALEX. BROWN
The date of this Prospectus is , 1997
<PAGE> 3
INSIDE FRONT COVER:
RentX logo; photo of a RentX associate assisting customers in front of a
RentX sign; photo of the inside of a RentX store showing merchandise; photo
of a RentX store yard showing equipment available for rent; photo of a
backhoe being used on a job site; photo of a home owner using a rototiller;
and photo of party tents assembled at a site.
FOLD OUT FRONT COVER:
Photos of rental equipment in use accompanied by RentX advertising slogans.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DISCUSSION OF THESE TRANSACTIONS,
SEE "UNDERWRITING."
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR ANY OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Risk Factors................................................ 7
Background of the Company................................... 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Information and Operating Data........... 18
Summary Unaudited Pro Forma Financial Information........... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 40
Management.................................................. 54
Certain Transactions........................................ 62
Principal Stockholders...................................... 65
Description of Capital Stock................................ 66
Shares Available for Future Sale............................ 69
Underwriting................................................ 71
Legal Matters............................................... 73
Experts..................................................... 73
Additional Information...................................... 74
Index to Financial Statements............................... F-1
</TABLE>
---------------------
The Company intends to mail to all of its stockholders annual reports
containing financial statements audited by independent auditors for each fiscal
year and quarterly reports containing unaudited financial data for each of the
first three quarters of each fiscal year.
The Company was incorporated in Delaware in March 1996. The Company's
principal executive offices are located at 6000 East Evans Avenue, Suite 2-300,
Denver, Colorado 80222, and its telephone number is 303-512-2000.
3
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, and the notes thereto, appearing elsewhere
in this Prospectus. As used in this Prospectus, unless the context otherwise
requires, the terms "RentX" or the "Company" include RentX Industries, Inc. and
the businesses of its subsidiaries. Unless otherwise indicated, all information
in this Prospectus (i) assumes an initial public offering price of $9.00 per
share (the midpoint of the estimated range of the initial public offering
price), (ii) assumes no exercise of the Underwriters' over-allotment option and
(iii) assumes the conversion of all of the outstanding shares of the Company's
Series A, Series B and Series C Preferred Stock and Class A Common Stock into an
aggregate of 5,722,018 shares of Common Stock, and the conversion of all
outstanding options to purchase shares of the Company's Class B Common Stock
into options to purchase a total of 248,308 shares of Common Stock, upon
consummation of this offering. References in this Prospectus to fiscal 1996 mean
the Company's fiscal year ended January 31, 1997.
THE COMPANY
RentX is a leading equipment rental company serving the needs of the
homeowner, light commercial and special events segments of the rental market.
RentX was formed in March 1996 to pursue a national consolidation and growth
strategy. Management believes RentX is unique in focusing on these fragmented
segments of the equipment rental market on a national scale. RentX is
implementing a branded national retail concept to offer a broad range of light
construction, industrial, general tool and special events equipment in a
service-oriented, customer-friendly and well-merchandised store. Company-wide
emphasis is placed on helping customers find "project solutions," backed by a
guarantee of complete customer satisfaction. On a pro forma basis, the Company
had revenues of $47.1 million in fiscal 1996 and revenues of $22.9 million for
the six months ended July 31, 1997. The Company's net income (loss) for the year
ended January 31, 1997 and the six months ended July 31, 1997 was $(76,000) and
$(404,000), respectively, on an historical basis and $2.8 million and $237,000,
respectively, on a pro forma basis.
Since May 1996, the Company has pursued an aggressive growth strategy,
acquiring 14 businesses with 57 stores in 10 states (the "Completed
Acquisitions"). The acquired businesses had been in operation for an average of
25 years. The Company currently has letters of intent to acquire an additional
business with two stores in Tennessee (the "Pending Acquisition"), and one other
immaterial business which would add one store in Colorado. The Company continues
to evaluate a large number of additional acquisitions. In addition to its
acquisition activity, the Company has built a substantial corporate
infrastructure by assembling an experienced management team, customizing and
commencing installation of a sophisticated management information system,
developing initiatives designed to enhance the performance of acquired stores
and developing refined concepts and prototypes for start-up stores, including
both general equipment rental stores to expand market coverage and special
events hubs. The Company's management includes executives with substantial
experience operating and growing multi-location, marketing-driven consumer and
commercial businesses, as well as executives with extensive experience in the
rental industry.
The Company's goal is to increase repeat business, attract new customers,
and ultimately to expand its target markets, while maximizing economies of scale
that arise from consolidation. RentX's strategy to achieve its goals includes:
providing total project solutions with guaranteed customer satisfaction;
developing a hub and spoke store structure in appropriate markets; implementing
sophisticated retailing techniques and marketing programs; generating
incremental revenue through tie-in merchandise sales; and implementing an
advanced management information system capable of integrating and analyzing
store data. RentX also endeavors to leverage the expertise of local managers by
preserving their autonomy and allows area managers sufficient flexibility to
tailor operations to their particular markets.
Management believes that RentX is well positioned to capitalize on
consolidation and growth opportunities in the homeowner, light commercial, and
special events segments of the equipment rental industry. The Company has
adopted a strategy for expansion through a combination of acquisitions, new
start-up stores in areas where it has an existing platform and increased sales
in existing stores. Acquisitions will include multi-store businesses to serve as
platforms in new markets
4
<PAGE> 6
and smaller "tuck-in" acquisitions in existing markets. Management believes that
the RentX concept can be adapted to a wide variety of markets, including large,
densely developed areas, smaller suburban markets and rural areas, by tailoring
the mix of equipment and merchandise, store size and concentration of stores to
fit the local customer base.
THE OFFERING
Common Stock Offered.......................... 3,750,000
Common Stock Outstanding after the Offering... 9,472,018(1)
Use of Proceeds............................... To reduce borrowings under the
Company's bank line of credit,
thereby increasing available
borrowing capacity for
acquisitions and working
capital, and to pay accrued
dividends on preferred stock.
See "Use of Proceeds."(2)
Proposed Nasdaq National Market Symbol........ RNTX
- ---------------
(1) Excludes (i) 248,308 shares subject to outstanding options granted pursuant
to the Company's stock option plans described in "Management -- Stock Option
Plans" (the "Stock Option Plans") or pursuant to individual agreements with
executive officers at a weighted average exercise price of $4.88 per share,
(ii) 193,400 shares subject to options to be granted pursuant to the Stock
Option Plans on the completion of this offering at an exercise price equal
to the offering price and (iii) 83,600 shares reserved for issuance pursuant
to the Stock Option Plans. See "Management -- Option Grants and -- Stock
Option Plans."
(2) All of the Company's outstanding preferred stock will be converted into
Common Stock upon completion of this offering and accrued dividends are
payable upon such conversion.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this Prospectus constitute
"forward-looking statements" within the meaning of the federal securities laws.
Such forward-looking statements involve known and unknown risks, uncertainties,
and other factors which may cause the actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, those described under "Risk
Factors" and the following: general economic and business conditions;
competition; success of operating initiatives and implementation of the RentX
model; development and operating costs; advertising and promotional efforts;
brand awareness; the occurrence or timing of acquisitions; availability,
locations and terms of sites for store development; changes in business strategy
or development plans; quality of management; availability, terms and deployment
of capital; business abilities and judgment of personnel; availability of
qualified personnel; labor and employee benefit costs; changes in, or the
failure to comply with, government regulations; construction costs; and other
factors referenced in this Prospectus. See "Risk Factors."
5
<PAGE> 7
SUMMARY FINANCIAL INFORMATION AND OPERATING DATA
(In thousands, except selected operating data and per share amounts)
<TABLE>
<CAPTION>
MAY 15, 1996
(COMMENCEMENT PRO FORMA PRO FORMA
OF OPERATIONS) AS ADJUSTED AS ADJUSTED
THROUGH YEAR ENDED SIX MONTHS SIX MONTHS
JANUARY 31, JANUARY 31, ENDED ENDED
1997(1) 1997(2) JULY 31, 1997 JULY 31, 1997(2)
-------------- ----------- ------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Rental revenue.............................. $ 9,221 $40,148 $13,598 $19,318
Rental equipment sales...................... 280 986 537 696
Merchandise and other....................... 1,337 5,921 1,934 2,903
------- ------- ------- --------
Total revenues....................... 10,838 47,055 16,069 22,917
Cost of revenues
Rental equipment expense.................... 1,285 4,895 1,634 2,212
Rental equipment depreciation............... 436 2,775 1,176 1,677
Cost of rental equipment sales.............. 272 907 512 655
Cost of merchandise sales................... 625 3,904 1,204 1,956
Direct operating expense.................... 4,864 19,469 6,763 10,235
------- ------- ------- --------
Total cost of revenues............... 7,482 31,950 11,289 16,735
Store contribution............................ 3,356 15,105 4,780 6,182
Selling, general and administrative expense... 2,351 8,721 3,504 4,601
Depreciation and amortization, excluding
rental equipment depreciation............... 293 944 422 538
------- ------- ------- --------
Operating income.............................. 712 5,440 854 1,043
Other expense (income), net................... 4 30 (38) (38)
Interest expense.............................. 784 738 1,295 687
------- ------- ------- --------
Income (loss) before income taxes............. (76) 4,672 (403) 394
Income taxes.................................. -- 1,865 -- 157
------- ------- ------- --------
Net income (loss)............................. (76) 2,807 (403) 237
Preferred stock dividends..................... (302) -- (384) --
------- ------- ------- --------
Net income (loss) attributable to common
stockholders................................ $ (378) $ 2,807 $ (787) $ 237
======= ======= ======= ========
Net income (loss) per common share............ $ (.01) $ .29 $ (.07) $ .02
======= ======= ======= ========
Common shares used in computing net
income (loss) per common share.............. 5,812 9,562 5,812 9,562
======= ======= ======= ========
Store contribution margin..................... 31.0% 32.1% 29.7% 27.0%
Operating margin.............................. 6.6% 11.6% 5.3% 4.6%
SELECTED OPERATING DATA:
Opening store count........................... -- -- 24 24
Stores purchased in acquisitions............ 24 59 33 35
New stores opened........................... -- -- 1 1
Stores closed............................... -- -- (1) (1)
------- ------- ------- --------
Ending store count............................ 24 59 57 59
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1997
-------------------------
JANUARY 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(2)
----------- ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ $29,083 $67,990 $71,642
Rental equipment, net....................................... 9,087 27,261 28,641
Total debt.................................................. 17,048 41,121 16,621
Redeemable preferred stock.................................. 10,050 20,295 --
Stockholders' (deficit) equity.............................. (270) (1,057) 48,826
Purchase price of acquisitions.............................. 26,526 27,747 31,747
Capital expenditures........................................ 1,811 9,586 NA
</TABLE>
- ---------------
(1) Includes information concerning the Company after the date of its first
acquisition. For information concerning the Company's predecessor, see
"Selected Financial Information and Operating Data."
(2) The pro forma as adjusted data gives effect to (i) the Completed
Acquisitions and the Pending Acquisition, (ii) the sale by the Company of
3,750,000 shares of Common Stock in the offering at an assumed initial
public offering price of $9.00 per share, (iii) a reduction in interest
expense and bank debt as a result of utilizing a portion of the estimated
net proceeds of the offering to reduce the debt of the Company and (iv) the
conversion of the Company's redeemable preferred stock and the payment of
the related accrued dividends, in each case as though such transaction had
occurred on the first day of the period presented in the case of statement
of operations data or at July 31, 1997 in the case of balance sheet data.
See "Use of Proceeds," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and the Company's historical and pro forma financial
statements and notes thereto. There can be no assurance that the Pending
Acquisition will be consummated.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ materially from the results discussed in
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY
RentX completed its first acquisition in May 1996 and had no operations
prior to that date. Accordingly, there is an extremely limited operating history
upon which to base an evaluation of the Company and its business and prospects.
The companies acquired by RentX had been operated independently by local
owner-managers and there can be no assurance that RentX will be able to
successfully integrate these businesses and operate them profitably on a
combined basis. As a result, period-to-period comparisons of the Company's
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. The Company's management team has been
assembled only recently and there can be no assurance that the management group
will be able to oversee the operation of the combined businesses and effectively
implement the Company's operating and growth strategies.
The Company's operating and growth strategies contemplate the
implementation of the RentX business model at acquired stores, subject to
adjustments for local market conditions, including an expanded inventory of
rental equipment and merchandise at many of the acquired stores. See
"Business -- Store Format and Retail Initiatives." The Company has only recently
begun implementing the RentX model at all acquired stores and there can be no
assurance that it can complete such implementation in a timely manner without
substantial costs, delays or other problems or that the new model will be
successful. The Company incurs additional costs at each acquired store in
connection with this process, which reduces short-term profitability, and there
can be no assurance that the Company will be able to recover such costs or
maintain historical levels of sales and profitability after the process is
completed. The Company's growth strategy also contemplates the establishment of
new stores in markets where businesses are acquired. The first two new stores
were opened in May and October 1997, and the Company intends to open a total of
five to 10 new stores in the fiscal year ending January 31, 1998. The Company
does not yet have sufficient experience with new stores to have tested the
concepts that it applies in choosing the size, configuration and location of
such stores. There can be no assurance that any new stores will be opened on
schedule, if at all, or operated profitably.
RISKS RELATING TO GROWTH STRATEGY
The principal component of the Company's growth strategy is to continue to
expand through additional acquisitions which complement the Company's business
in new or existing markets. Since its formation in 1996, the Company has pursued
an aggressive growth strategy and has acquired 14 businesses with 57 stores in
10 states. It currently has letters of intent with respect to the Pending
Acquisition and one other immaterial acquisition, but there can be no assurance
that either or both of such acquisitions will be consummated. The Company also
intends to grow by opening new stores in existing markets. The Company's future
growth will be dependent upon a number of factors including, among others, the
Company's ability to (i) identify and negotiate satisfactory agreements with
acceptable acquisition candidates; (ii) identify and secure sites for new
stores; (iii) generate sufficient funds from existing operations or obtain
third-party financing to support expansion; (iv) staff, train and retain skilled
on-site management personnel; (v) successfully integrate acquired businesses
with the Company's existing operations and systems; and (vi) expand its customer
base. Certain of these factors are beyond the Company's control and may be
affected by the economy or actions taken by competing companies. There can be no
assurance that the Company will successfully expand or that any expansion will
result in profitability. The failure to effectively identify, evaluate, purchase
and
7
<PAGE> 9
integrate acquired businesses would adversely affect the Company's business,
financial condition and results of operations, causing negative effects on the
market price of the Common Stock. In addition, acquisitions involve a number of
special risks, such as diversion of management's attention, difficulties in the
integration of acquired operations and retention of key personnel and
unanticipated legal liabilities, some or all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The results achieved to date by the Company may not be indicative of
its prospects or ability to operate successfully in new markets, many of which
may have different competitive conditions and demographic characteristics than
the Company's current markets.
The Company's strategy to expand in existing markets by opening new stores
involves a number of special risks, including unexpected delays in opening due
to construction delays or the failure of vendors to deliver equipment, fixtures
or merchandise, inability to obtain necessary zoning or other regulatory
approvals, hiring and training skilled personnel to staff the new stores,
integrating new personnel and facilities into the Company's overall systems and
operations and significant start-up costs which must be incurred before the
viability of the stores is established, some of which are beyond the control of
the Company. There can be no assurance that the Company will be successful in
opening new stores on schedule, if at all, or that such new stores will achieve
revenue and profitability levels comparable to existing stores, if they are
profitable at all, or that the Company will improve its overall market position
and profitability by opening such new stores.
In connection with prospective acquisitions and new stores, the Company
anticipates experiencing growth in the number of its employees and the
geographic area of its operations. The Company believes this growth will
increase the operating complexity of the Company, the demands on its operating
and financial systems and the level of responsibility for both existing and new
management personnel. Implementation of the Company's growth strategy may
therefore impose significant strain on the Company's management and systems. To
manage this expected growth, the Company intends to continue to expand, train
and manage its employee base and update its systems as necessary. There can be
no assurance that the Company will be able to attract and retain qualified
management and employees or maintain adequate operating and financial systems
and controls to support its growth. The inability of the Company to successfully
manage expected growth would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Growth
Strategy."
DEPENDENCE ON ADDITIONAL CAPITAL FOR FUTURE GROWTH
Expansion of the Company through acquisitions, new stores and internal
growth will require significant capital expenditures. The Company must continue
to reinvest in high quality, well-maintained equipment and rental facilities in
order to remain competitive. In addition, the Company will be required to make
substantial capital expenditures in implementing the RentX business model,
including increasing inventories at recently acquired stores. Although the
Company's actual capital needs will vary depending upon the number of
acquisitions completed, whether such acquisitions are financed through cash or
issuance of equity securities, the number of new stores opened and the level of
reinvestment in rental equipment inventory, the Company currently anticipates
that total capital expenditures through January 31, 1999 will be approximately
$150 million. The Company has historically financed acquisitions and capital
expenditures primarily through the issuance of equity securities, secured
borrowings and internally generated cash flow. The proceeds of the offering,
borrowings under the Company's current credit facility and funds generated from
operations are expected to fund capital requirements until April 1998. To fully
implement its growth strategy and meet the resulting capital requirements, the
Company will be required to increase amounts available under its credit facility
and/or issue additional equity securities (which could result in dilution to the
purchasers of Common Stock offered hereby). Such additional indebtedness would
likely increase RentX's leverage, may make the Company more vulnerable to
economic downturns and may limit its ability to withstand competitive pressures.
There can be no assurance that additional capital, if and when required, will be
available on terms acceptable to the Company, or at all. Failure by the
8
<PAGE> 10
Company to obtain sufficient additional capital in the future would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Growth Strategy."
DEPENDENCE ON MANAGEMENT INFORMATION SYSTEM
The Company believes that its management information system is critical to
the success of its operations. RentX has recently completed the installation of
a new integrated management, inventory, accounting and point-of-sale system in
all of its stores. Until the Company installs its system in newly acquired
stores, they are operated using the systems in place at the time of the
acquisition. The Company's failure to implement the system in future stores
could adversely affect revenues and profitability. RentX has not operated with
the new system for a full fiscal year and has not had the opportunity to use the
system with a large number of stores. In addition, some of the system's
capabilities, such as the ability to capture and analyze certain information,
are not yet fully functional. Implementation of these capabilities will require
substantial time and cost and there can be no assurance that the Company will be
able to utilize these capabilities in the near-term. The Company's aggressive
growth strategy is expected to place significant additional burdens on the
system and will eventually require the expansion of the hardware for the system.
There can be no assurance that the system will handle the additional transaction
volume satisfactorily, that it can be expanded to keep pace with the Company's
expected growth or that the system's cost will not exceed the Company's current
expectations. The failure of the system to perform in accordance with design
specifications could have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the Company relies on a
single outside vendor for the software and support of its management information
system and on an independent contractor to monitor the operation of the system.
If the Company's current vendor failed to support the software, or if the
Company's independent system monitoring firm failed to promptly identify and
report operating problems in the system, the Company could experience system
delays or interruptions, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Management Information System."
COMPETITION; LIMITED BARRIERS TO ENTRY
The overall equipment rental industry is highly fragmented and competitive
with limited barriers to entry. The Company's competitors in various segments of
its business include independent businesses with one to four rental stores in a
single geographic area or regional competitors that operate in more than one
state; large national equipment rental companies; home improvement and hardware
retailers; and equipment vendors and dealers who both sell and rent equipment
directly to customers. Some of the Company's competitors have greater financial
resources and a longer operating history than the Company and a substantial
local customer base, and consequently have greater name recognition than the
Company. There can be no assurance that the Company will not encounter increased
competition from existing competitors or new market entrants that may be
significantly larger and have greater financial and marketing resources than the
Company. Increased competition is likely to result in, among other things,
reduced operating margins, loss of market share and diminished brand value, any
one of which could have a material adverse effect on the Company. One equipment
rental company which operates primarily in the heavy equipment segment has
significantly reduced prices on longer term rentals of certain pieces of heavy
equipment. In addition, existing or future competitors may compete with the
Company for acquisition candidates and sites for new stores, which could have
the effect of increasing the price for acquisitions or reducing the number of
suitable acquisition candidates or new store locations. Currently, the largest
companies in the equipment rental industry, including a number which are
actively pursuing consolidation and growth strategies, are primarily in the
heavy equipment segment of the market, but also compete in some of the Company's
targeted segments. There can be no assurance that some or all of these companies
will not increase their focus on one or more of the market segments in which the
Company is active, which would
9
<PAGE> 11
significantly increase competition for customers, acquisitions and locations for
new stores. In addition, there can be no assurance that foreign companies that
focus on the Company's market segments will not aggressively enter the U.S.
market. See "Business -- Competition."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance and development will depend, in large
part, upon the efforts and abilities of certain members of senior management,
particularly Arnold A. Bernstein, Chief Executive Officer, Gary J. Kulesza,
Chief Operating Officer and Thomas D. Nugent, Chief Financial Officer. The loss
of the services of one or more members of senior management could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company is dependent upon the
performance and productivity of its local area managers and field personnel and
upon retaining the key members of operating management of the businesses it
acquires. The Company's ability to attract and retain business is significantly
affected by local relationships and the quality of service rendered by local
managerial personnel. The loss of the Company's key local managers could have an
adverse effect on the Company's business, financial condition and results of
operations, including the Company's ability to establish and maintain customer
relationships and to control store costs. See "Management."
DEPENDENCE ON BACE INDUSTRIES; POSSIBLE CONFLICTS OF INTEREST WITH BACE
INDUSTRIES
The Company's success is dependent on its continued relationship with BACE
Industries, LLC ("BACE"). The Company and BACE are parties to a Consulting
Agreement under which BACE provides consulting services to the Company. When the
Company was first founded, those services included a wide range of management
and administrative support. As the Company has assembled its own management team
and systems, BACE's role now consists primarily of assisting management in
identifying, evaluating and effecting acquisitions of companies. The termination
of this Consulting Agreement or the loss of the services provided by BACE could
have a material adverse effect on the Company's business, financial condition or
results of operations and in particular its ability to successfully implement
its acquisition strategy. BACE does not have and after the offering will not
have a majority stock ownership position in the Company or majority
representation on the Board of Directors. After consummation of this offering,
the members and employees of BACE will beneficially own 19.1% of the outstanding
shares of Common Stock of the Company (18.1% if the Underwriters' over-allotment
option is exercised in full) and Craig J. Zoellner and Richard M. Tyler,
principals of BACE, will continue to serve on the Company's Board of Directors.
As a result, BACE will be able to significantly influence the affairs and
policies of the Company, the election of the Company's board of directors and
the approval or disapproval of any matter submitted to a vote of the
stockholders, including certain fundamental corporate transactions requiring
stockholder approval. The Company may enter into additional or modified
agreements, arrangements and transactions with BACE. While the Company expects
that any such future arrangements and transactions will be determined through
negotiation between the two companies, there can be no assurance that conflicts
of interest will not occur with respect to such future business dealings and
similar corporate matters or that any such conflicts will be resolved in a
manner favorable to the Company or its stockholders. All material contracts and
transactions between the Company and BACE have been approved by a majority of
the Company's directors who are not affiliated with BACE, and the Company
intends to continue that policy in the future. See "Certain
Transactions -- Consulting Agreement and -- Stockholders Agreement."
SEASONALITY AND WEATHER
The Company's business is highly seasonal. In fiscal 1996, the majority of
the Company's total pro forma revenues occurred during the six months from May
through October. The Company expects to have net losses in the first and fourth
fiscal quarters each year for the foreseeable future. The Company's annual
results would be materially adversely affected if the Company's revenues were to
be
10
<PAGE> 12
below seasonal norms during the second and third fiscal quarters of the year.
Demand for certain of the Company's products is significantly influenced by
weather, particularly weekend weather during the peak homeowner seasons.
Meteorologists are currently predicting that a severe weather phenomenon known
as "El Nino" will impact the U.S. in late 1997 and early 1998, which may result
in unusually cool and wet conditions in several of the Company's markets. The
Company's business, financial condition and results of operations could be
materially adversely affected by this or other weather patterns which result in
unseasonably cool temperatures, rain or snow, water shortages or floods. In
addition, RentX's geographic mix makes it more susceptible to seasonality than
companies with a greater concentration of stores in warmer climates.
QUARTERLY FLUCTUATIONS
The revenues and operating results of the Company and the businesses
acquired by the Company vary from quarter to quarter and are expected to
continue to fluctuate in the future. These fluctuations result from a number of
factors, including: general economic conditions and weather conditions in the
Company's markets; the timing of acquisitions and new store openings and related
costs; the product and customer mix of businesses acquired; the costs of
integrating acquired businesses; the timing of expenditures for new equipment
and the disposition of used equipment; the realization of targeted equipment
utilization rates; seasonal rental patterns of the Company's customers; and
price changes in response to competitive factors. The Company anticipates that
these fluctuations will be more significant in the future due to implementation
of its aggressive growth strategy. These factors, among others, may cause the
Company's results of operations in some future quarters to be below the
expectations of securities analysts and investors, which could have a material
adverse effect on the market price of the Common Stock. See "-- Seasonality and
Weather" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
GENERAL ECONOMIC CONDITIONS
The equipment rental industry is impacted by national, regional and local
economic conditions, including slowdowns in construction. The Company's
operating results may be adversely affected by events or conditions in a
particular region, such as a regional economic slowdown, adverse weather and
other factors. In addition, the Company's operating results may be adversely
affected by increases in interest rates that may lead to a decline in economic
activity, while simultaneously resulting in higher interest payments by the
Company under its variable rate credit facilities. Economic slowdowns or adverse
economic or competitive conditions would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Stores and Facilities."
CONTROL BY EXISTING STOCKHOLDERS
After the sale of the shares of Common Stock offered hereby, the Company's
officers and directors and holders of five percent or more of the Company's
securities will in the aggregate own approximately 57.8% of the Company's
outstanding Common Stock (54.6% if the Underwriters' over-allotment option is
exercised in full). Accordingly, such persons, if they choose to act together,
generally will be able to exercise significant control over the business,
policies and affairs of the Company, to elect all of the directors and to
approve any matter requiring the approval of the Company's stockholders.
Similarly, such persons, acting together, would be in a position to prevent a
takeover of the Company by one or more third parties, which could deprive the
Company's stockholders of a control premium that might otherwise be realized by
them in connection with an acquisition of the Company. The holders of 5,722,018
shares of the Company's Common Stock, which will represent approximately 60.4%
of the Common Stock outstanding after the offering, are parties to a
Stockholders Agreement requiring them to vote for their nominees in all
elections of directors for a period of two years following the offering. In
addition, the Company has agreed to indemnify certain of its stockholders
against certain matters. See "Principal Stockholders" and "Certain
Transactions -- Stockholders Agreement."
11
<PAGE> 13
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to various federal, state, local
and common laws and regulations governing, among other things, worker safety,
air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes. Under
these laws, an owner or operator (including a lessee) of a facility may be
liable for the costs of removal or remediation of certain hazardous or toxic
substances located on or in, or emanating from, its property, as well as related
costs of investigation and property damage. Liability is often imposed without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. There can be no assurance that
the Company's locations have been operated in compliance with environmental laws
and regulations or that future uses or conditions will not result in the
imposition of environmental liability upon the Company or expose the Company to
third-party actions such as tort suits. In addition, the Company dispenses
petroleum products and propane gas from above-ground storage tanks located at
certain rental locations. There can be no assurance that these tank systems have
been or will at all times remain free from leaks or that the use of these tanks
has not or will not result in spills or other releases, which could subject the
Company to significant removal or remediation costs. The Company also uses
hazardous materials such as solvents to clean and maintain its rental equipment.
In addition, the Company generates and disposes of wastes such as used motor
oil, radiator fluid and solvents, and may be liable under various federal, state
and local laws for environmental contamination at treatment, storage, disposal
or recycling facilities to which its waste is or has been shipped. The Company
is required to obtain stormwater discharge permits for most of its stores. In
some instances the Company may also be required to obtain authorization from
local waste water treatment authorities for discharge of industrial wash waters
to the sanitary sewer system. There can be no assurance that the Company's
failure to comply with either present or future laws or regulations, which may
become more stringent, would not subject the Company to significant compliance
expenses, restrictions on expansion or the acquisition of costly equipment. See
"Business -- Government and Environmental Regulation."
LIABILITY AND INSURANCE
The Company's business exposes it to possible claims for personal injury or
death resulting from the use of equipment rented or sold by the Company and from
injuries caused in motor vehicle accidents in which Company delivery and service
personnel are involved. The Company carries comprehensive insurance subject to a
deductible that generally must be renewed on an annual basis. There can be no
assurance that future claims will not exceed the level of the Company's
insurance or that such insurance will continue to be available on economically
reasonable terms, if at all. In addition, certain types of claims, such as
claims for punitive damages or for damages arising from intentional misconduct,
are generally not covered by the Company's insurance. Claims against the
Company, regardless of their merit or eventual outcome, may have a material
adverse effect on the Company's business, financial condition and results of
operation.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws include provisions
that may delay, defer or prevent a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of the Common Stock and
the voting and other rights of the holders of the Common Stock. These provisions
include, but are not limited to, a provision under which only the Board of
Directors may call meetings of stockholders and certain advance notice
procedures for nominating candidates for election to the Board of Directors. The
Certificate of Incorporation provides that the Board of Directors may issue up
to 1,000,000 shares of preferred stock and fix the rights, preferences,
privileges and priorities, including voting rights, of such preferred stock,
without any further stockholder approval. The rights of holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The Company has no
present plans to issue shares of
12
<PAGE> 14
preferred stock. In addition, under certain conditions, Section 203 of the
Delaware General Corporation Law would prohibit the Company from engaging in a
"business combination" with an "interested stockholder" (in general, a
stockholder owning 15% or more of the Company's outstanding voting stock) for a
period of three years. See "Description of Capital Stock."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE; NO DIVIDENDS
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
as a result of this offering or, if a trading market does develop, that it will
be sustained or that the shares of Common Stock could be resold at or above the
initial public offering price. After completion of this offering, the market
price of the Common Stock could be subject to significant variation due to
fluctuations in the Company's operating results, changes in earnings estimates
by investment analysts, the degree of success the Company achieves in
implementing its business and growth strategies, changes in business or
regulatory conditions affecting the Company, its customers or its competitors
and other factors. In addition, the Nasdaq National Market historically has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic, political and market conditions, may
adversely affect the market price of the Common Stock. The initial public
offering price of the Common Stock offered hereby will be determined through
negotiations between the Company and the representatives of the Underwriters and
may not be indicative of the market price of the Common Stock after this
offering. See "Underwriting." The Company has never paid any cash dividends on
its Common Stock and does not anticipate paying cash dividends in the future.
See "Dividend Policy."
ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET
The sale of a substantial number of shares of Common Stock in the public
market following this offering, or the perception that such sales could occur,
could adversely affect the market price of the Common Stock. Upon completion of
this offering, the Company will have outstanding an aggregate of 9,472,018
shares of Common Stock assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options. The 3,750,000 shares of Common
Stock sold in this offering will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), unless such shares are held by "affiliates" of the Company,
as that term is defined under the Securities Act and the regulations promulgated
thereunder.
The remaining 5,722,018 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. All of the Restricted
Shares are subject to lock-up agreements under which the holders have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this Prospectus without the prior written consent of
BancAmerica Robertson Stephens. Beginning 180 days after the date of this
Prospectus, 4,758,738 Restricted Shares will be eligible for sale in the public
market pursuant to Rule 144 under the Securities Act, subject to the volume and
other limitations of Rule 144. The remaining 963,280 Restricted Shares will
become eligible for sale at various times through June 1998. In addition,
holders of 5,722,018 shares of Common Stock have registration rights with
respect to such shares. The Company intends to file a registration statement on
Form S-8 180 days after the date of this Prospectus to register 550,308 shares
of Common Stock authorized for issuance under the Company's Stock Options Plans
or other agreements with employees, of which options for 248,308 shares are
outstanding and options for an additional 193,400 shares will be granted upon
completion of this offering. See "Management -- Stock Option Plans
and -- Employment Agreements," "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of Common Stock. Investors purchasing
shares of Common Stock in the offering will be subject to immediate dilution in
pro forma net tangible book value of $7.12 per share. See "Dilution."
13
<PAGE> 15
BACKGROUND OF THE COMPANY
RentX was incorporated in March 1996 and completed its first acquisition in
May 1996. To date, RentX has acquired 14 separate businesses operating a total
of 57 stores in 10 different states. See "Business -- Acquisition History." The
following table summarizes those acquisitions:
<TABLE>
<CAPTION>
DATE COMPANY ACQUIRED MARKET AREA NUMBER OF STORES
---- ---------------- ----------- ----------------
<S> <C> <C> <C>
May 1996 Zodiac Rentals Denver, Colorado 9
May 1996 A to Z Rentals Spokane, Washington 4
August 1996 E-Z Way Rentals Five Colorado mountain 5
and January 1997 and resort towns
November 1996 U-Rent Oklahoma City and 4
Southern Oklahoma
December 1996 U-Do-It Rental Centers Northern Idaho 2
and January 1997
February 1997 Hays Rentals Arkansas 5
March 1997 Central Virginia Rentals Central Virginia 6
April 1997 Scotty Rents San Francisco Bay 4
Area, California
May 1997 A-1 Rental Center Southern New Mexico 5
June 1997 Suburban Rent-It Detroit, Michigan 7
July 1997 A-Z Rents It Fort Collins, Colorado 1
July 1997 A-1 Rent All Tyler, Texas 3
July 1997 A-1 Rent All of Marshall Marshall, Texas 1
July 1997 Duncan Rents All Duncan, Oklahoma 1
</TABLE>
The Company has combined two of the acquired stores in New Mexico and has opened
start-up stores in Spokane, Washington and Bethany, Oklahoma.
The Company has signed letters of intent relating to the Pending
Acquisition, which would add two locations in Tennessee, and one other
acquisition which would add one store in Colorado. The one-store acquisition is
not material to the Company and financial information concerning the business to
be acquired has not been included herein. There can be no assurance that either
or both of these acquisitions will be consummated. The Company continually
evaluates information on rental equipment companies active in one or more of its
targeted segments to determine whether they would be attractive candidates for
acquisition. The Company is in discussion with a large number of potential
acquisition candidates, some of which would be material to the Company. If and
when appropriate acquisition opportunities become available, the Company intends
to pursue them actively. No assurance can be given that any acquisition by the
Company will or will not occur, that, if an acquisition does occur, it will not
materially and adversely affect the Company or that any such acquisition will be
successful in enhancing the Company's business. See "Risk Factors -- Risks
Relating to Growth Strategy."
In addition to pursuing acquisitions, the Company has focused on assembling
a management team, identifying sites for new stores and putting in place the
systems necessary to support its growth and operations. The Company's management
includes executives with substantial experience operating and growing
multi-location, marketing driven consumer and commercial businesses, as well as
executives with extensive experience in the rental industry. Many of the former
owners of the businesses acquired by RentX have joined its management team,
either as area managers or as part of senior management with Company-wide
responsibilities, and have also invested in the Company. A number of the
individuals are prominent in the American Rental Association ("ARA"), the rental
industry's active national trade association, and in state trade associations.
See "Management." In October 1997, the Company completed the national
installation in existing stores of a sophisticated integrated point of sale,
inventory, accounting and management information system that was selected by the
management team after extensive analysis and customized to meet the Company's
needs and
14
<PAGE> 16
management objectives. See "Business -- Management Information System."
Management believes that its management team and information system will be
adequate to support the Company's continuing growth for the foreseeable future.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,750,000 shares of
Common Stock offered hereby at an assumed initial public offering price of $9.00
per share, after deducting estimated underwriting discounts and commissions and
offering expenses, are estimated to be approximately $29.6 million. The Company
intends to utilize approximately $28.5 million of such net proceeds to reduce
borrowings under its bank line of credit. The total amount of the bank line of
credit is $39.3 million and the interest rate is currently 8.5% per annum. As of
July 31, 1997, the total outstanding borrowings were approximately $35 million.
The line of credit matures on May 31, 1999. Borrowings under the line have been
used to fund the Company's acquisitions and for working capital. For additional
information regarding the Company's bank line of credit, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 5 of Notes to the
Company's financial statements. The increase in available borrowing capacity
resulting from the repayment of outstanding borrowings will provide the Company
with a source of funds for working capital and acquisitions. The Company has
signed letters of intent with respect to the Pending Acquisition and another
immaterial acquisition and is engaged in acquisition discussions with a number
of other companies. See "Risk Factors -- Risks Relating to Growth Strategy,"
"Background of the Company" and "Business -- Growth Strategy." The Company will
use approximately $1 million of the net proceeds of this offering to pay accrued
dividends to the holders of Preferred Stock. All outstanding Preferred Stock
will convert to Common Stock upon the consummation of this offering, and accrued
dividends will be payable through the date of conversion. See "Certain
Transactions -- Sales of Preferred Stock."
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
formation and does not currently intend to pay cash dividends in the foreseeable
future. The Company intends to retain any earnings for the operation and
expansion of its business. The payment of any future dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, results of operations,
level of indebtedness, capital requirements, general business conditions and
contractual restrictions on payment of dividends, if any, as well as such other
factors the Board of Directors may deem relevant. The Company is restricted by
the terms of its bank line of credit from paying cash dividends on its Common
Stock, and may in the future enter into loan or other agreements or issue debt
securities or preferred stock that restrict the payment of cash dividends on
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and Note 5 of
Notes to the Company's financial statements.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth the total debt and capitalization of the
Company at July 31, 1997 on (i) an historical basis, (ii) a pro forma basis to
reflect the consummation of the Pending Acquisition and (iii) a pro forma as
adjusted basis to reflect the conversion of the Company's Series A, Series B and
Series C Preferred Stock and Class A and Class B Common Stock into a single
class of Common Stock effective upon the consummation of this offering and to
give effect to the sale by the Company of 3,750,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.00 per share
and the application of the estimated net proceeds therefrom. There can be no
assurance that the Pending Acquisition will be consummated. This table should be
read in conjunction with "Selected Financial Information and Operating Data" and
the Company's historical and pro forma financial statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
------- ------- -----------
<S> <C> <C> <C>
) (In thousands
Debt:
Bank debt and long term obligations(1).................... $40,798 $44,798 $16,298
Notes payable to related parties.......................... 323 323 323
------- ------- -------
Total debt......................................... 41,121 45,121 16,621
Redeemable preferred stock, cumulative, convertible, $1 par
value:
Series A preferred stock; 17,195 shares authorized; 17,195
shares issued and outstanding actual and pro forma
(entitled in liquidation to $17,195,000); none issued
and outstanding pro forma as adjusted................... 17,095 17,095 --
Series B preferred stock; 200 shares authorized; 200
shares issued and outstanding actual and pro forma
(entitled in liquidation to $200,000); none issued and
outstanding pro forma as adjusted....................... 200 200 --
Series C preferred stock; 3,000 shares authorized; 3,000
shares issued and outstanding actual and pro forma
(entitled in liquidation to $3,000,000); none issued and
outstanding pro forma as adjusted....................... 3,000 3,000 --
------- ------- -------
Total redeemable preferred stock...................... 20,295 20,295 --
Stockholders' (deficit) equity:
Class A common stock, $.01 par value; 5,964,326 shares
authorized; 1,000 shares issued and outstanding actual
and pro forma; none issued and outstanding pro forma as
adjusted................................................ -- -- --
Class B common stock, $.01 par value; 248,308 shares
authorized; none issued and outstanding(2).............. -- -- --
Common stock, $.01 par value; 19,000,000 shares
authorized; 9,472,018 shares issued and outstanding pro
forma as adjusted(2)(3)................................. -- -- 95
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding(3).............. -- -- --
Paid-in capital........................................... 108 108 49,896
Accumulated deficit....................................... (1,165) (1,165) (1,165)
------- ------- -------
Total stockholders' (deficit) equity............... (1,057) (1,057) 48,826
------- ------- -------
Total capitalization............................. $60,359 $64,359 $65,447
======= ======= =======
</TABLE>
- ---------------
(1) The Company will apply approximately $28.5 million of the net proceeds from
this offering to repay outstanding borrowings under its bank line of credit
and approximately $1 million of the net proceeds to pay accrued dividends on
the Preferred Stock outstanding prior to this offering. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(2) Issued and outstanding shares exclude (i) 248,308 shares subject to
outstanding options granted pursuant to the Company's Stock Option Plans or
pursuant to individual agreements with executive officers at a weighted
average exercise price of $4.88 per share, (ii) 193,400 shares subject to
options to be granted pursuant to the Stock Option Plans on the completion
of this offering at an exercise price equal to the offering price and (iii)
83,600 shares reserved for issuance pursuant to the Stock Option Plans. See
"Management -- Option Grants and -- Stock Option Plans."
(3) Under the Company's Amended and Restated Certificate of Incorporation, upon
completion of the offering the Series A, Series B and Series C Preferred
Stock and Class A and Class B Common Stock reflected in the table will be
eliminated and the authorized capitalization will consist of 19,000,000
shares of Common Stock and 1,000,000 shares of Preferred Stock.
16
<PAGE> 18
DILUTION
The net tangible book value (deficit) of the Company as of July 31, 1997
was $(9.5) million, or $(1.65) per share of Common Stock. Net tangible book
value per share of Common Stock is determined by dividing net tangible book
value (total tangible assets less total liabilities) by the number of shares of
Common Stock outstanding at July 31, 1997. Giving pro forma effect to the
Pending Acquisition, the pro forma net tangible book value (deficit) of the
Company as of July 31, 1997 would have been $(11.7) million, or $(2.05) per
share of Common Stock. Without taking into account any changes in the pro forma
net tangible book value after July 31, 1997, other than to give effect to the
sale by the Company of the 3,750,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $9.00 per share and the application of
the estimated net proceeds therefrom, the pro forma as adjusted net tangible
book value of the Company's Common Stock at July 31, 1997, would have been $17.8
million, or $1.88 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $3.93 per share to existing
stockholders and an immediate dilution of $7.12 per share to new investors. The
following table illustrates this dilution per share.
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................. $ 9.00
Net tangible book value (deficit) before the Pending
Acquisition and the offering........................... $ (1.65)
Decrease in pro forma net tangible book value attributable
to the Pending Acquisition............................. $ (0.40)
Increase in pro forma net tangible book value (deficit)
attributable to new investors in the offering.......... $ 3.93
--------
Pro forma as adjusted net tangible book value after the Pending
Acquisition and the offering........................................ $ 1.88
--------
Dilution to new investors............................................. $ 7.12
========
</TABLE>
The following table summarizes, on a pro forma basis, as of July 31, 1997,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid by the existing stockholders and new investors and the
average price paid per share by the existing stockholders and new investors
(assuming an initial public offering price $9.00 per share and before deducting
the underwriting discount and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 5,722,018 60.4% $20,395,000 37.7% $ 3.56
New investors.............. 3,750,000 39.6 33,750,000 62.3 $ 9.00
--------- ----- ----------- ----- ------
Total............ 9,472,018 100.0% $54,145,000 100.0%
========= ===== =========== =====
</TABLE>
Options are outstanding under the Company's Stock Option Plans and other
agreements with executive officers to purchase a total of 248,308 shares of
Common Stock at a weighted average exercise price of $4.88 per share, subject to
vesting. In addition, upon completion of the offering, options to purchase
193,400 shares of Common Stock will be granted under the Stock Option Plans at
an exercise price equal to the public offering price. The exercise of such
options would be antidilutive. See "Capitalization" and "Management -- Stock
Option Plans."
17
<PAGE> 19
SELECTED FINANCIAL INFORMATION AND OPERATING DATA
The following selected statement of operations data of the Company for the
period from May 15, 1996 (commencement of operations) through January 31, 1997,
and selected balance sheet data as of January 31, 1997, have been derived from
the audited financial statements of the Company appearing elsewhere in this
Prospectus. The selected statement of operations data of the Company for the
six-month period ended July 31, 1997 and selected balance sheet data as of July
31, 1997 have been derived from the unaudited financial statements of the
Company appearing elsewhere in this Prospectus, which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the Company's results of operations and
financial position at such date and for such period. The results for the six
months ended July 31, 1997 are not necessarily indicative of the results that
may be expected for future periods or for the year ending January 31, 1998. The
following selected statement of operations data of the Company's predecessor,
Zodiac Rentals ("Zodiac" or the "Predecessor Company"), for the years ended
December 31, 1994 and 1995 and the period from January 1, 1996 through May 14,
1996 and selected balance sheet data of Zodiac as of December 31, 1994 and 1995
have been derived from the audited financial statements of Zodiac appearing
elsewhere in this Prospectus. The selected statement of operations data of
Zodiac for the years ended December 31, 1992 and 1993 and selected balance sheet
data of Zodiac as of December 31, 1992 and 1993 have been derived from the
unaudited financial statements of Zodiac not included herein. The selected pro
forma financial information has been derived from the unaudited pro forma
financial information included elsewhere herein. The selected operating data
presented below has not been audited. The selected historical and pro forma
financial information and operating data presented below should be read in
conjunction with the Company's financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
18
<PAGE> 20
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND
OPERATING DATA)
JANUARY 1
YEARS ENDED DECEMBER 31, THROUGH
--------------------------------- MAY 14,
1992 1993 1994 1995 1996
------ ------ ------ ------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Rental revenues....................... $3,015 $3,709 $4,697 $6,425 $2,160
Rental equipment sales................ 140 64 88 99 193
Merchandise and other................. 616 748 865 1,066 461
------ ------ ------ ------ ------
Total revenues.................... 3,771 4,521 5,650 7,590 2,814
Cost of revenues
Rental equipment expense.............. 322 341 450 509 214
Rental equipment depreciation......... 213 337 546 1,069 463
Cost of rental equipment sales........ 42 52 64 91 149
Cost of merchandise sales............. 412 451 629 462 203
Direct operating expense.............. 1,360 1,677 2,436 3,296 1,408
------ ------ ------ ------ ------
Total cost of revenues............ 2,349 2,858 4,125 5,427 2,437
Store contribution...................... 1,422 1,663 1,525 2,163 377
Selling, general and administrative
expense............................... 1,210 1,601 1,094 1,486 553
Depreciation and amortization, excluding
rental equipment depreciation......... 31 34 31 21 20
------ ------ ------ ------ ------
Operating income........................ 181 28 400 656 (196)
Other expense (income), net.............
Interest expense........................ 43 71 113 216 93
------ ------ ------ ------ ------
Income (loss) before income taxes....... 138 (43) 287 440 (289)
Income taxes(3).........................
Net income (loss).......................
Preferred stock dividends...............
Net income (loss) attributable to common
stockholders..........................
Net income (loss) per common
share(4)..............................
Common shares used in computing net
income (loss) per common
share(4)(5)...........................
Store contribution margin................. 37.7% 36.8% 27.0% 28.5% 13.4%
Operating margin.......................... 4.8% 0.6% 7.1% 8.6% (7.0)%
SELECTED OPERATING DATA:
Opening store count..................... 5 5 5 7 9
Stores purchased in acquisitions...... -- -- 1 2 --
New stores opened..................... -- -- 1 -- --
Stores closed......................... -- -- -- -- --
------ ------ ------ ------ ------
Ending store count...................... 5 5 7 9 9
<CAPTION>
THE COMPANY
----------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
PRO FORMA
MAY 15, 1996 PRO FORMA AS ADJUSTED
(COMMENCEMENT AS ADJUSTED 6 MONTHS 6 MONTHS
OF OPERATIONS) YEAR ENDED ENDED ENDED
THROUGH JANUARY 31, JULY 31, JULY 31,
JANUARY 31, 1997 1997(1) 1997(2) 1997(1)
---------------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Rental revenues....................... $ 9,221 $40,148 $13,598 $19,318
Rental equipment sales................ 280 986 537 696
Merchandise and other................. 1,337 5,921 1,934 2,903
------- ------- ------- -------
Total revenues.................... 10,838 47,055 16,069 22,917
Cost of revenues
Rental equipment expense.............. 1,285 4,895 1,634 2,212
Rental equipment depreciation......... 436 2,775 1,175 1,677
Cost of rental equipment sales........ 272 907 512 655
Cost of merchandise sales............. 625 3,904 1,204 1,956
Direct operating expense.............. 4,864 19,469 6,764 10,235
------- ------- ------- -------
Total cost of revenues............ 7,482 31,950 11,289 16,735
Store contribution...................... 3,356 15,105 4,780 6,182
Selling, general and administrative
expense............................... 2,351 8,721 3,504 4,601
Depreciation and amortization, excluding
rental equipment depreciation......... 293 944 422 538
------- ------- ------- -------
Operating income........................ 712 5,440 854 1,043
Other expense (income), net............. 4 30 (38) (38)
Interest expense........................ 784 738 1,295 687
------- ------- ------- -------
Income (loss) before income taxes....... (76) 4,672 (403) 394
Income taxes(3)......................... 1,865 157
------- ------- ------- -------
Net income (loss)....................... (76) 2,807 (403) 237
Preferred stock dividends............... (302) -- (384) --
------- ------- ------- -------
Net income (loss) attributable to common
stockholders.......................... (378) 2,807 (787) 237
======= ======= ======= =======
Net income (loss) per common
share(4).............................. $ (.01) $ .29 $ (.07) $ .02
======= ======= ======= =======
Common shares used in computing net
income (loss) per common
share(4)(5)........................... 5,812 9,562 5,812 9,562
======= ======= ======= =======
Store contribution margin................. 31.0% 32.1% 29.7% 27.0%
Operating margin.......................... 6.6% 11.6% 5.3% 4.6%
SELECTED OPERATING DATA:
Opening store count..................... -- -- 24 24
Stores purchased in acquisitions...... 24 59 33 35
New stores opened..................... -- -- 1 1
Stores closed......................... -- -- (1) (1)
------- ------- ------- -------
Ending store count...................... 24 59 57 59
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- MAY 14, JANUARY 31,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $2,245 $2,687 $3,425 $4,234 $4,262 $29,083
Rental equipment, net................... 826 1,020 1,957 2,509 3,120 9,087
Total debt.............................. 676 1,389 1,915 2,363 3,027 17,048
Redeemable preferred stock.............. -- -- -- -- -- 10,050
Stockholders' equity (deficit).......... 1,210 1,167 1,332 1,516 933 (270)
Purchase price of acquisitions.......... NA NA NA NA NA 26,526
Capital expenditures.................... 667 628 1,536 1,545 1,099 1,811
<CAPTION>
PRO FORMA
AS ADJUSTED
JULY 31, JULY 31,
1997 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $67,990 $71,642
Rental equipment, net................... 27,261 28,641
Total debt.............................. 41,121 16,621
Redeemable preferred stock.............. 20,295 --
Stockholders' equity (deficit).......... (1,057) 48,826
Purchase price of acquisitions.......... 27,747 31,747
Capital expenditures.................... 9,586 NA
</TABLE>
- ---------------
(1) The pro forma as adjusted data gives effect to (i) the Completed
Acquisitions and the Pending Acquisition, (ii) the sale by the Company of
3,750,000 shares of Common Stock in the offering at an assumed initial
public offering price of $9.00 per share, (iii) a reduction in interest
expense and bank debt as a result of utilizing a portion of the estimated
net proceeds of the offering to reduce the debt of the Company and (iv) the
conversion of the Company's redeemable Preferred Stock and the payment of
the related accrued dividends, in each case as though such transaction had
occurred on the first day of the period presented in the case of statement
of operations data or at July 31, 1997 in the case of balance sheet data.
See "Use of Proceeds," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Transactions" and the Company's pro forma and historical financial
statements and notes thereto.
(2) Unaudited income statement information for the six-month period ended July
31, 1996 has not been provided. The Company did not commence operations
until May 15, 1996. Operating results for the period ended July 31, 1996
cannot be meaningfully compared to July 31, 1997 because of the significant
changes in the Company's scope of operations resulting from acquisitions.
(3) The Predecessor Company was structured as a partnership or S corporation
during the periods presented and accordingly had no income tax expense at
the entity level.
(4) Net income per common share and common shares used in computing net income
(loss) per common share are not presented for the Predecessor Company on an
historical basis as such information would not be representative of the
capital structure of the Company after this offering. Historical and pro
forma earnings per share were calculated by assuming the conversion of the
outstanding Preferred Stock of the Company into Common Stock equivalents and
the exercise of all stock options issued within one year of the assumed
effective date, on a treasury stock basis. Pro forma as adjusted earnings
per share also assumes the issuance of 3,750,000 shares of Common Stock in
this offering.
(5) Historical and pro forma earnings per share were calculated by assuming the
conversion of the outstanding Preferred Stock of the Company into Common
Stock equivalents and the exercise of all stock options issued within one
year of the initial filing of the Registration Statement of which this
Prospectus is a part. The calculation utilizes the as-if converted method
for Preferred Stock and the treasury stock method for stock options. Pro
forma as adjusted earnings per share also assumes the issuance of 3,750,000
shares of Common Stock in this offering.
19
<PAGE> 21
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following summary unaudited pro forma financial information of the
Company presents the unaudited pro forma statements of operations for the six
months ended July 31, 1997 and fiscal 1996. The pro forma statement of
operations for the six months ended July 31, 1997, has been adjusted to give
effect to the Completed Acquisitions that were consummated after January 31,
1997 and the Pending Acquisition as if such acquisitions had occurred on
February 1, 1997. The Company is a party to a letter of intent with respect to
one other acquisition, but no financial information concerning that business has
been included because the transaction is not material to the Company. There can
be no assurance that either or both of the Pending Acquisition and such other
acquisition will be consummated. Pro forma adjustments relating to the Completed
Acquisitions and the Pending Acquisition are referred to herein as the
"Completed Acquisition Adjustments" and the "Pending Acquisition Adjustments,"
respectively. The pro forma statement of operations for fiscal 1996 has been
adjusted to give effect to the Completed Acquisitions and the Pending
Acquisition, in each case, as if such transactions had occurred on February 1,
1996. See "Background of the Company" and "Business -- Acquisition History" for
information as to the dates of and companies acquired in the Completed
Acquisitions and to be acquired in the Pending Acquisition.
The pro forma as adjusted statements of operations for fiscal 1996 and the
six months ended July 31, 1997, give additional effect to (i) the sale by the
Company of 3,750,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $9.00 per share, (ii) a reduction in interest expense
as a result of a reduction in indebtedness upon application of a portion of the
net proceeds from the offering and (iii) the conversion of all of the Company's
Series A, Series B and Series C Preferred Stock and Class A Common Stock into a
total of 5,722,018 shares of Common Stock upon the consummation of this offering
and the payment of the related accrued preferred stock dividends, as though they
had occurred at the beginning of the periods covered by such statements of
operations or as of the date of such balance sheet. The pro forma adjustments
relating to the transactions referred to in clauses (i), (ii) and (iii) are
referred to herein collectively as the "Offering Adjustments." See "Use of
Proceeds."
The Completed Acquisition Adjustments, the Pending Acquisition Adjustments
and the Offering Adjustments represent the Company's determination of all
adjustments necessary to present fairly the Company's pro forma results of
operations and financial position and are based upon available information and
certain assumptions considered reasonable under the circumstances. The pro forma
financial information presented herein does not purport to present what the
Company's financial position or results of operations would actually have been
had the events leading to such adjustments in fact occurred on the date or at
the beginning of the periods indicated or to project the Company's financial
position or results of operations for any future date or period.
The unaudited summary pro forma financial information should be read in
conjunction with the historical and pro forma financial statements of the
Company and the notes thereto and management's discussion thereof contained
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and the notes thereto.
20
<PAGE> 22
SUMMARY UNAUDITED PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
SIX MONTHS ENDED JULY 31, 1997
-----------------------------------------------------------------------------
COMPLETED
HISTORICAL COMPLETED ACQUISITION PENDING
COMPANY ACQUISITIONS(1)(3) ADJUSTMENTS PRO FORMA ACQUISITION(2)(3)
---------- ------------------ ----------- --------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue............. $13,598 $4,203 $ -- $17,801 $1,517
Rental equipment sales..... 537 159 -- 696 --
Merchandise and other
revenues................. 1,933 692 -- 2,625 278
------- ------ -------- ------- ------
Total revenues....... 16,068 5,054 -- 21,122 1,795
Cost of revenues
Rental equipment expense... 1,634 466 -- 2,100 112
Rental equipment
depreciation............. 1,176 632 (227)(4) 1,581 174
Cost of rental equipment
sales.................... 512 67 76(5) 655 --
Cost of merchandise and new
equipment sales.......... 1,204 529 -- 1,733 223
Direct operating expense... 6,763 2,421 16(6) 9,200 1,035
------- ------ -------- ------- ------
Total cost of
revenues........... 11,289 4,115 (135) 15,269 1,544
Store contribution........... 4,779 939 135 5,853 251
Selling, general and
administrative
expense.................... 3,504 1,333 (455)(7) 4,382 516
Depreciation and
amortization, excluding
rental equipment
depreciation............... 422 102 (15)(8) 509 38
------- ------ -------- ------- ------
Operating income............. 853 (496) 605 962 (303)
Other (income) expense,
net........................ (38) -- -- (38) --
Interest expense, related
parties.................... 6 -- -- 6 --
Interest expense, other...... 1,289 121 251(10) 1,661 15
------- ------ -------- ------- ------
Income (loss) before income
taxes...................... (404) (617) 354 (667) (318)
------- ------ -------- ------- ------
Income tax expense........... -- (95) (190)(11) (285) (117)
------- ------ -------- ------- ------
Net income (loss)............ (404) (522) 544 (382) (201)
Preferred stock dividends.... (384) -- (116) (500) --
------- ------ -------- ------- ------
Net income (loss) available
to common stockholders..... $ (788) $ (522) $ 428 $ (882) $ (201)
======= ====== ======== ======= ======
Store contribution margin.... 29.7% 18.6% 27.7%
Operating margin............. 5.3% -9.8% 4.6%
Net income (loss) per common
share(15).................. $ (.07) $ (.07)
======= =======
Common shares used in
computing net income (loss)
per common share(15)....... 5,812 5,812
======= =======
<CAPTION>
SIX MONTHS ENDED JULY 31, 1997
-------------------------------------------
PENDING
ACQUISITION OFFERING PRO FORMA
ADJUSTMENTS ADJUSTMENTS(12) AS ADJUSTED
----------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Rental revenue............. $ -- $ -- $19,318
Rental equipment sales..... -- -- 696
Merchandise and other
revenues................. -- -- 2,903
------ ------- -------
Total revenues....... -- -- 22,917
Cost of revenues
Rental equipment expense... -- -- 2,212
Rental equipment
depreciation............. (78)(4) -- 1,677
Cost of rental equipment
sales.................... -- -- 655
Cost of merchandise and new
equipment sales.......... -- -- 1,956
Direct operating expense... -- -- 10,235
------ ------- -------
Total cost of
revenues........... (78) -- 16,735
Store contribution........... 78 -- 6,182
Selling, general and
administrative
expense.................... (297)(7) -- 4,601
Depreciation and
amortization, excluding
rental equipment
depreciation............... (9)(8) -- 538
------ ------- -------
Operating income............. 384 -- 1,043
Other (income) expense,
net........................ -- -- (38)
Interest expense, related
parties.................... -- -- 6
Interest expense, other...... 145(10) (1,140)(13) 681
------ ------- -------
Income (loss) before income
taxes...................... 239 1,140 394
------ ------- -------
Income tax expense........... 85(11) 474(11) 157
------ ------- -------
Net income (loss)............ 154 666 237
Preferred stock dividends.... -- 500(14) --
------ ------- -------
Net income (loss) available
to common stockholders..... $ 154 $ 1,166 $ 237
====== ======= =======
Store contribution margin.... 27.0%
Operating margin............. 4.6%
Net income (loss) per common
share(15).................. $ .02
=======
Common shares used in
computing net income (loss)
per common share(15)....... 3,750 9,562
======= =======
</TABLE>
21
<PAGE> 23
SUMMARY UNAUDITED PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
May 15, 1996 Fiscal 1996
(Commencement -----------------------------------------------------------------
of Operations) Completed
through Completed Acquisition Pending
January 31, 1997 Acquisitions(1)(3) Adjustments Pro Forma Acquisition(2)(3)
---------------- ------------------ ----------- --------- ------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues
Rental revenue......... $ 9,221 $27,380 $ -- $36,601 $3,547
Rental equipment
sales................ 280 706 -- 986 --
Merchandise and other
revenues............. 1,337 4,066 -- 5,403 518
------- ------- ------- ------- ------
Total revenues... 10,838 32,152 -- 42,990 4,065
Cost of revenues
Rental equipment
expense.............. 1,285 3,367 -- 4,652 243
Rental equipment
depreciation......... 436 3,412 (1,265)(4) 2,583 342
Cost of rental
equipment sales...... 272 429 206(5) 907 --
Cost of merchandise and
new equipment sales.. 625 2,865 -- 3,490 414
Direct operating
expense.............. 4,864 12,329 94(6) 17,287 2,182
------- ------- ------- ------- ------
Total cost of
revenues....... 7,482 22,402 (965) 28,919 3,181
Store contribution....... 3,356 9,750 965 14,071 884
Selling, general and
administrative
expense................ 2,351 6,568 (511)(7) 8,408 677
Depreciation and
amortization, excluding
rental equipment
depreciation........... 293 562 32(8) 887 76
------- ------- ------- ------- ------
Operating income......... 712 2,620 1,444 4,776 131
Other (income) expense,
net.................... 4 (577) 603(9) 30 --
Interest expense, related
parties................ 28 -- -- 28 --
Interest expense,
other.................. 756 939 975(10) 2,670 20
------- ------- ------- ------- ------
Income (loss) before
income taxes........... (76) 2,258 (134) 2,048 111
Income tax expense....... -- 579 294(11) 873 41
------- ------- ------- ------- ------
Net income (loss)........ (76) 1,679 (428) 1,175 70
Preferred stock
dividends.............. (302) -- (697) (999) --
------- ------- ------- ------- ------
Net income (loss)
available to common
stockholders........... $ (378) $ 1,679 $(1,125) $ 176 $ 70
======= ======= ======= ======= ======
Store contribution
margin................. 31.0% 30.3% 32.7% 21.7%
Operating margin......... 6.6% 8.1% 11.1% 3.2%
Net income (loss) per
common share(15)....... $ (.01) $ 0.20
======= =======
Common shares used in
computing net income
(loss) per common
share(15).............. 5,812 5,812
======= =======
<CAPTION>
Fiscal 1996
-------------------------------------------
Pending
Acquisition Offering Pro Forma
Adjustments Adjustments(12) As Adjusted
----------- --------------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues
Rental revenue......... $ -- $ -- $40,148
Rental equipment
sales................ -- -- 986
Merchandise and other
revenues............. -- -- 5,921
------ ------- -------
Total revenues... -- -- 47,055
Cost of revenues
Rental equipment
expense.............. -- -- 4,895
Rental equipment
depreciation......... (150)(4) -- 2,775
Cost of rental
equipment sales...... -- -- 907
Cost of merchandise and
new equipment sales.. -- -- 3,904
Direct operating
expense.............. -- -- 19,469
------ ------- -------
Total cost of
revenues....... (150) -- 31,950
Store contribution....... 150 -- 15,105
Selling, general and
administrative
expense................ (364)(7) -- 8,721
Depreciation and
amortization, excluding
rental equipment
depreciation........... (19)(8) -- 944
------ ------- -------
Operating income......... 533 -- 5,440
Other (income) expense,
net.................... -- -- 30
Interest expense, related
parties................ -- -- 28
Interest expense,
other.................. 300(10) (2,280)(13) 710
------ ------- -------
Income (loss) before
income taxes........... 233 2,280 4,672
Income tax expense....... 96(11) 855(11) 1,865
------ ------- -------
Net income (loss)........ 137 1,425 2,807
Preferred stock
dividends.............. -- 999(14) --
------ ------- -------
Net income (loss)
available to common
stockholders........... $ 137 $ 2,424 $ 2,807
====== ======= =======
Store contribution
margin................. 32.1%
Operating margin......... 11.6%
Net income (loss) per
common share(15)....... $ .29
=======
Common shares used in
computing net income
(loss) per common
share(15).............. 3,750 9,562
======= =======
</TABLE>
22
<PAGE> 24
NOTES TO SUMMARY UNAUDITED PRO FORMA INCOME STATEMENTS
(1) Since inception in March 1996, the Company has effected the Completed
Acquisitions as follows: (i) Zodiac, acquired on May 15, 1996, with nine
locations in and around Denver, Colorado; (ii) A to Z, acquired on May 29, 1996,
with four locations in Spokane, Washington; (iii) E-Z Way, acquired on August 2,
1996 (four locations) and January 31, 1997 (one location), located in five
Colorado mountain and resort towns; (iv) U-Rent, acquired on November 1, 1996,
with four locations in Oklahoma; (v) U-Do-It, acquired on December 20, 1996 and
January 6, 1997, with two locations in Idaho; (vi) Hays, acquired on February
14, 1997, with five locations in Arkansas; (vii) CVR, acquired on March 14,
1997, with six locations in Virginia; (viii) A-1, acquired on May 22, 1997, with
five locations in New Mexico; (ix) Suburban, acquired on June 26, 1997, with
seven locations in and around Detroit, Michigan; (x) Duncan, acquired on July
31, 1997, with one location in Oklahoma; and (xi) and four other insignificant
acquisitions with nine locations in Colorado, California and Texas.
(2) The Company has entered into a letter of intent with respect to the
Pending Acquisition, which would add two locations in Tennessee. The audited
financial statements of the business to be acquired in the Pending Acquisition
are included elsewhere herein.
(3) The results of operations reflected in the pro forma financial
information for certain of the acquired businesses differ from those reflected
in the historical financial statements for those businesses elsewhere in this
Prospectus. These differences result from three different adjustments. First,
all of the businesses acquired in fiscal 1996 (Zodiac, A to Z, E-Z Way, U-Rent
and U-Do-It) were calendar year companies so that, if their historical results
were added to the Company's results, a thirteen-month period would result. In
these cases, one month's operations were removed. Second, the business that is
the subject of the Pending Acquisition (Redi) and one of the insignificant
Completed Acquisitions had fiscal years that ended more than 93 days from the
Company's year end, and therefore their income statements could not be
consolidated with the Company's income statement. For pro forma purposes, the
historical financial statements of these acquired businesses have been adjusted
to year ends within 93 days of RentX's fiscal year end. A similar adjustment was
made for A-1 for purposes of the pro forma information for the six months ended
July 31, 1997. Third, the Company did not acquire one location owned by CVR and
the results of operations for that location were eliminated for purposes of the
pro forma information. In addition, the income statement information for
Suburban for the period from January 1 through March 31, 1997, and for the
Pending Acquisition and one of the insignificant Completed Acquisitions for the
period from December 1, 1996 through April 30, 1997 are included in both the pro
forma income statements for the year ended January 31, 1997 and the six months
ended July 31, 1997.
(4) For each acquisition, the historical book values of the rental
equipment acquired (approximately $17 million for the Completed Acquisitions and
$900,000 for the Pending Acquisition) were revalued to estimated fair market
value (approximately $20 million for the Completed Acquisitions and $1.5 million
for the Pending Acquisition). The Company utilizes several methods to estimate
fair market value, including independent appraisals, the Company's actual
experience in selling used rental equipment and analytical review. The rental
equipment acquired is depreciated generally over a six-year period, with salvage
value estimated at 22%. The equipment of Zodiac is being depreciated over a
seven-year life because the equipment was generally newer than that acquired in
other acquisitions.
For fiscal 1996, historical rental equipment depreciation of $3.4 million
for the Completed Acquisitions was reversed and $2.1 million of recomputed
depreciation expense was recorded, and historical rental equipment depreciation
expense of $342,000 for the Pending Acquisition was replaced by $192,000 of
recomputed depreciation expense. For the six-months ended July 31, 1997,
historical rental equipment depreciation expense of $631,000 for the Completed
Acquisitions was replaced by recomputed depreciation expense of $404,000, and
historical rental equipment depreciation expense of $174,000 for the Pending
Acquisition was replaced by recomputed depreciation expense of $96,000.
(5) Although the cost of goods sold for used rental equipment sales by the
acquired businesses was approximately 60% on a combined historical basis, for
purposes of the pro forma presentation, the cost of used rental equipment sales
was recalculated, as necessary, to equal approximately 93% of revenues from the
sale of used rental equipment, the Company's estimate of the cost of used rental
equipment sold for the year.
(6) For each acquisition, facility rentals were adjusted to rental rates
currently being paid by the Company.
(7) As necessary, salary and benefits paid to former owners of the acquired
businesses or members of their families were reduced or eliminated to reflect
employment arrangements entered into at the time of the acquisitions. For the
Completed Acquisitions, the adjustment reduced selling, general and
administrative expense by $1.2 million and $505,000 for fiscal 1996 and the six
months ended July 31, 1997, respectively. For the Pending Acquisition, the
adjustments for those periods were $364,000 and $297,000, respectively.
Additionally, Zodiac incurred $34,000 for accounting and legal services related
to its sale to the Company in 1996, which were
23
<PAGE> 25
eliminated. These adjustments were partially offset by $740,000 of incremental
infrastructure costs in 1996 and $50,000 in the six months for 1997.
(8) For each acquisition, the historical book values of the non-rental
depreciable assets acquired (approximately $1.7 million for the Completed
Acquisitions and $200,000 for the Pending Acquisition) were valued based upon
purchase accounting (approximately $30 million for the Completed Acquisitions
and $2.3 million for the Pending Acquisition). The tangible assets acquired
(approximately $800,000) were depreciated over periods ranging from five to ten
years. The intangible assets acquired were goodwill (approximately $28.5 million
for the Completed Acquisitions and $2.3 million for the Pending Acquisition) and
covenants not to compete (approximately $500,000). Goodwill is amortized over a
forty-year period and covenants not to compete are amortized over periods
ranging from two to five years.
For fiscal 1996, historical non-rental depreciation and amortization
expense of $562,000 for the Completed Acquisitions was reversed and $594,000 of
recomputed depreciation and amortization expense was recorded, and historical
non-rental depreciation and amortization expense of $76,000 for the Pending
Acquisition was replaced by $57,000 of recomputed depreciation and amortization
expense. For the six-month period ended July 31, 1997, historical non-rental
depreciation and amortization expense of $102,000 for the Completed Acquisitions
was replaced by recomputed depreciation and amortization expense of $87,000, and
historical non-rental depreciation and amortization expense of $38,000 for the
Pending Acquisition was replaced by recomputed depreciation and amortization
expense of $29,000.
(9) For the A to Z acquisition, historical results were adjusted to
eliminate $548,000 in gains recognized on the distribution of assets to the
prior owner in conjunction with the acquisition. For U-Do-It, the historical
results included a $55,000 gain on the sale of assets to RentX which was
eliminated for pro forma purposes.
(10) For each Completed Acquisition and the Pending Acquisition, historical
debt balances (approximately $12.8 million) and historical interest expense
($959,000 for fiscal 1996 and $136,000 for the six-month period in 1997) were
eliminated. They were replaced by acquisition debt of approximately $37 million
and interest expense computed as if the acquisition debt had been outstanding
for all periods presented at an effective interest rate of 8%, which
approximates the rate paid on the Company's credit facility for the periods
presented. For fiscal 1996, the historical interest expense eliminated was
$939,000 for the Completed Acquisitions and $20,000 for the Pending Acquisition,
and recomputed interest expense was $1.9 million for the Completed Acquisitions
and $320,000 for the Pending Acquisition. For the six-months ended July 31,
1997, the historical interest expense eliminated was $121,000 for the Completed
Acquisitions and $15,000 for the Pending Acquisition, and the recomputed
interest expense was $372,000 for the Completed Acquisitions and $160,000 for
the Pending Acquisition.
(11) The Completed Acquisitions included companies that were S corporations
or partnerships for income tax purposes. Accordingly, the income or loss for
these entities was included in the income tax returns of their respective
owners, and no income tax expense was recorded at the entity level. Other
Completed Acquisitions involved taxable C corporations, which recorded income
tax expense (benefit) at effective rates ranging from zero to 46%. In
determining pro forma effective income taxes, the Company eliminated historical
income tax expense (benefit) recorded at the entity level and recalculated
income tax expense based on the new basis in the acquired assets and the effect
of the non-deductibility of goodwill, if applicable, for income tax purposes.
(12) Assumes the sale of 3,750,000 shares of Common Stock in the offering at
an assumed initial public offering price of $9.00 per share and the application
of the estimated net proceeds thereof as described herein.
(13) Represents a reduction in interest expense and bank debt as a result of
utilizing a portion of the estimated net proceeds of the offering to reduce the
debt of the Company. For both periods, the debt reduction was assumed to take
place at the start of the period and interest on the amount of the debt
reduction was calculated at 8% per annum, which approximates the interest on the
Company's borrowings during the periods. Assuming an $8 per share initial public
offering price, the pro forma adjustment to interest expense would have been
approximately $2.0 million for fiscal 1996 and $1.0 million for the six months
ended July 31, 1997, resulting in pro forma as adjusted net income of
approximately $2.6 million or $0.28 per share for fiscal 1996 and $153,000 or
$0.02 per share for the six months ended July 31, 1997.
(14) Represents the conversion of the outstanding Preferred Stock to Common
Stock.
(15) Historical and pro forma earnings per share were calculated by assuming
the conversion of the outstanding Preferred Stock of the Company into Common
Stock equivalents and the exercise of all stock options issued within one year
of the initial filing of the Registration Statement of which this Prospectus is
a part. The calculation utilizes the as-if converted method for Preferred Stock
and the treasury stock method for stock options. Pro forma as adjusted earnings
per share also assume the issuance of 3,750,000 shares of Common Stock in this
offering.
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the historical financial condition and
results of operations of the Company. The financial information, discussion and
analysis which follow are based upon and should be read in conjunction with the
financial statements and notes thereto included elsewhere herein. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was formed in March 1996 and had no operations until May 1996
when it acquired Zodiac. Because Zodiac was the first and largest acquisition,
the Company considers Zodiac to be its predecessor. Including Zodiac, the
Company has acquired 14 businesses operating 57 locations in 10 states, with the
first acquisition occurring on May 15, 1996. The Company's acquisition strategy
has focused on rental businesses primarily serving the homeowner, light
commercial and special events markets. The Company has adopted a strategy for
expansion through a combination of acquisitions, start-up stores in areas where
it has an existing platform and increased sales in existing stores. As of
October 31, 1997, the Company has opened two start-up stores and several others
are in the planning phase. The Company began implementation of its
merchandising, advertising, computerization and inventory improvement programs
in the first half of 1997, and most of the impact of those programs has not yet
been realized. As a consequence, the Company's growth in revenues since
inception has been primarily derived from acquisitions.
Since May 15, 1996, the Company has acquired the following businesses: (i)
Zodiac, acquired on May 15, 1996 with nine locations in and around Denver,
Colorado; (ii) A to Z Rentals and Sales, Inc., acquired on May 29, 1996, with
four locations in Spokane, Washington ("A to Z"); (iii) E-Z Way Rentals,
acquired on August 2, 1996 (four locations) and January 31, 1997 (one location),
with locations in five Colorado mountain and resort towns ("E-Z Way"); (iv)
Redwine Enterprises, Inc., fka U-Rent, Inc., acquired on November 1, 1996, with
four locations in Oklahoma ("U-Rent"); (v) U-Do-It Rental Centers, Inc.,
acquired on December 20, 1996 and January 6, 1997, with two locations in Idaho
("U-Do-It"); (vi) Hays Rental and Sales, acquired on February 14, 1997, with
five locations in Arkansas; ("Hays") (vii) CVR, Inc., fka Central Virginia
Rentals Company, acquired on March 14, 1997, with six locations in Virginia
("CVR"); (viii) Newmanco, Inc., dba A-1 Rental Centers, acquired on May 22,
1997, with five locations in New Mexico ("A-1"); (ix) Titus Rental Service
Companies, Inc., dba Suburban Rent-It Company and Able Party Rental, acquired on
June 26, 1997, with seven locations in and around Detroit, Michigan
("Suburban"); (x) Mer-Cal Enterprises, Inc. dba Duncan Rent-Alls, acquired on
July 31, 1997, with one location in Oklahoma ("Duncan"); and (xi) four other
businesses with nine locations in Colorado, California and Texas.
The Company had revenues of $10.8 million and operating income of $700,000
for the period from May 15, 1996 through January 31, 1997. Giving pro forma
effect to the Completed Acquisitions and the Pending Acquisition, the Company
had pro forma revenues of $47.1 million and pro forma operating income of $5.4
million in fiscal 1996. The Company's net income (loss) for the year ended
January 31, 1997 and the six months ended July 31, 1997 was $(76,000) and
$(404,000), respectively, on an historical basis, and $2.8 million and $237,000,
respectively, on a pro forma basis.
The Company has historically financed its acquisitions and capital
expenditures through the issuance of preferred stock, bank borrowings, equipment
financing and internally generated cash flow. Such financings have increased the
Company's interest expense and resulted in the accrual of dividends on preferred
stock. All acquisitions have been accounted for under the purchase method of
accounting and accordingly have increased the Company's goodwill and other
intangible assets (including covenants not to compete). In addition, the various
steps taken to integrate acquisitions
25
<PAGE> 27
(procurement and setup of merchandise, conversion of signage, installation of
computer systems, modernization and expansion of rental inventories and
implementation of employee benefit plans at all locations) have depressed store
contribution and operating margins in the short term. Although no assurance can
be given, the Company believes these actions will contribute to growth in
revenues, store contribution and operating margins in the future.
The Company is continually involved in the investigation and evaluation of
potential acquisitions and start-up locations. In evaluating acquisition
candidates, the Company considers, among other factors, the target's competitive
market position, business mix, strategic value and growth position, the
continuing management team and the demographic characteristics of the target's
market. At any time, the Company may have one or more offers outstanding and may
have executed letters of intent or binding acquisition agreements. The Company
has entered into letters of intent with respect to the Pending Acquisition,
which will add two locations in Tennessee and another immaterial acquisition,
which will add one store in Colorado. The Company is currently discussing a
number of possible additional acquisitions. There can be no assurance, however,
that the Pending Acquisition or any other acquisition will be consummated.
In acquisitions, the Company typically acquires the operating assets of the
business, including equipment inventories, merchandise, leasehold improvements
and accounts receivable, customer lists and goodwill. The Company has not
acquired any real property and does not typically assume any of the seller's
liabilities. The sellers agree to indemnify the Company against adverse
consequences the Company may suffer as a result of circumstances in existence at
or prior to closing.
In connection with start-up stores, the Company expenses certain
pre-opening costs relating to marketing, training, set-up of fixtures,
merchandise and the in-store computer system. As a result, the profitability of
a new store is expected to be lower in the initial period of its operations. The
Company expects these stores to approximately break even at the operating level
in the first year of operation. The Company anticipates that new store openings
will reduce the Company's overall store contribution and operating margins until
such stores achieve normalized profitability.
The Company frequently makes additional investments in the rental inventory
of acquired stores to broaden and deepen available product offerings. In the six
months ended July 31, 1997, the Company invested $7.9 million in the rental
inventories of previously acquired businesses. The Company further invested
approximately $1.7 million in operating equipment, fixtures for its merchandise
program, signage and new computer systems. Depreciation relating to these
capital expenditures depresses margins in the short term. Although no assurances
can be given, the Company believes that its substantial investment in
merchandising and information systems, combined with its "hub and spoke"
strategy, will allow it to achieve stronger and steadier revenue growth and
better asset utilization over time. The hub and spoke strategy is designed to
increase asset utilization by allowing stores with smaller inventories or "stock
outs" to access inventory at a larger central store for rental. The hub store
will carry more inventory and some of the larger items of equipment.
As the Company was formed during fiscal 1996 to pursue an industry
consolidation, the Company does not have comparable data for prior fiscal year
periods. The following discussion and analysis does not compare the Company's
results of operations to the results of operations of the Company's predecessor,
Zodiac, because of the dramatic change in the business resulting from pursuing
the Company's industry consolidation strategy. Historical Zodiac results are
analyzed and discussed in a separate section of this analysis.
PRO FORMA RESULTS OF OPERATIONS
PRO FORMA SIX MONTHS ENDED JULY 31, 1997
Revenues are composed of rental revenue, derived from the rental of the
Company's equipment; rental equipment sales, reflecting revenues received by the
Company from the sale of used rental equipment; and sales of tie-in merchandise
and other items which the Company sells in conjunction with the rental of its
equipment. For the six months ended July 31, 1997, the Company had pro forma
26
<PAGE> 28
revenues of $22.9 million. On a pro forma basis, the Company acquired ten
businesses with 35 locations during the period including the Pending
Acquisition. In addition, the Company opened one new store and consolidated one
store into an existing store during the period.
Cost of revenues includes Rental equipment expense, which is the cost of
repairing and maintaining the rental equipment inventory, as well as the rental
cost to the Company of obtaining equipment, on a short-term basis that the
Company does not own for use by its customers; Rental equipment depreciation,
which reflects the depreciation expense in the period associated with equipment
rented by the Company, calculated on a straight line basis by estimating the
useful life of equipment net of the estimated salvage value; Cost of rental
equipment sales, which reflects the net book value and related disposition costs
of used rental equipment sold by the Company; Cost of merchandise, which
reflects the cost of ancillary merchandise sold by the Company to complement its
equipment offerings; and Direct operating expense, which is composed of such
expenses as facility rents, utilities, property taxes, store labor, employee
training and benefits, store supplies and uniforms, the cost of equipment added
to the rental inventory that is expensed, rather than capitalized, credit card
fees, insurance, computer expenses and other store level charges. For the six
months ended July 31, 1997, the Company's pro forma cost of revenues was $16.7
million. As a percent of sales, pro forma cost of revenues for the period were
73.0%, generating a pro forma store contribution for the period of $6.2 million
or 27.0%.
Selling, general and administrative expense ("SG&A") includes the cost of
advertising and marketing, expenses associated with an area's management
structure and home office overhead. For the six months ended July 31, 1997, the
Company had pro forma SG&A of $4.6 million. As a percent of revenues, pro forma
SG&A for the period was 20.1%.
Depreciation and amortization, excluding rental equipment depreciation
includes depreciation expense associated with computers and other home office
equipment (including leasehold improvements), as well as amortization of
intangible assets, which arise principally from the excess of the purchase price
paid for acquired companies over the estimated fair market value of their
assets. For the six months ended July 31, 1997, the Company had pro forma
depreciation and amortization expense, excluding rental equipment depreciation
of $0.5 million. As a percent of sales, pro forma depreciation and amortization
expense, excluding rental equipment depreciation expense for the period was
2.3%.
Other (income) expense, net includes interest income and other
non-operating items. For the six months ended July 31, 1997, the Company had pro
forma other income, net of $38,000.
Interest expense reflects the debt the Company incurs to fund its
acquisitions, the purchase of rental and other equipment and working capital
during seasonally slow months. For the six months ended July 31, 1997, the
Company had pro forma as adjusted interest expense of $0.7 million.
Income tax expense. For the six months ended July 31, 1997, the Company had
pro forma as adjusted income tax expense of $0.2 million. The Company's
effective tax rate for the period was 39.8%.
PRO FORMA FISCAL 1996
Revenues. In fiscal 1996, the Company had pro forma revenues of $47.1
million. The Company acquired five businesses with 24 locations during the
period.
Cost of Revenues. In fiscal 1996, the Company had pro forma cost of
revenues of $32.0 million. As a percent of sales, pro forma cost of revenues for
the period were 67.9%, generating a pro forma store contribution for the period
of $15.1 million or 32.1%. Pro forma figures for the period generally do not
include the full year impact of increased depreciation deductions from new
rental equipment investment, expanded employee benefit programs and store-level
costs of converting acquired stores to the RentX model.
27
<PAGE> 29
Selling, general and administrative expense. In fiscal 1996, the Company
had pro forma SG&A of $8.7 million. As a percent of revenues, pro forma SG&A for
the period was 18.5%.
Depreciation and amortization, excluding rental equipment depreciation. In
fiscal 1996, the Company had pro forma depreciation and amortization expense,
excluding rental equipment depreciation of $0.9 million. As a percent of sales,
pro forma depreciation and amortization expense, excluding rental equipment
depreciation expense for the period was 2.0%. As of the end of the period, the
Company had not yet begun installation of its management information system.
Therefore, no depreciation expense relating to that system would have been
incurred. As a result, most expenses in this category relate to amortization of
goodwill arising from acquisitions.
Other (income) expense, net. In fiscal 1996, the Company had pro forma
other expense, net of $30,000.
Interest expense. In fiscal 1996, the Company had pro forma as adjusted
interest expense of $738,000.
Income tax expense. In fiscal 1996, the Company had pro forma as adjusted
income tax expense of $1.9 million. The Company's effective tax rate for the
period was 39.9%.
RENTX HISTORICAL RESULTS OF OPERATIONS
RENTX SIX MONTHS ENDED JULY 31, 1997 AND 1996
Revenues for the Company increased to $16.1 million for the six months
ended July 31, 1997 from $3.0 million for the six months ended July 31, 1996,
due largely to the increase in stores resulting from acquisitions. As of July
31, 1996, the Company had 13 locations which were acquired in May 1996. As of
July 31, 1997, the Company had 57 locations. Store contribution margin for the
six months ended July 31, 1996 of 41.1% (versus 29.7% for the six months ended
July 31, 1997) benefitted from excluding the low seasonal performance of the
acquired businesses during the first quarter, due to the timing of the
respective acquisitions. Additionally the store contribution margin in 1997 was
impacted by lower margins from subsequent acquisitions, in particular E-Z Way
and U-Rent, which derived a larger share of their revenues from "split rentals."
In split rental arrangements, the Company obtains equipment on consignment from
the owner (typically an equipment dealer) and pays the owner a percentage of any
rentals received. The equipment can be returned to the owner at any time.
Historically, split rentals generate a margin of 20% to 25% compared to margins
of 30% and higher on equipment owned by the Company. Company-wide, split rentals
accounted for approximately 5.4% of total rental revenues for the six months
ended July 31, 1997. In addition, store contribution margins in the 1997 period
were adversely affected by poor weather conditions in the Company's comparable
market areas, incremental depreciation expense on investments for new rental
inventory and lower margins on merchandise sales. SG&A for the two periods
represents the continued development of a corporate infrastructure necessary to
execute the Company's strategy. Interest expense increased $1.1 million and
preferred stock dividends increased $313,000 in the 1997 period due to increased
debt and sales of additional preferred stock to finance acquisitions.
RENTX MAY 15, 1996 (COMMENCEMENT OF OPERATIONS) THROUGH JANUARY 31, 1997
Revenues. In fiscal 1996, the Company had revenues of $10.8 million. The
Company acquired five businesses with 24 locations during the period.
Cost of Revenues. In fiscal 1996, the Company had cost of revenues of $7.5
million. As a percent of sales, cost of revenues for the period was 69.0%,
generating a store contribution for the period of 31.0%. Relative to full annual
periods, the Company benefitted from commencing operations after the first
quarter, which generally has low sales and low operating margins given the
generally fixed nature of operating expenses.
28
<PAGE> 30
Selling, general and administrative expense. In fiscal 1996, the Company
had SG&A of $2.4 million. As a percent of revenues, SG&A for the period was
21.7%. These costs arise from the initial development of the area management and
corporate infrastructures necessary to implement the Company's strategy.
Depreciation and amortization, excluding rental equipment depreciation. In
fiscal 1996, the Company had depreciation and amortization expense, excluding
rental equipment depreciation of $0.3 million. As a percent of sales,
depreciation and amortization expense, excluding rental equipment depreciation
expense for the period was 2.7%.
Other (income) expense, net. In fiscal 1996, the Company had other expense,
net of $4,000.
Interest expense. In fiscal 1996, the Company had interest expense of $0.8
million.
Income tax expense. In fiscal 1996, the Company did not incur income tax
expense as it had a loss of $76,000 before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash have been the funding of acquisitions
and capital expenditures. The Company has financed its acquisitions in part with
borrowings under its credit facility and in part by the sale of preferred stock
to several private equity funds, various members of management and certain
previous owners of the acquired businesses. The Company's capital expenditures
have been financed by cash flow from operations and equipment financing. The
Company's cash flow from operations can be expected to follow the same seasonal
pattern as its revenues -- lower in the first and fourth quarters and higher in
the second and third quarters. Accordingly, the Company expects that debt
utilization for working capital needs will be most intensive during the first
quarter as the Company historically has generated lower cash flow from
operations and purchases a significant portion of its new rental equipment in
advance of the peak rental season.
The Company's credit facility provides for a revolving line of credit of up
to $5.6 million and for term loans of up to $39.3 million. However, in no event
may the combination of term loans and the revolving facility exceed $39.3
million. The Company has recently received a commitment from another lender that
would increase the credit facility by $20 million. The commitment is subject to
definitive documentation and the approval of the existing lenders and there can
be no assurance that such increased borrowings will be available to the Company.
The credit facility permits the Company to obtain outside equipment financing of
up to $10.0 million. The credit facility matures May 31, 1999. The credit
facility has certain covenants relating to total debt outstanding, minimum
ratios of equity funding for acquisitions and other limitations regarding lease
terms, payment of dividends and certain other restrictions. Virtually all of the
assets of the Company secure the loan.
As of April 30, 1997, the Company was not in compliance with a covenant
under the credit facility relating to the total amount of debt (including
equipment financing) that the Company could carry relative to cash flow. The
lenders waived compliance with this covenant for the quarter ended April 30,
1997. In August 1997, the credit agreement was amended to change the covenant
for each of the quarters July 31, 1997 through April 30, 1998. At the same time,
the lenders increased the total credit facility to $39.3 million. As of July 31,
1997 the Company was in compliance with all the covenants of the Credit
Facility.
As of July 31, 1997, the Company had utilized approximately $35 million
under its credit facility. The increase in borrowings over those outstanding on
January 31, 1997 relate primarily to the funding of 1997 acquisitions.
As allowed under the credit facility, the Company had arranged for
equipment financing of up to $6.2 million. At July 31, 1997, the Company had
utilized approximately $5.9 million of the equipment financing, and at September
9, 1997, the Company had drawn all of the available equipment financing.
29
<PAGE> 31
For the fiscal year ending January 31, 1998, the Company has budgeted
approximately $12 million for the purchase of rental equipment, delivery
vehicles, store fixtures, leasehold improvements and computer systems for the
businesses acquired through July 31, 1997. As of July 31, 1997, the Company had
spent approximately $10 million of the budgeted amount. In addition, the Company
has opened two start-up stores, and expects to open a total of five to 10
start-up stores in the fiscal year ended January 31, 1998 at an estimated
average investment, including rental equipment, of approximately $450,000 per
store.
Expansion of the Company through acquisitions, new stores and internal
growth will require significant capital expenditures. The Company must continue
to reinvest in high quality, well-maintained equipment and rental facilities in
order to remain competitive. In addition, the Company will be required to make
substantial capital expenditures in implementing the RentX business model,
including increasing inventories at recently acquired stores. Although the
Company's actual capital needs will vary depending upon the number of
acquisitions completed, whether such acquisitions are financed through cash or
issuance of equity securities, the number of new stores opened and the level of
reinvestment in rental equipment inventory, the Company currently anticipates
that total capital expenditures through January 31, 1999 will be approximately
$150 million. The proceeds of the offering, borrowings under the Company's
current credit facility and funds generated from operations are expected to fund
capital requirements until April 1998. To fully implement its growth strategy
and meet the resulting capital requirements, the Company will be required to
increase amounts available under its credit facility and/or issue additional
equity securities (which could result in dilution to the purchasers of Common
Stock offered hereby). Such additional indebtedness would likely increase
RentX's leverage, may make the Company more vulnerable to economic downturns and
may limit its ability to withstand competitive pressures. There can be no
assurance that additional capital, if and when required, will be available on
terms acceptable to the Company, or at all. Failure by the Company to obtain
sufficient additional capital in the future could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Growth Strategy."
SEASONALITY
The Company's business is highly seasonal. Given the Company's targeted
segments and geographical mix of stores, revenues and operating income are
expected to be low in the first and fourth quarters and to be relatively
stronger during the second and third quarters. This seasonality should become
less pronounced as the Company continues to expand its special events business,
which typically has a stronger fourth quarter than the general rental business,
and becomes increasingly diversified geographically. The cost structure of the
business is relatively fixed in nature, which negatively impacts store
contribution margins during the seasons with low revenues. During the first
quarter of each year, the Company expects to invest heavily in new equipment and
repairing older equipment in advance of the peak rental season. The resulting
depreciation deductions and repair expenses also contribute to lower store
contribution margins in the first half of the year.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Inflation has not significantly impacted operating results in the Company's
brief history, nor is it expected to significantly impact future results.
However, there can be no assurance that the Company would be able to modify its
prices to offset any inflationary cost increases that may occur in the future.
The equipment rental industry is impacted by national, regional and local
economic conditions, including slowdowns in construction. The Company's
operating results may be adversely affected by events or conditions in a
particular region, such as a regional economic slowdown, adverse weather and
other factors. In addition, the Company's operating results may be adversely
affected by increases in interest rates that may lead to a decline in economic
activity, while simultaneously resulting in higher interest payments by the
Company under its variable rate credit facilities. Economic slowdowns or adverse
economic or competitive conditions would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Business
- -- Stores and Facilities."
30
<PAGE> 32
ACQUIRED BUSINESSES
SUMMARY FINANCIAL RESULTS
The Company has acquired 14 separate businesses. The results achieved by
these separate businesses are not necessarily indicative of the results that
they would have achieved had they been operated as a single business. The
companies acquired by RentX were formed using a variety of legal structures and
had varying accounting policies, especially in regard to depreciation and
expensing purchases of rental equipment. They further employed substantial
numbers of people who were owners or relatives of the owners, and those persons
often received wages that were significantly above market (as a part of each
acquisition the Company negotiates pay rates with owners and their family
members staying with the business that more closely reflect market rates). The
acquired companies also had vastly different policies with respect to employee
benefits. In some cases, the various companies served different market segments.
For example, some derived a significant percentage of their revenues from
special events, while others had no special events and focused on general
rentals. Finally, some companies were structured as C corporations for federal
income tax purposes while others were structured as S corporations or
partnerships, and therefore had no income tax expense at the entity level. Most
of the companies were managed with the objective of minimizing taxable income
rather than maximizing reported income. As a result of these and other factors,
margins, net income and growth rates of the companies acquired vary
significantly, and company-to-company or period-to-period comparisons of
financial results are not necessarily meaningful.
31
<PAGE> 33
The following table summarizes the audited financial results for the
Completed Acquisitions and the Pending Acquisition. For 1996, the information
given reflects the financial results of the Completed Acquisitions effected
during that year up to the respective dates of acquisition by RentX and the
information given for RentX reflects the results of their operation on a
combined basis after those dates. The audited results have not been modified to
render the periods presented consistent or to eliminate operations not acquired
by the Company as would be required for consolidation or for a pro forma
presentation. See "Summary Pro Forma Financial Information." All figures relate
to the calendar year unless otherwise indicated in the notes to the table. All
percentages presented are in relation to revenues.
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
RentX(1).......................................... $ -- $ -- $10,838,364
Zodiac(2)......................................... 5,650,306 7,590,554 2,814,332
A to Z(3)......................................... 4,411,111 4,171,595 1,351,437
E-Z Way(4)........................................ 2,582,337 2,792,549 1,506,468
U-Rent(5)......................................... NA NA 1,800,945
U-Do-It........................................... 1,030,483 1,114,078 1,228,376
Hays(6)........................................... 2,582,944 2,910,927 3,386,777
CVR(7)............................................ 3,930,894 4,699,458 5,656,814
A-1(8)............................................ 2,327,044 2,980,027 3,365,810
Suburban(9)....................................... 3,304,215 3,311,585 3,885,251
Duncan............................................ 631,649 730,663 921,261
Insignificant acquisitions(10).................... 6,119,249 6,397,106 7,163,016
Pending Acquisition............................... 3,503,197 3,784,104 4,090,059
STORE CONTRIBUTION % % %
----- ----- -----
RentX(1).......................................... $ -- $ -- $ 3,356,089 31.0
Zodiac Rentals(2)................................. 1,525,236 27.0 2,163,340 28.5 377,924 13.4
A to Z(3)......................................... 1,899,266 43.1 1,963,230 47.1 597,255 44.2
E-Z Way(4)........................................ 1,462,027 56.6 1,425,575 51.0 770,596 51.2
U-Rent(5)......................................... NA NA 1,076,844 59.8
U-Do-It........................................... 533,816 51.8 672,140 60.3 717,407 58.4
Hays(6)........................................... 944,410 36.6 1,125,262 38.7 1,313,718 38.8
CVR(7)............................................ 635,876 16.2 768,971 16.4 1,189,356 21.0
A-1(8)............................................ 560,406 24.1 806,659 27.1 881,576 26.2
Suburban(9)....................................... 610,390 18.5 804,696 24.3 1,118,217 28.8
Duncan............................................ 175,936 27.9 179,723 24.6 273,229 29.7
Insignificant acquisitions(10).................... 1,320,504 21.6 1,359,804 21.3 1,396,472 19.5
Pending Acquisition............................... 816,498 23.3 860,243 22.7 894,680 21.9
OPERATING INCOME
RentX(1).......................................... $ -- $ -- $ 711,702 6.6
Zodiac(2)......................................... 400,714 7.1 656,234 8.6 (196,284) (7.0)
A to Z(3)......................................... 1,164,405 26.4 827,751 19.8 320,499 23.7
E-Z Way(4)........................................ 510,808 19.8 546,784 19.6 201,493 13.4
U-Rent(5)......................................... NA NA 308,477 17.1
U-Do-It........................................... 60,855 5.9 163,296 14.7 (4,075) (0.3)
Hays(6)........................................... 164,319 6.4 163,657 5.6 227,683 6.7
CVR(7)............................................ 296,255 7.5 351,932 7.5 602,117 10.6
A-1(8)............................................ 163,707 7.0 314,078 10.5 328,090 9.7
Suburban(9)....................................... 9,625 0.3 144,093 4.4 339,185 8.7
Duncan............................................ 39,472 6.2 4,622 0.6 105,096 11.4
Insignificant acquisitions(10).................... 273,176 4.5 240,917 3.8 265,368 3.7
Pending Acquisition............................... 202,610 5.8 132,382 3.5 127,359 3.1
</TABLE>
- ---------------
(1) All 1996 figures for RentX relate to the period from commencement of
operations through January 31, 1997.
(2) All 1996 figures for Zodiac relate to the period from January 1, 1996
through May 14, 1996.
(3) All 1996 figures for A to Z relate to the period from January 1, 1996
through May 28, 1996.
(4) All 1996 figures for E-Z Way relate to the period from January 1, 1996
through July 31, 1996. As the fifth location was not acquired by the
Company until January 31, 1997, the results of that location are not
included in the E-Z Way figures or the Company's figures for August 1, 1996
through January 31, 1997.
(5) All 1996 figures for U-Rent relate to the period from January 1, 1996
through October 31, 1996.
(6) All figures for Hays relate to the period from November 1 through October
31.
(7) All figures for CVR include a seventh location which was not purchased by
the Company.
(8) All figures for A-1 relate to the period from October 1 through September
30.
(9) All figures for Suburban relate to the period from April 1 through March
31.
(10) Figures for one of the insignificant acquisitions are not available for
1994 and 1995.
32
<PAGE> 34
DISCUSSION AND ANALYSIS OF ACQUIRED COMPANIES
ZODIAC RENTALS
Results of Operations
On May 15, 1996, the Company acquired Zodiac, a nine-store chain located in
the Denver, Colorado metropolitan area primarily targeting the homeowner and
light commercial segments of the general rental market. Founded in 1974, Zodiac
was a well-established business with a strong reputation for customer service.
The two prior owners of Zodiac became members of the Company's senior operating
team and subsequently invested in Company stock. Both prior owners are
nationally recognized within the rental industry; one of the prior owners was,
at the time of the acquisition, the president of the ARA. The acquisition of
Zodiac gave the Company immediate industry visibility and further positioned it
for rapid future growth through acquisitions given the extensive contacts of the
prior owners.
Zodiac's results of operations for 1996 consisted of the period from
January 1, 1996 through May 14, 1996. Accordingly, comparisons of 1996 results
to 1995 results are not meaningful. Zodiac's revenues were $2,814,332 in 1996.
Store contribution was $377,924, or 13.4% of revenues, and Zodiac had an
operating loss of $196,284. As the period from January 1 through May 14, 1996
only represents a partial year and includes the seasonally poor revenue months
of January through March, store contribution and operating margin for the short
period prior to acquisition by the Company in 1996 declined from the full year
operating margins realized in 1995.
Zodiac's revenues increased to $7,590,554 in 1995 from $5,650,306 in 1994,
an increase of $1,940,248 or 34.3%. Growth was enhanced by the addition of two
new stores in early 1995 which contributed $740,000 of revenue in 1995 and the
full-year impact of a store acquired in the third quarter of 1994 which
contributed $785,000 in 1995. Store contribution increased to $2,163,340, or
28.5% of revenues, in 1995 from $1,525,236, or 27.0% of revenues, in 1994, an
increase of $638,104 or 41.8%. This increase was attributable to efficiencies at
the store level from a larger revenue base and to increased merchandise margins.
Operating income increased to $656,234, or 8.6% of revenues, in 1995 from
$400,714, or 7.1% of revenues, in 1994, an increase of $255,520 or 63.8%.
Operating income grew more rapidly than revenues and store contribution as SG&A
was spread over a larger revenue base.
Liquidity and Capital Resources
During the period from January 1, 1996 through May 14, 1996, Zodiac
borrowed $1,050,000 to meet its working capital needs and to finance the
purchase of $1,099,225 of new rental equipment. During the fiscal years ended
December 31, 1994 and 1995, Zodiac purchased $1,536,088 and $1,545,049,
respectively, in new rental equipment. These purchases were financed with bank
borrowings and cash flow from operations.
A TO Z RENTALS AND SALES, INC.
Results of Operations
On May 29, 1996, the Company acquired A to Z, a four-store chain in the
Spokane, Washington area primarily targeting the homeowner, light commercial and
special events segments of the market. A to Z was owned by a former president of
the ARA. The prior owners are no longer involved with the business.
A to Z's results of operations for 1996 consisted of the period from
January 1, 1996 through May 28, 1996. Accordingly, comparisons of 1996 results
to 1995 results are not meaningful. A to Z's revenues were $1,351,437 in 1996
and its store contribution was $597,255, or 44.2% of revenues. Operating income
was $320,499, or 23.7% of revenues, in 1996. Even though the period from January
1 through May 28, 1996 only represents a partial year and includes the
seasonally poor revenue months of January through April, operating margins
improved for the short period prior to acquisition by the Company due to a
significant decline in prior owner compensation.
33
<PAGE> 35
A to Z's revenues decreased to $4,171,595 in 1995 from $4,411,111 in 1994,
a decrease of $239,516 or 5.7%. The Company believes this decrease was
principally due to reduced involvement of the majority owner, several years of
insufficient investment in inventory and a lack of an outside sales effort.
Store contribution increased to $1,963,230, or 47.1% of revenues, in 1995 from
$1,899,266, or 43.1% of revenues, in 1994, an increase of $63,964 or 3.4%.
Operating income decreased to $827,751, or 19.8% of revenues, in 1995 from
$1,164,405, or 26.4% of revenues, in 1994, a decrease of $336,654 or 28.9%. This
decrease was principally the result of the relatively fixed nature of operating
costs in the rental equipment business with declining sales and an increase in
compensation paid to the prior owners.
Liquidity and Capital Resources
During 1994, 1995 and the short period for 1996, A to Z did not invest
significantly in new rental equipment, purchasing only $324,279 in new
equipment. The prior owners also received material distributions from the
business (cash distributions totalled $585,298 in 1994, $1,379,957 in 1995 and
$1,694,439 in the short period for 1996).
E-Z WAY RENTALS
Results of Operations
On August 2, 1996 (four locations) and January 31, 1997 (one location), the
Company acquired the five rental stores owned and operated by E-Z Way. The five
E-Z Way stores are located in mountain and resort communities in Colorado and
primarily targeted the light commercial market with, in some cases, a limited
focus on special events. At closing, the prior owner and his wife retired from
the business. The prior owner subsequently entered into a consulting and
advisory agreement with the Company to aid it in the acquisition and development
of new stores in the Colorado mountains.
E-Z Way's results of operations for 1996 consisted of the seven month
period ended July 31, 1996. Accordingly, comparisons of 1996 results to 1995
results are not meaningful. E-Z Way's revenues were $1,506,468 in 1996 and store
contribution was $770,596, or 51.2% of revenues. Operating income was $201,493,
or 13.4% of revenues, in 1996. As the period from January 1 through July 31,
1996 only represents a partial year and includes the seasonally poor revenue
months of January through April, store contribution and operating margin for the
short period prior to acquisition by the Company in 1996 declined from the full
year operating margins realized in 1995.
E-Z Way's revenues increased to $2,792,549 in 1995 from $2,582,337 in 1994,
an increase of $210,212 or 8.1%. The Company believes that revenue growth was
enhanced by strong construction and development activity in the areas served by
E-Z Way's stores. Store contribution decreased to $1,425,575, or 51.0% of
revenues, in 1995 from $1,462,027, or 56.6% of revenues, in 1994, a decrease of
$36,452 or 2.5%. This decrease was attributable in part to the increased volume
of split rentals made by E-Z Way. Split rentals generate lower margins than
typical rental transactions but do not require capital investment in the
equipment. Split rentals are typically limited to larger items of equipment
useful to contractor customers. Operating income increased to $546,784, or 19.6%
of revenues, in 1995 from $510,808, or 19.8%, in 1994, an increase of $35,976 or
7.0% due largely to the increase in revenues.
Liquidity and Capital Resources
During the seven months ended July 31, 1996, E-Z Way used its cash flow
from operations to reduce debt and made cash distributions of $101,788 to the
owners. During 1994 and 1995, E-Z Way utilized cash flow from operations to
invest $287,210 and $316,370, respectively, in new rental equipment per year and
to reduce debt. In 1995, E-Z Way increased its cash distributions to owners from
$84,338 to $300,000.
34
<PAGE> 36
U-RENT, INC.
Results of Operations
On November 1, 1996, the Company acquired U-Rent, a company operating four
rental stores in Oklahoma, primarily targeting the homeowner, farming and light
commercial markets. The prior owner remained with the Company after the
acquisition as the Oklahoma area manager and subsequently invested in Company
stock.
Audits could not be performed on U-Rent's financial statements prior to
1996. As a result, audited comparative results from operations are not
available. In 1996, U-Rent had revenues of $1,800,945, store contribution of
$1,076,844 or 59.8% of revenues and operating income of $308,477 or 17.1% of
revenues.
Liquidity and Capital Resources
During the ten months ended October 31, 1996, U-Rent invested $913,737 in
new rental equipment which was financed by cash flow from operations and
increased bank borrowings.
U-DO-IT RENTAL CENTERS, INC.
Results of Operations
On December 20, 1996 and January 6, 1997, the Company acquired two rental
stores operated by U-Do-It in Idaho. U-Do-It primarily served the homeowner and
light commercial market segments. As a part of the acquisition, the Company
acquired the assets of an affiliated partnership which leased certain items of
rental equipment to U-Do-It. While the prior owner retired from the business
after acquisition by the Company, his two sons remained as managers of the
stores.
U-Do-It's revenues increased to $1,228,376 in 1996 from $1,114,078 in 1995,
an increase of $114,298 or 10.3%. Revenue growth was enhanced by the strong
economy of the resort areas serviced by U-Do-It. Store contribution increased to
$717,407, or 58.4% of revenues, in 1996 from $672,140, or 60.3% of revenues in
1995. Contribution margin declined as a result of the increased reliance on
split rentals of equipment. U-Do-It had an operating loss of $4,075 in 1996 as
compared to operating income of $163,296, or 14.7% of revenues, in 1995, a
decrease of $167,371. Operating income declined in part due to the decline in
store contribution and the establishment of pension and retirement programs for
the prior owner. During 1996, the new retirement programs increased expenses by
approximately $57,000.
U-Do-It's revenues increased to $1,114,078 in 1995 from $1,030,483 in 1994,
an increase of $83,595 or 8.1%. Store contribution increased to $672,140, or
60.3% of revenues, in 1995 from $533,816, or 51.8% of revenues, in 1994, an
increase of $138,324 or 25.9%. Store contribution grew more rapidly than
revenues over the same period due to declines in store operating expenses.
Operating income increased to $163,296, or 14.7% of revenues, in 1995 from
$60,855, or 5.9% of revenues, in 1994. This increase primarily was the result of
the expansion in store contribution coupled with slow growth in SG&A.
Liquidity and Capital Resources
Over the periods ended December 31, 1994, 1995 and 1996, U-Do-It utilized
its cash flow from operations to invest modestly in new rental equipment and to
reduce debt. During 1996, U-Do-It completed the sale of its first location to
the Company and utilized the proceeds to reduce long-term debt. U-Do-It
subsequently sold the remainder of its assets and retired the remainder of its
debt on January 6, 1997 when it sold its second location to the Company.
35
<PAGE> 37
HAYS RENTAL AND SALES
Results of Operations
On February 14, 1997, the Company acquired five rental stores operated by
Hays. The Company further acquired certain items of equipment owned by a related
entity. The five Hays rental stores specialized in the homeowner, light
commercial and portable toilet businesses. The prior owner, a former regional
director of the ARA, remained with the Company after the acquisition as the
Arkansas area manager and subsequently invested in Company stock. Hays was one
of a few companies acquired by the Company that have historically been dealers
in new items of equipment.
Hays' revenue increased to $812,575 for the three months ended January 31,
1997 from $758,670 for the three months ended January 31, 1996, an increase of
$53,905 or 7.1%. Operating income increased $70,969 due to the increased
revenues and lower SG&A.
Hays' revenues increased to $3,386,777 in 1996 from $2,910,927 in 1995, an
increase of $475,850 or 16.3%. Growth was enhanced by the continued positive
impact of an incentive compensation program implemented in 1995 and growth in
the local economy. Store contribution increased to $1,313,718, or 38.8% of
revenues, in 1996 from $1,125,262, or 38.7% of revenues, in 1995, an increase of
$188,456 or 16.7%. Operating income increased to $227,683, or 6.7% of revenues,
in 1996 from $163,657, or 5.6% of revenues, in 1995, an increase of $64,026 or
39.1%. This increase was attributable to sales growth and SG&A growing slower
than sales.
Hays' revenues increased to $2,910,927 in 1995 from $2,582,944 in 1994, an
increase of $327,983 or 12.7%. Revenue growth was enhanced by the implementation
of an effective incentive compensation program and an expanding local economy in
southern Arkansas. Store contribution increased to $1,125,262, or 38.7% of
revenues, in 1995 from $944,410, or 36.6% of revenues, in 1994, an increase of
$180,852 or 19.1%. Store contribution outpaced revenue growth partly as a result
of reduced rental equipment expense and improved merchandise margins. Operating
income decreased to $163,657, or 5.6% of revenues, in 1995 from $164,319, or
6.4% of revenues in 1994. Operating income was essentially flat due to increased
SG&A from the centralization of certain administrative activities, the
implementation of a new computer system and increased depreciation from
non-rental equipment.
Liquidity and Capital Resources
In each of the three years ended October 31, 1996, 1995 and 1994, Hays did
not make significant investments in its rental equipment inventory. Over the
three-year period, Hays utilized cash flow from operations to reduce debt.
CENTRAL VIRGINIA RENTAL COMPANY
Results of Operations
On March 14, 1997, the Company acquired six of the seven rental stores
owned by CVR. The six stores acquired by the Company targeted the homeowner,
light commercial and special events segments of the market. The Company also
secured an eighteen month option to purchase the seventh location, located in
Waynesboro, Virginia. All three prior owners of CVR remained with the Company in
some capacity: one is a consultant and advisor to the Company in identifying
acquisitions and start-up locations in the area; the second remained as the
Company's area manager; and the third remained as the Company's assistant area
manager and local special events manager. Two of the three prior owners
subsequently invested in Company stock.
CVR's revenues increased to $5,656,814 in 1996 from $4,699,458 in 1995, an
increase of $957,356 or 20.4%. This increase in revenues was primarily
attributable to the addition of a seventh location (which was not acquired by
the Company). This location provided approximately $650,000 in new revenues.
Store contribution increased to $1,189,356, or 21.0% of revenues, in 1996 from
$768,971, or 16.4% of revenues, in 1995, an increase of $420,385 or 54.7%. The
increase in contribution margin was primarily attributable to better cost
management at the store level and increased revenues. Operating income
36
<PAGE> 38
increased to $602,117, or 10.6% of revenues, in 1996 from $351,932, or 7.5% of
revenues, in 1995, an increase of $250,185 or 71.1%. The additional revenues
from the seventh location contributed to gains in operating income as SG&A did
not grow as quickly as revenues.
CVR's revenues increased to $4,699,458 in 1995 from $3,930,894 in 1994, an
increase of $768,564 or 19.6%. Revenue growth was enhanced by the addition of a
new location. Store contribution increased to $768,971, or 16.4% of revenues, in
1995 from $635,876, or 16.2% of revenues, in 1994, an increase of $133,095 or
20.9%. Since CVR derives a large share (approximately 25%) of its revenues from
its special events business, which is more labor intensive but requires less
capital investment than the general tool business, CVR's store contribution
margins generally are lower than other rental companies focusing on general tool
rentals. Operating income increased to $351,932, or 7.5% of revenues, in 1995
from $296,255, or 7.5% of revenues, in 1994, an increase of $55,677 or 18.8%.
Liquidity and Capital Resources
During 1994, 1995 and 1996, CVR invested $1,619,157 in new rental
equipment. These investments were financed by cash flows from operations.
A-1 RENTAL CENTERS
Results of Operations
On May 22, 1997, the Company acquired A-1, a five-store chain in New
Mexico. The Company further acquired certain items of rental equipment from an
entity owned by the prior owner which were leased to A-1. A-1 targeted the
homeowner, light commercial and special events segments, and also sold and
serviced small items of power equipment (chain saws, lawn mowers, etc.) in one
location. The Company has recently consolidated the repair service and equipment
sales unit into one of the other locations. The prior owner of A-1, who was the
president of the ARA for 1995, remained with the Company as its Western Regional
Director of Operations, and subsequently invested in Company stock. One of the
prior owner's sons served as A-1's general manager prior to acquisition by the
Company and has remained as the Company's area manager. Another son also joined
the Company as an assistant area manager.
Revenues decreased to $1,421,150 for the six months ended March 31, 1997
from $1,498,477 for the six months ended March 31, 1996, a decrease of $77,327
or 5.2%, primarily due to increased local competition. The revenue decrease
combined with increased operating costs resulted in a $211,304 decrease in
operating income.
A-1's revenues increased to $3,365,810 in 1996 from $2,980,027 in 1995, an
increase of $385,783 or 12.9%. Store contribution increased to $881,576, or
26.2% of revenues, in 1996 from $806,659, or 27.1% of revenues, in 1995, an
increase of $74,917 or 9.3%. Contribution margin decreased in part due to an
increase in depreciation. Operating income increased to $328,090, or 9.7% of
revenues, in 1996 from $314,078, or 10.5% of revenues, in 1995, an increase of
$14,012 or 4.5%.
A-1's revenues increased to $2,980,027 in 1995 from $2,327,044 in 1994, an
increase of $652,983 or 28.1%. Revenue growth was enhanced by the opening of one
location in late 1994 and by economic growth in the area. Store contribution
increased to $806,659, or 27.1% of revenues, in 1995 from $560,406, or 24.1% of
revenues in 1994, an increase of $246,253 or 43.9%. Operating income increased
to $314,078, or 10.5% of revenues, in 1995 from $163,707, or 7.0% of revenues,
in 1994, as SG&A was spread over a larger sales base.
Liquidity and Capital Resources
In each of the three years in the period ended September 30, 1996, A-1
continued to invest in new rental equipment. Over the period, A-1 invested
$1,061,860 in new rental equipment which was financed primarily by cash flow
from operations.
37
<PAGE> 39
TITUS RENTAL SERVICE COMPANIES, INC. DBA SUBURBAN RENTS-IT COMPANY AND ABLE
PARTY RENTAL
Results of Operations
On June 26, 1997, the Company acquired Suburban, which operated seven
rental stores in the western suburbs of Detroit, Michigan focusing on the
homeowner, light commercial and special events markets. The prior majority
owner, who had not been active in the business for several years, retired after
the sale. Each of his two sons, who were minority owners in the business, have
remained with the Company as area and assistant area managers. By the end of the
year, the Company plans to consolidate the operations of one of the special
events stores into a nearby location.
Suburban's revenues increased to $3,885,251 in 1996 from $3,311,585 in
1995, an increase of $573,666 or 17.3%. Revenue growth was enhanced by the
stabilization of the operation following the closure of two facilities in 1994
(discussed below), modernization and expansion of the rental inventories and a
strong local economy. Store contribution increased to $1,118,217, or 28.8% of
revenues, in 1996 from $804,696, or 24.3% of revenues, in 1995, an increase of
$313,521 or 39.0%. This increase primarily was attributable to the increase in
revenues. Operating income increased to $339,185, or 8.7% of revenues, in 1996
from $144,093, or 4.4% of revenues, in 1995. Operating income increased despite
increased salaries paid to prior owners.
Suburban's revenues were relatively flat, increasing to $3,311,585 in 1995
from $3,304,215 in 1994. The lack of growth in revenue was primarily
attributable to the facility closures in late 1994. Store contribution increased
to $804,696, or 24.3% of revenues, in 1995 from $610,390, or 18.5% of revenues,
in 1994, an increase of $194,306 or 31.8%. This improvement in store
contribution primarily was due to improvements in the margin earned on the sale
of used rental equipment that, in 1994, had been sold at a loss. Store
contribution growth was further enhanced by the reduction in rent expense
previously payable for the two stores closed in the prior year. Operating income
increased to $144,093, or 4.4% of revenues, in 1995 from $9,625, or 0.3% of
revenues. Due to the increase in revenues and store contribution, operating
income improved as the 1994 results were burdened by losses relating to the
termination of the leases on the two abandoned facilities and the liquidation of
certain other operating assets.
Liquidity and Capital Resources
In the three years ended March 31, 1997, Suburban purchased $1,659,325 in
new rental equipment and these investments were financed primarily by operating
cash flows and proceeds from the sale of used rental equipment.
MER-CAL ENTERPRISES, INC. DBA DUNCAN RENT-ALLS
Results of Operations
On July 31, 1997, the Company purchased Duncan. Duncan operated a single
store located in south central Oklahoma, targeting the homeowner, light
commercial and portable toilet markets.
Duncan's revenues decreased to $427,429 for the six months ended June 30,
1997 from $447,337 for the six months ended June 30, 1996, a decrease of $19,908
or 4.4%. Revenues decreased due to a $28,000 decrease in merchandise sales,
which was caused by discontinuance of the moving truck rental line of business,
and the nonrecurrence of substantial revenues generated in the 1996 period from
rebuilding projects necessitated by a tornado. Operating income increased
$31,000 due largely to improved operating expense control.
Duncan's revenues increased to $921,261 in 1996 from $730,663 in 1995, an
increase of $190,598 or 26.1%. Revenue growth was enhanced by the continued
resurgence of the local economy and the effects of the infrastructure and
equipment investments levels in 1995 that continued in 1996. Store contribution
increased to $273,229, or 29.7% of revenues, in 1996 from $179,723, or 24.6% of
revenues, in 1995, an increase of $93,506 or 52.0%. Operating income increased
to $105,096, or 11.4% of revenues,
38
<PAGE> 40
in 1996 from $4,622, or 0.6% of revenues, in 1995. Store contribution and
operating income both benefited from volume efficiencies and cost controls.
Duncan's revenues increased to $730,663 in 1995 from $631,649 in 1994, an
increase of $99,014 or 15.7%. Revenue growth was enhanced by a strong local
economy, increases in merchandise sales and expansion of the rental equipment
inventory. Store contribution increased to $179,723, or 24.6% of revenues, in
1995 from $175,936, or 27.9% of revenues, in 1994. Store contribution increased
less than revenues as a result of higher labor costs and repair and maintenance
expense. Operating income decreased to $4,622, or 0.6% of revenues, in 1995 from
$39,472, or 6.2% of revenues, in 1995, a decrease of $34,850 or 88.3%. This
decrease was the result of higher SG&A associated with revenue growth and
infrastructure investment.
Liquidity and Capital Resources
During the three years ended December 31, 1996, Duncan invested $595,925 in
new rental equipment for the business. These purchases were financed by
operating cash flows and increased debt.
OTHER ACQUISITIONS
During 1997, the Company acquired four other businesses with a total of
nine locations in Colorado, California and Texas. In 1996, the aggregate
revenues for these businesses were $7,163,016, and these stores generated
$1,396,472 in store contribution and $265,368 of operating income.
PENDING ACQUISITION
REDI RENTALS, INC.
Results of Operations
On July 16, 1997, the Company entered into a letter of intent to acquire
Redi Rentals, Inc. ("Redi"), a two-store rental company in Knoxville, Tennessee.
Redi focuses on the homeowner, light commercial and special events segments. The
current owners do not anticipate remaining with the Company beyond a three-month
transition period after the acquisition.
Redi's revenues increased to $4,090,059 in 1996 from $3,784,104 in 1995, an
increase of $305,955 or 8.1%. Revenue growth was primarily attributable to
growth in the special events business and additional investments in the rental
inventory. Rental revenue growth of 6.8% over 1995 was offset by lower
merchandise and equipment sales. Store contribution increased to $894,680, or
21.9% of revenues, in 1996 from $860,243, or 22.7% of revenues, in 1995, an
increase of $34,437 or 4.0%. Store contribution growth was lower than revenue
growth as a result of higher rental equipment expense and direct expenses.
Operating income decreased to $127,359, or 3.1% of revenues, in 1996 from
$132,382, or 3.5% of revenues, in 1995, a decrease of $5,023 or 3.8%. Operating
income decreased due to increased SG&A related to increased compensation for the
owners.
Redi's revenues increased to $3,784,104 in 1995 from $3,503,197 in 1994, an
increase of $280,907 or 8.0%. Store contribution increased to $860,243, or 22.7%
of revenues, in 1995 from $816,498, or 23.3% of revenues, in 1994, an increase
of $43,745 or 5.4%. Operating income decreased to $132,382, or 3.5% of revenues,
in 1995 from $202,610, or 5.8% of revenues, in 1994, a decrease of $70,228 or
34.7%.
Liquidity and Capital Resources
During the three years ended May 31, 1997, Redi invested $1,101,488 in new
rental equipment which was financed primarily by cash flow from operations.
39
<PAGE> 41
BUSINESS
The discussion in this section of the Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that would cause or
contribute to such differences include, but are not limited to those discussed
in "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," as well as those discussed elsewhere in
this section and in this Prospectus.
GENERAL
RentX is a leading equipment rental company serving the needs of the
homeowner, light commercial and special events segments of the rental market.
RentX was formed in March 1996 to pursue a national consolidation and growth
strategy. Management believes RentX is unique in focusing on these fragmented
segments of the equipment rental market on a national scale. RentX is
implementing a branded national retail concept to offer a broad range of light
construction, industrial, general tool and special events equipment in a
service-oriented, customer-friendly and well-merchandised store. Company-wide
emphasis is placed on helping customers find "project solutions," backed by a
guarantee of complete customer satisfaction. On a pro forma basis, the Company
had revenues of $47.1 million in fiscal 1996 and revenues of $22.9 million for
the six months ended July 31, 1997. The Company's net income (loss) for the year
ended January 31, 1997 and the six months ended July 31, 1997 was $(76,000) and
$(404,000), respectively, on an historical basis and $2.8 million and $237,000,
respectively, on a pro forma basis.
Since May 1996, the Company has pursued an aggressive growth strategy,
acquiring 14 businesses with 57 stores in 10 states and opening two new start-up
stores. The acquired businesses had been in operation for an average of 25
years. The Company has signed letters of intent relating to the Pending
Acquisition, which will add two stores in Tennessee and another immaterial
acquisition, which will add one store in Colorado, and continues to evaluate a
large number of additional acquisitions. In addition to its acquisition
activity, the Company has built a substantial corporate infrastructure by
assembling an experienced management team, customizing and commencing
installation of a sophisticated management information system, developing
initiatives designed to enhance the performance of acquired stores and
developing refined concepts and prototypes for start-up stores, including both
general equipment rental stores to expand market coverage and special events
hubs.
Management believes that RentX is well positioned to capitalize on
consolidation and growth opportunities in the homeowner, light commercial, and
special events segments of the equipment rental industry. The Company has
adopted a strategy for expansion through a combination of acquisitions, start-up
stores in areas where it has an existing platform and increased sales in
existing stores. Acquisitions will include multi-store businesses to serve as
platforms in new markets and smaller "tuck-in" acquisitions in existing markets.
Management believes that the RentX concept can be adapted to a wide variety of
markets, including large, densely developed areas, smaller suburban markets and
rural areas, by tailoring the mix of equipment and merchandise, store size and
concentration of stores to fit the local customer base.
INDUSTRY OVERVIEW
Overall equipment rental industry revenues, exclusive of special events
rentals and equipment sales, grew from approximately $600 million in 1982 to
approximately $13 billion in 1993 (the most recent year for which data is
available), a compound annual growth rate of 32%, according to a study conducted
by Manfredi & Associates for the Associated Equipment Distributors. Manfredi &
Associates further estimate that such revenues increased to $16 billion in 1996.
The rental industry can be divided into four segments: (i) heavy equipment,
typically rented by larger contractors and industrial users ("heavy equipment");
(ii) light construction and industrial equipment ("light commercial"); (iii)
general tools and equipment ("homeowner"); and (iv) event and party equipment
("special events"). Most equipment rental companies derive their revenues from
three sources: renting
40
<PAGE> 42
equipment, selling used rental equipment and selling tie-in merchandise. While
some equipment rental companies also sell new equipment, most such sales are in
the heavy equipment segment. RentX focuses on the homeowner, light commercial
and special events segments. Although the Company is not aware of any industry
data that tracks these segments specifically, the ARA estimates that they
represented over $6 billion in annual revenues in 1996.
The equipment rental industry, including the homeowner, light commercial
and special events segments, is highly fragmented with approximately 14,000
stores and primarily consists of independent operators typically serving a local
or regional market through one to four locations. As a result of consolidation,
expansion and industry growth, 1996 rental revenues of the top 100 equipment
rental companies increased over 1995 rental revenues by approximately 23%, to
$3.1 billion, according to estimates by the Rental Equipment Register. In spite
of this growth, the 100 largest companies still represent only a small
percentage of the total estimated equipment rental revenues. Management believes
that the ten largest equipment rental companies derive their rental revenues
primarily from the heavy equipment segment.
Homeowner Segment. Management believes that a number of current trends in
the homeowner segment will favorably impact the growth in equipment rental
revenues. According to the most recent data available from the ARA, the
percentage of homeowners who have rented equipment at some time has been
increasing gradually, but still represented only 41% of all homeowners in 1993
(the most recent year for which data is available). In the Company's experience,
the typical homeowner customer currently rents a piece of equipment only once
per year. The Company believes that there is a significant opportunity to
increase the percentage of homeowners who rent and the frequency with which they
rent by, among other things, introducing sophisticated retailing and marketing
techniques in this segment of the rental industry.
The typical equipment rental homeowner customer is a 35 to 54 year old male
according to statistics compiled by the ARA. The Bureau of the Census projects
that this segment of the population will increase from 37.3 million people in
1996 to 40.2 million people in the year 2000, reflecting a compound annual
growth rate more than twice that of the overall population. The Company believes
that its customer-friendly initiatives will also increase the Company's appeal
to female customers. Additionally, according to the Bureau of the Census, the 35
to 54 year old segment of the population has a higher rate of home ownership as
compared to the total population. Management believes that these demographic
factors, coupled with the higher maintenance and remodeling required with the
general aging of houses in the U.S. from an average 23 years old in 1985 to 28
years old in 1995, will favorably impact demand in the homeowner segment of the
equipment rental industry.
Light Commercial. Management believes that there is a substantial
opportunity for growth in the light commercial segment because contractors
currently rent only a small percentage of their equipment requirements.
According to The CIT Group Construction Industry Forecast, contractors intend to
rent approximately 6% of their total equipment needs in 1997. The Company
believes that the equipment rental industry benefits from the trend among
businesses of all types to outsource various aspects of their operations in
order to reduce capital investment and focus on core competencies. The benefits
of renting can be especially important to small contractors in the light
commercial segment, who often have limited capital and cannot purchase all of
the equipment necessary for every job. The light commercial segment also
encompasses customers outside the construction industry, including industrial
companies which need equipment for maintenance or construction projects;
government agencies and authorities, such as school systems, public golf courses
and park systems; private organizations that own and operate large facilities,
such as golf or tennis clubs; and a wide array of businesses that have ongoing
maintenance and project needs. Management believes that these non-construction
customers represent a substantial growth opportunity in the light commercial
segment due to their budgetary constraints, significant but infrequent usage of
various types of essential equipment and, in many cases, limited previous
exposure to equipment rental.
41
<PAGE> 43
Special Events. The special events segment represents one of the three
largest categories of equipment rented by homeowners, according to a 1993 study
by the ARA (the most recent available data). This segment tends to be less
capital intensive because of the relatively low cost of the equipment, with the
potential for high utilization rates. Special events rentals are
counter-seasonal to some extent, with strong activity during the winter holidays
when other rentals tend to be slowest. The customer base for this segment
includes homeowners and a variety of organizations which present conferences or
host social functions. Management believes that none of the ten largest U.S.
rental companies derive meaningful revenues from the special events segment.
Based on the Company's analysis of acquisition candidates, management also
believes that the special events segment currently has the highest growth rate
of the three segments targeted by the Company.
Attractiveness of Target Equipment Rental Segments. RentX believes its
segments are attractive relative to the heavy equipment segment of the equipment
rental industry for a number of reasons. Customers in the homeowner, light
commercial and special events segments are primarily focused on equipment
availability and convenience, and are therefore less price sensitive than heavy
equipment customers. Additionally, the short-term nature and lower cost of the
rental, both in absolute terms and in relation to purchasing the equipment for
an infrequent project, lessens customer price sensitivity. The Company believes
its segments are also attractive because of reduced exposure to down business
cycles due to the nature and balance of the Company's customer mix. In down
cycles, homeowners tend to pursue refurbishment and maintenance projects and
light contractors tend to turn to remodeling projects rather than new
construction. Special events such as weddings and graduations are not dependent
on business cycles. Management further believes that the smaller equipment
required in these segments will allow the Company to establish new locations
quickly with lower capital requirements. In addition, the Company believes that
it has the opportunity to realize higher aggregate revenues in relation to the
cost of the equipment because short-term rental rates are generally higher than
long-term rates. Like the heavy equipment segment, the light commercial segment
benefits from the trend towards increased outsourcing by contractors and other
commercial customers.
Competitiveness of RentX. The Company believes that it maintains
significant competitive advantages over small local or regional independent
operators and other competitors less focused on the homeowner, light commercial
and special events segments. Relative to smaller "mom and pop" businesses, RentX
benefits from several competitive advantages including: (i) volume equipment
purchasing and disposition, including disposition through non-traditional
channels; (ii) a customized management information system geared to processing a
high volume of short-term transactions and maximizing equipment utilization;
(iii) the ability to cluster stores which provides equipment breadth and depth
and marketing synergies to maximize local market penetration; and (iv)
professional management and retailing initiatives. Relative to equipment rental
companies primarily focused on the heavy equipment segment, RentX believes it is
better able to serve its customers due to its convenient locations, retail
orientation, employee training programs and customized management information
system. In addition, the Company has and is expanding marketing programs
designed to reach its targeted market segments, which heavy equipment rental
companies generally do not employ. RentX believes that it also has significant
advantages over home improvement and hardware retailers which rent equipment due
to the Company's maintenance capabilities, equipment breadth and depth, rental
oriented customer service and systems and convenient locations.
BUSINESS STRATEGY
The Company's business strategy is to focus on the homeowner, light
commercial and special events segments of the equipment rental industry. The
Company's goal is to develop a branded national system of equipment rental
stores and to become the largest equipment rental company in its target
segments. Each of the following elements of the Company's strategy is designed
to maximize repeat business, attract new customers and ultimately expand the
size of the Company's market, while enabling the Company to operate in a
cost-effective manner.
42
<PAGE> 44
Deliver Project Solutions. Guaranteed. The Company believes that it
differentiates itself from many of its competitors by providing total project
solutions with guaranteed customer satisfaction. The Company's compensation and
training programs and systems are designed to emphasize and support this
approach. RentX associates are trained to help the customer evaluate project
needs, offer or identify sources of appropriate equipment and/or merchandise,
and, if appropriate, train the customer in the use of the equipment and/or
merchandise. Regular maintenance is a critical element in ensuring customer
satisfaction and high asset utilization. Company procedures require associates
to clean, inspect and test all equipment after each rental. To provide customers
with a quick and convenient rental experience, the Company offers pick-up and
delivery service and has developed a customer-friendly store environment,
customized point-of-sale computer system and standardized operating procedures.
RentX responds to customer problems promptly and effectively, doing whatever is
necessary to satisfy the customer, including, where appropriate, sending an
associate to the customer's project site to replace equipment or render
assistance. RentX believes that its focus on total project solutions with
guaranteed customer satisfaction will both differentiate it from its competition
and expand the Company's target market over time.
Capitalize on Economies of Consolidation While Preserving Local
Autonomy. Although the Company's goal is to maximize the economies of scale that
arise from consolidation, its local managers are encouraged to act autonomously
in order to preserve the entrepreneurial spirit that characterizes its acquired
businesses. While the Company has designed and implemented consistent operating
procedures to improve the performance of its acquisitions, it continues to allow
store level management sufficient flexibility to tailor operations to the local
market. For example, although most major equipment purchases are made pursuant
to national accounts with manufacturers or distributors, the specific equipment
to be purchased at each location is selected based on the recommendations of the
local managers. Similarly, rental rates at each store are determined locally. As
part of its effort to assist local management, RentX makes available to all
stores the best practices and products from its acquired businesses. The Company
believes that by supporting, rather than constraining, local management,
operations in each area can be structured to maximize market penetration and
increase existing store revenues.
Derive Benefits from Hub and Spoke Structure. In appropriate markets, RentX
develops a local area based on a hub and spoke structure where conveniently
located, smaller spoke stores are supported by a larger hub store. The hub and
spoke structure is designed to minimize capital investment, increase utilization
rates and provide breadth and depth of equipment by utilizing the Company's
sophisticated management information system to transfer equipment inventory as
necessary. In addition, the Company's more experienced mechanics and specialized
maintenance equipment can be concentrated at the hub for more efficient
utilization, while minimizing spare parts inventory. The hub and spoke structure
can also be used to enhance specific segments of the Company's business. For
example, in appropriate markets small displays of special events equipment in
general rental stores are used to develop sales and contacts for a special
events hub serving an entire region. Because most rental transactions require
both a pick-up and return trip, the convenience and proximity to the customer
provided by the hub and spoke structure is a key competitive advantage.
Introduce Sophisticated Retailing Techniques to the Rental Industry. RentX
is implementing sophisticated retailing techniques in all its stores and expects
this approach to be a significant differentiating factor in an industry which
has not traditionally focused on creating a customer-friendly environment.
Although stores may have different physical layouts and mixes of equipment, they
are all designed to have a clean, uniform look prominently featuring RentX
signage, improved labeling, visual presentations to showcase rental equipment
and an enhanced selection of tie-in merchandise for sale. The Company is
instituting training programs, reinforced by an incentive compensation system,
to provide a knowledgeable and professional staff and to make available a career
path for successful associates. All of these techniques are designed to create a
familiar, less intimidating retail experience for customers and to establish a
national standard of professionalism for all RentX stores.
43
<PAGE> 45
Generate Incremental Revenue Through Tie-In Merchandise Sales. The Company
seeks to increase revenues at its acquired stores by introducing or expanding
the variety of merchandise sold which is related to projects for which equipment
is rented. While RentX will not approach the breadth or depth of product offered
by hardware stores, product categories such as power tool accessories, safety/
protection products, small hand tools (hammers, saws, pliers, etc.), long handle
tools (rakes, shovels, etc.), gloves, propane and related accessories, floor
care products and others are being introduced system-wide to generate
incremental revenues. The Company's point-of-sale system will prompt associates
to suggest tie-in merchandise. Due to the convenience of one-stop shopping,
RentX typically does not discount the prices of such tie-in merchandise.
Employ Sophisticated MIS. The Company has made substantial investments to
select and customize a management information system designed to improve asset
utilization, customer service and financial performance and to support a high
volume of short-term rental contracts. RentX's aggressive expansion strategy led
it to select a system designed to rapidly integrate a large number of acquired
and new stores. The system links all stores to each other and to the home office
and provides real time transaction processing, extensive asset management tools
and daily financial management reporting.
Leverage Acquired Management. RentX leverages the management of acquired
businesses both to help manage the Company and to help develop the acquisition
pipeline. In managing its ongoing operations, RentX seeks to retain the managers
of the companies it acquires in order to maintain continuity, benefit from their
knowledge of local market conditions, disseminate new best practices and
products and achieve its growth objectives. In many cases, existing management
has joined the RentX team by continuing in store management capacities or by
becoming area managers or consultants. In managing its acquisition program, the
Company finds that the former owners and managers of acquired companies provide
an extensive industry network through which to identify, approach and open
negotiations with potential acquisition targets. To date, acquired company
managers have included two past national presidents of the ARA (including the
1996 president and current chairman and the 1996 chairman, both of whom are now
executives of RentX) and three past executives of regional rental associations.
GROWTH STRATEGY
RentX's growth strategy is to continue to enter new geographic markets
through platform acquisitions and expand its presence in existing markets
through a combination of tuck-in acquisitions and new fill-in stores. An
important aspect of the Company's growth strategy is to cluster stores in
targeted markets, thereby increasing customer awareness, leveraging the RentX
brand and creating operating, capital expenditure, distribution and advertising
efficiencies. The Company is able to pursue this clustering strategy due to its
flexible store format and ability to operate in different types of locations.
The Company believes that, by clustering RentX stores, it discourages potential
competition and can generate higher revenues. The Company seeks to generate
revenue growth and enhanced profitability across its stores through the
implementation of a number of RentX developed initiatives, including the
following:
Acquire Equipment Rental Businesses. The cornerstone of RentX's growth
strategy is the acquisition of existing equipment rental businesses. The Company
seeks to acquire companies in new markets that will provide platforms from which
to pursue growth within the markets through tuck-in acquisitions of other
businesses with complementary operations and locations. Typically, a platform
acquisition includes several stores, but in some instances a single large
facility may be acquired. Tuck-in acquisitions in existing markets usually
consist of one or two stores.
In evaluating a platform acquisition candidate, the Company looks for a
business that operates in at least one of its targeted segments, with a history
of profitability, a quality reputation in the local market, a leading local
market position and a capable operating management team which can continue with
RentX post-acquisition. Acquisition candidates are often family owned businesses
facing capital constraints limiting growth and succession and/or estate planning
issues. When evaluating these
44
<PAGE> 46
acquisition candidates, RentX examines historical and projected revenue, but
uses its own cost structure, including overhead, staffing and expenses related
to new equipment purchases, in determining the purchase price. The final
valuation depends on the growth prospects of both the local market and
individual stores, in addition to the intangibles associated with the existing
business. Tuck-in acquisitions are selected primarily on the basis of location.
RentX and BACE conduct extensive due diligence prior to each acquisition, and
the Company routinely engages an outside consultant to perform environmental due
diligence. Seller indemnification is a standard feature of acquisition
agreements.
Open Start-Up Stores in Existing Markets. The Company intends to supplement
its acquisitions by filling in markets with new stores at locations convenient
for its customers. In general, new stores will be located to fill voids in
under-served communities, rather than in close proximity to existing RentX or
competing stores. New stores will also be established in response to population
shifts and growth in a given market as neighborhoods develop and expand.
Start-up stores in the special events segment will typically be combined
showroom and warehouse facilities that handle the majority of the special events
business in a local area.
RentX has devoted extensive management resources to the development of a
prototype general rental store for start-up locations, which can typically be
opened with a relatively low investment. The prototype is flexible so that RentX
can either have a new store constructed by its landlord on a "build-to-suit"
basis or remodel an existing building to meet its specifications. The first
start-up store, which is a special events showroom and warehouse designed to
serve an entire market area, opened in May 1997. The second start-up store is a
spoke general equipment rental store that was opened in October 1997 to increase
the Company's penetration of an existing market. The Company expects to open a
total of five to 10 start-up stores in the fiscal year ending January 31, 1998.
It is the Company's policy to lease, rather than purchase, its locations.
Pursue Internal Growth. RentX plans to achieve internal growth in revenues
and profitability through the application of its operating strategy and the
benefits of consolidation. RentX's operating strategy is designed to expand
revenues by, among other things, broadening its product offerings through the
best practices and products program, improving asset utilization, delivering a
high level of customer service, increasing brand recognition and awareness of
rental possibilities, increasing average revenues per visit through tie-in
rentals and merchandise sales and instituting direct sales efforts to the light
commercial segment. The Company believes that this strategy will encourage
repeat visits by existing customers and generate initial visits by new
customers.
Management believes that consolidation will benefit margins as well. For
example, economies of scale have improved capital equipment and merchandise
purchasing terms and availability. Besides realizing economies of scale in
purchasing new equipment, organizing consolidated sales of used rental equipment
will help RentX access alternative distribution channels that can provide higher
resale prices which would not be available to smaller operators. The Company
also has plans to improve asset management through the use of integrated
information systems and rental equipment transfers among locations, and to
leverage selling, general and administrative expenses over a large number of
stores.
Role of BACE. As a major equity owner and the founder of RentX, BACE has
played an active role in supporting the development of the Company. BACE worked
with management to develop the growth strategy which RentX is following, and has
dedicated significant resources to recruiting a management team and assisting
RentX in identifying, analyzing, negotiating and documenting acquisitions. BACE
has developed a systematic and efficient approach to RentX's acquisition process
and has dedicated a team of professionals to the acquisition needs of the
Company. This allows the management of RentX to focus on selecting new
acquisitions, integrating the stores acquired with the existing business,
implementing the business plan and directing the ongoing operations. BACE has
entered into a consulting agreement pursuant to which the acquisition expertise
of the BACE team is made available to the Company. See "Certain
Transactions -- Consulting Agreement."
45
<PAGE> 47
ACQUISITION INTEGRATION
Upon completion of an acquisition, the Company integrates the operations of
the acquired business. Integration includes installing RentX's sophisticated
management information system, coordinating asset management, installing RentX
signage, ensuring a clean, attractive outer and inner store appearance,
implementing training, marketing and merchandising programs, emphasizing a
culture of customer service and consolidating used equipment disposition.
Although purchasing decisions are made based on recommendations from the local
managers, the stores in each area receive the pricing economies of RentX's
volume purchasing power, including national account status with most major
vendors. Where market conditions dictate, an acquired company may use both its
historical name and the RentX name during a transition period in order to
minimize customer disruption. Since May 1996, RentX has acquired 14 businesses
with a total of 57 stores in 10 states. All of these stores are scheduled to be
fully integrated to the RentX format in the fourth quarter of the fiscal year
ending January 31, 1998.
Management believes that it is important to retain the services of the
operating management of the platform companies it acquires in order to maintain
continuity, benefit from their knowledge of local market conditions and
accelerate growth. In many cases, an existing manager will join the RentX team
as an area manager. These individuals play a key role in developing and
spreading best practices and products throughout the RentX system and helping to
identify new acquisition targets and start-up store opportunities. In addition,
the Company has hired or formed alliances with several prominent industry
veterans, which increases the Company's credibility and broadens its network
throughout the industry.
STORE FORMAT AND RETAIL INITIATIVES
RentX intends to expand its customer base by implementing a number of
initiatives designed to provide a pleasant and satisfactory rental experience
for its customers and increase awareness of the benefits and possibilities of
equipment rental. To this end, RentX has developed a store format and a set of
retail initiatives for the homeowner and light commercial markets which
management believes are unique in the equipment rental industry. The following
is a discussion of the Company's existing stores as well as the retailing
initiatives and store appearance and signage changes the Company is currently
implementing.
Store Location and Layout. The Company's stores typically are located in
convenient suburban, urban or rural areas with proximity to both contractor and
homeowner customers. Store layouts incorporate an indoor sales floor which
displays smaller rental equipment as well as tie-in merchandise with informative
signage, an outdoor equipment yard for larger equipment and for storage of
multiple units of equipment displayed indoors and a maintenance area. Store
sizes range from 2,800 to 20,400 square feet and outdoor storage yards range
from 6,000 to 90,000 square feet. The size and layout of the store are dependent
on a variety of factors including the economics of the site and the
characteristics of the market.
Store Appearance and Merchandising. As the Company continues to acquire
stores, it expects to improve both store appearance and merchandising to reflect
the RentX business model. Start-up stores will be sized and merchandised to fit
the particular market, but will be based upon the RentX developed format. While
local managers retain flexibility in equipment and merchandise selection, most
external and internal enhancements and practices are applied Company-wide. The
Company's distinctive red and blue logo is featured both on the store front and
throughout the store on associate uniforms, merchandise and signage. Store
interiors are clean, uncluttered and well lit. High profile signage directs
customers to equipment categories and a tagging program identifies equipment and
merchandise as either for sale or for rent and indicates rental rates or prices.
In addition, the Company attractively merchandises tie-in items according to
flexible planograms strategically placing merchandise near related rental
equipment, and uses fixtures such as endcaps to influence impulse purchases and
efficiently utilize square footage.
46
<PAGE> 48
Best Products and Practices. The Company has implemented a number of other
retail initiatives through its best products and practices program. Through this
program, particular expertise of a given store or area is disseminated to other
RentX stores. For instance, through "best products" the Company has added a far
larger selection of tie-in merchandise at its stores to provide the convenience
of one-stop shopping and incremental revenues. Propane refills, for example,
generate significant traffic for the Company, and RentX now regularly carries
gas grill tie-in merchandise such as lava rocks, extra tanks and cleaning tools.
Through "best practices" the Company prepares and provides concise product
safety and operating instruction sheets for most items of power equipment
rented.
Customer Service, Employee Training and Compensation. RentX strives to
develop the technical and interpersonal skills of its store personnel to ensure
that customers consistently receive knowledgeable and courteous assistance. The
Company seeks to retain the employees of the acquired companies and benefit from
their combined experience, pre-existing knowledge level and customer
relationships. Associates actively provide equipment information, instructions
and project assistance both in the store and in the equipment yard. The Company
is developing extensive training for all of its associates aimed at improving
customer service and the understanding of project solutions and equipment use.
Customer satisfaction is enhanced through the proper and regular maintenance of
the rental equipment. RentX associates are expected to support equipment
reliability, even visiting the project site to render assistance or replace
equipment if necessary. If the Company does not have a piece of equipment
requested by a customer, RentX associates attempt to obtain the equipment from a
distributor or competitor to satisfy the customer's needs. Furthermore, the
Company's sophisticated management information system is designed to prompt
associates to suggest tie-in merchandise to help customers arrive at a
satisfactory project solution. The system is also important in ensuring that the
customer experiences easy in-and-out service.
The Company attempts to attract, retain and motivate qualified personnel
through a compensation system structured to reward associates who contribute to
the achievement of the Company's goals. Associates are reviewed periodically and
annual compensation decisions are based on the performance record established by
these reviews. The associates in each area are eligible for team incentive
bonuses based on the performance of the stores in the area compared to budgeted
revenues and profitability. All salaried employees, including assistant store
managers, field sales personnel and maintenance supervisors, are eligible to
receive stock options under the Company's Stock Option Plans. The RentX
structure provides a career path for associates whose skills and knowledge of
the Company's operations show continuing growth.
PRODUCTS
The Company believes that it offers a comprehensive and well-maintained
rental equipment inventory designed to meet the needs of its homeowner, light
commercial and special events target segments. The Company offers over 3,200
different types of rental equipment on an hourly, daily, weekly or monthly
basis. The breadth and depth of each store's product mix is tailored to satisfy
the needs and preferences of the local customer base. In fiscal 1996, equipment
rental accounted for approximately 85.1% of the Company's total revenues.
In addition to equipment rental, RentX stores offer a wide range of
merchandise used in conjunction with the rental equipment. In doing so, the
Company seeks to attract and retain customers by offering the convenience of
one-stop shopping, while generating incremental sales of high margin
merchandise. For example, a customer refinishing a floor may visit a store
intending only to rent a floor sander, but may also purchase gloves, sand paper,
a safety mask and goggles. In fiscal 1996, 12.3% of the Company's total revenues
were from sales of merchandise.
47
<PAGE> 49
The following table gives selected examples of equipment rented by the
Company and related merchandise:
<TABLE>
<CAPTION>
LIGHT GENERAL SPECIAL TIE-IN
CONSTRUCTION TOOL EVENTS MERCHANDISE
- ------------------ --------------- ------------------ -----------------
<S> <C> <C> <C>
Backhoes Carpentry tools Canopies Cleaning fluids
Compressors Carpet cleaners China and flatware Extension cords
Forklifts Detectors Dance floors Garden
Generators Drills Grills implements
Hydraulic tools Floor polishers Helium tanks Gloves
Mini excavators Heaters Staging Goggles
Mixers Lawn and garden Tables and chairs Nails
Platform lifts equipment Table linens Propane and tanks
Pumps Paint sprayers Tents Sandpaper
Skid steer loaders Power sanders Saw blades
Tractors Saws Tape
Tile cutters
</TABLE>
The Company also routinely sells its used rental equipment in order to
maintain an economically competitive inventory and to adjust to fluctuations in
the demand for specific rental products. The Company believes that its
maintenance program is an important factor in maximizing the resale value of
used equipment. In fiscal 1996, the sale of used equipment accounted for
approximately 2.6% of the Company's total revenues. The Company also sells some
new equipment, but its revenues from such sales are not material.
ASSET MANAGEMENT
Asset Utilization. The Company believes that its sophisticated management
information system, when fully implemented, combined with its ability to
redeploy equipment among stores, will allow RentX to better manage its equipment
and achieve high utilization rates. With the Company's information systems, an
employee at any store can locate a specific piece of equipment, whether out on
rent, in maintenance or ready to rent. Once identified, the equipment can be
reserved for a customer through the system and scheduled for delivery or pick-up
at the store of choice. Management can review overall utilization of equipment
by asset, asset class, store or area. The Company is then able to further
enhance asset utilization and reduce capital expenditures by identifying and
deploying equipment to those stores where it will likely generate the highest
return.
An additional benefit of the Company's management information system is the
ability to track missed rentals and instances in which the Company obtains
equipment from a distributor or competitor to meet a customer's needs, a
statistic which can help management assess when to purchase new equipment or
transfer equipment between stores. The Company's information system also will
keep track of and schedule preventive maintenance for each piece of equipment
and thus enhance the reliability of its equipment, extend the useful life of its
inventory and attain favorable resale value for its used rental equipment. To
support its efforts at efficient asset management, monthly bonuses for store
personnel are based upon revenues and profits within an area, rather than at a
particular store, and annual bonuses of area managers and regional directors are
based in part on asset utilization Company-wide.
Purchasing. As a result of volume purchasing and the creation of a
dedicated purchasing function, the Company increasingly receives significant
discounts. The Company has achieved national account status with vendors who are
expected to supply approximately 50% of the new rental equipment to be purchased
in the year ending January 31, 1998, based on the cost of equipment purchased
and expected to be purchased in that year. National account status establishes
prices, usually at a discount, of many major items across the country for a year
at a time, which allows the Company to both acquire more cost-effectively and
budget more precisely. National accounts carry
48
<PAGE> 50
additional benefits such as service contracts, terms, spare parts stocking and
co-op advertising. The Company maintains relationships with at least two
suppliers in every major category of equipment. The Company believes that its
purchasing power will continue to grow as it increases in size.
Used Rental Equipment Disposition. Optimizing the disposition of used
equipment is an important part of the Company's asset management program. The
Company monitors the age, repair record and, in appropriate cases, hours of
operation of its rental equipment in an effort to dispose of used equipment at
the projected optimum point in its useful life based on resale values and
expected maintenance costs. By consolidating its used equipment sales
nationwide, the Company expects to have access to sales channels that might not
be available on a local level. For example, the Company intends to explore
international markets for used equipment, particularly those with high duties on
new equipment, where the prices for used equipment can be significantly higher
than in domestic markets.
MANAGEMENT INFORMATION SYSTEM
The Company has invested significant time and capital in an integrated
management, accounting, inventory and point-of-sale system which management
believes will enhance revenues and profitability. The system will link all RentX
stores to each other and to the home office and will enable home office and
regional management to continually monitor and analyze the performance of
individual stores, areas and the Company as a whole. All of the Company's stores
are operating on the new system. As of July 31, 1997, the Company had spent
approximately $1.1 million on the system and estimates that it has expended an
additional $100,000 since that date to complete the integration of all existing
stores.
In the stores, the system allows associates to monitor equipment
availability system-wide on a real-time basis, prompts associates to suggest
tie-in merchandise and accumulates information for a customer database. The
system has the capability to capture information from rental and merchandise
transactions which can be analyzed in a number of ways, including: (i) revenues
by store, customer, area or equipment category; (ii) margin by store or area;
(iii) asset utilization by individual asset, asset class, store, or area; (iv)
revenues and margin by merchandise category; and (v) labor productivity by store
or area. In addition, the system is designed to integrate back office functions,
including purchasing, accounts receivable, accounts payable and general ledger.
The software and hardware for the system were selected for their
functionality and scalability. The software, which is being customized to meet
the Company's specifications, includes a point-of-sale subsystem which is
designed to support expansion to 150 stores with current hardware, and which can
be upgraded beyond those levels with additional hardware investment. RentX is
training area system specialists who train and support individual stores
throughout the RentX system, as well as providing general system support. The
hardware/telecommunications network provides for maximum up-time, with 56 KB
lines tying together stores with local switching offices (and an independent
network monitoring vendor), connected via T1 to an HP 9000, and via partial T1
to the Company's home office in Denver.
CUSTOMERS
The Company serves a large number of small customers, none of which
accounts for a meaningful portion of its revenues. The composition of RentX's
customer base varies by store and is determined by several factors, including
the business composition of the local economy and the character of the
neighborhood in which the store is located. For fiscal 1996, management
estimates that over 90% of the Company's total pro forma revenues were derived
from the homeowner, light commercial and special events segments of the
equipment rental market. The loss of any one customer would not have a material
adverse effect on the Company's business.
The majority of the Company's customers are homeowners who rent either
general tools or special event items. RentX's customers in the light commercial
segment are small contractors, a wide
49
<PAGE> 51
variety of other business customers and governmental units, all of which are
primarily motivated by the same factors that are important to homeowners. RentX
believes that, because the cost of each transaction is relatively low, customer
service, convenience and equipment availability are generally more important to
its customers than price.
MARKETING AND SALES
In an effort to build the RentX brand, increase public awareness and
enhance revenues, the Company is designing and implementing a new marketing and
sales program.
Marketing. Rental companies in the homeowner, light commercial and special
events segments of the market have traditionally limited their advertising to
telephone directories. The Company believes that the targeted marketing
techniques commonly used in other industries can be successfully employed in its
segments of the equipment rental industry. The Company's existing customer
database provides targeted mailing lists for seasonal specials and specific
promotions. The Company's general marketing program will combine coordinated
local newspaper, radio and billboard advertising designed to tie projects in
areas such as home improvements, gardening and special events to equipment
suggestions and the RentX name. In addition, the Company has company-wide
guidelines for store front, in-store, and on-vehicle signage which prominently
features the RentX logo and, where appropriate, the 1-888-88-RENTX phone number.
Sales. The Company's sales are primarily conducted within the stores by
RentX sales associates. See "-- Store Format and Retail Initiatives." The
Company also has a dedicated field sales force for both commercial and special
events rentals. All areas have at least one field sales representative who will
be responsible for calling on commercial accounts. In addition, a number of
locations will have dedicated special events rental representatives who visit
event sites to help customers assess their rental needs and plan event equipment
logistics. Management believes that, besides helping to increase rental
revenues, these dedicated field sales representatives emphasize its "project
solutions" approach and contribute to its competitive distinction among rental
companies focused primarily on its market segments. Management also believes
that the sales representatives can help expand the total market by calling on
potential customers who have not traditionally been contacted by such field
sales efforts.
50
<PAGE> 52
ACQUISITION HISTORY
Since May 1996, the Company has acquired 14 businesses with a total of 57
locations in 10 states. The following table summarizes those acquisitions.
<TABLE>
<CAPTION>
LOCATION AND YEARS IN
COMPANY NUMBER OF BUSINESS
DATE ACQUIRED STORES BEFORE ACQUISITION
---- ---------------- ----------------------- ------------------
<S> <C> <C> <C>
May 1996 Zodiac Denver, CO(1) 23
Aurora, CO(3)
Parker, CO(1)
Castle Rock, CO(1)
Westminster, CO(1)
Littleton, CO(1)
Thornton, CO(1)
May 1996 A to Z Spokane, WA(4) 35
August 1996 E-Z Way Silverthorne, CO(1) 21
and January 1997 Vail, CO(1)
Eagle, CO(1)
Craig, CO(1)
Glenwood Spgs., CO(1)
November 1996 U-Rent Oklahoma City, OK(1) 22
Lawton, OK(1)
Chickasha, OK(1)
Newcastle, OK(1)
December 1996 U-Do-It Coeur d'Alene, ID(1) 12
and January 1997 Sandpoint, ID(1)
February 1997 Hays Arkadelphia, AR(1) 23
Hot Springs, AR(1)
El Dorado, AR(1)
Magnolia, AR(1)
Camden, AR(1)
March 1997 CVR Waynesboro, VA(1) 23
Harrisonburg, VA(1)
Culpeper, VA(1)
Charlottesville, VA(2)
Staunton, VA(1)
April 1997 Scotty Rents Lafayette, CA(1) 27
Pleasant Hill, CA(1)
Walnut Creek, CA(1)
Danville, CA(1)
May 1997 A-1 Las Cruces, NM(3) 18
Silver City, NM(1)
Alamogordo, NM(1)
June 1997 Suburban Novi, MI(2) 37
Livonia, MI(1)
South Lyon, MI(1)
Brighton, MI(1)
Westland, MI(1)
Plymouth, MI(1)
July 1997 A-Z Rents It Fort Collins, CO(1) 39
July 1997 A-1 Rent All Tyler, TX(2) 37
Jacksonville, TX(1)
July 1997 A-1 Rent All of Marshall, TX(1) 17
Marshall
July 1997 Duncan Duncan, OK(1) 16
</TABLE>
The Company has combined two of the acquired stores in New Mexico and has
opened two start-up stores, one in Spokane, Washington and one in Bethany,
Oklahoma.
51
<PAGE> 53
STORES AND FACILITIES
At October 31, 1997, the Company operated 58 rental stores, including two
start-up stores opened in May and October 1997, in the following 10 states:
Arkansas (5), California (4), Colorado (15), Idaho (2), Michigan (7), New Mexico
(4), Oklahoma (6), Texas (4), Virginia (6) and Washington (5). The Pending
Acquisition and one other immaterial acquisition for which the Company has
signed letters of intent would give the Company two stores in Tennessee and an
additional store in Colorado. There can be no assurance that either or both of
these acquisitions will be consummated.
The Company's rental stores are generally situated in industrial,
commercial or mixed-use zones. These locations typically range from one-half
acre to one and one-quarter acres, with hub locations as large as three acres,
and include a customer showroom, an equipment service area and storage
facilities. All of the Company's rental stores are leased, with lease terms
expiring from 1998 to 2014, most with multiple options to extend. In many
instances, the Company's rental locations are leased from the former owners of
businesses acquired by the Company.
The Company also leases its home office facilities in Denver, Colorado,
under a lease expiring November 30, 2001, with an option to renew for an
additional three-year term. The home office consists of approximately 8,470
square feet, with options to lease an additional 2,800 square feet.
COMPETITION
The equipment rental industry is highly fragmented and competitive with
limited barriers to entry. All of the 10 largest equipment rental companies are
primarily in the heavy equipment segment of the market. Management believes that
RentX is the only equipment rental company currently pursuing a national
consolidation focused on the homeowner, light commercial and special events
segments of the market. The Company's competitors in various segments of its
business include independent businesses with one to four rental stores in a
single geographic area or regional competitors that operate in more than one
state; larger national equipment rental companies; home improvement and hardware
retailers; and equipment vendors and dealers who both sell and rent equipment
directly to customers.
RentX believes that it competes in the markets it serves primarily on the
basis of customer service, convenience and equipment availability. The success
of a rental operator in the Company's targeted segments is predicated on its
customer service and problem solving abilities; quality, condition and servicing
of its equipment; availability of equipment (both depth and breadth); delivery
capabilities; management information systems; location of its stores in relation
to its customer base; overall operation of its business; and price. The Company
believes that it competes favorably on the basis of these factors.
Some of the Company's competitors have greater financial resources and a
longer operating history than the Company, with a substantial local customer
base, and consequently have greater name recognition than the Company. Because
the capital investment required to establish a rental store in the homeowner,
light commercial and special events segments is relatively low, the barriers to
entry are also relatively low. There can be no assurance that the Company will
not encounter increased competition from existing competitors or new market
entrants that may be significantly larger and have greater financial and
marketing resources then the Company. Increased competition is likely to result
in, among other things, reduced operating margins, loss of market share and
diminished brand value, any of which could have a material adverse effect on the
Company. One equipment rental company which operates primarily in the heavy
equipment segment has significantly reduced prices on longer term rentals of
certain pieces of heavy equipment. In addition, existing or future competitors
may compete with the Company for acquisition candidates and sites for new
stores, which could have the effect of increasing the price for acquisitions or
reducing the number of suitable acquisition candidates or new store locations.
Currently, the largest companies in the equipment rental industry, including a
number which are actively pursuing consolidation and growth strategies, are
primarily in the heavy equipment segment of the market, but also compete in the
Company's targeted segments. Some or all of these companies may increase their
focus on one or more of the market segments in which the Company is active,
which would significantly increase competition for customers, acquisi-
52
<PAGE> 54
tions and locations for new stores. In addition, there can be no assurance that
foreign companies that focus on the Company's market segments will not
aggressively enter the U.S. market. See "Risk Factors -- Competition; Limited
Barriers to Entry."
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to a variety of federal, state,
local and common laws and regulations governing, among other things, worker
safety, air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous or toxic substances located
on or in, or emanating from, its property, as well as related costs of
investigation and property damage. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In connection with its
acquisitions and new stores, the Company generally obtains environmental
assessment reports prepared by independent environmental consultants and
environmental indemnities from the sellers. Initially, an environmental
assessment consists of a site visit, historical record review, interviews and
report, with the purpose of identifying potential environmental conditions
associated with the subject real estate. Soil, ground water and other samples
are taken where and when appropriate. There can be no assurance, however, that
such assessments or sampling have fully identified contamination which may be
present on a property. Further, there can be no assurance that acquired or
leased locations have been operated in compliance with environmental laws and
regulations or that future uses or conditions will not result in the imposition
of environmental liability upon the Company or expose the Company to third-party
actions such as tort suits.
The Company dispenses petroleum products from above-ground storage tanks
located at certain rental locations that it owns or leases. The Company
maintains an environmental compliance program that includes the implementation
of required technical and operational activities designed to minimize the
potential for leaks and spills, maintenance of records and the regular testing
and monitoring of tank systems for tightness. There can be no assurance,
however, that these tank systems have been or will at all times remain free from
leaks or that the use of these tanks has not or will not result in spills or
other releases. The Company also uses hazardous materials such as solvents to
clean and maintain its rental equipment. In addition, the Company generates and
disposes of waste such as used motor oil, radiator fluid and solvents, and may
be liable under various federal, state and local laws for environmental
contamination at facilities where its waste is or has been transported for
treatment, storage, disposal or recycling. The Company believes that it
currently conducts its operations in material compliance with all applicable
laws and regulations. Compliance by the Company with applicable environmental
laws has not had a material adverse effect on the Company's financial condition
or competitive position to date. See "Risk Factors -- Government and
Environmental Regulation."
LEGAL PROCEEDINGS
From time to time the Company is a party to litigation involving claims
incidental to the business of the Company. The Company does not believe that any
pending litigation will have a material adverse effect on its business or
financial condition.
EMPLOYEES
At September 4, 1997, the Company employed 620 people, including 527
in-store rental associates, 14 field sales associates, 52 operational associates
and 27 corporate and regional management personnel. None of these associates is
represented by a union or a collective bargaining agreement. The Company
considers its labor relations to be good.
53
<PAGE> 55
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information as of the date of this
Prospectus with respect to the directors, executive officers and key employees
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- -------------------------------------------
<S> <C> <C>
Arnold A. Bernstein....................... 54 President, Chief Executive Officer and
Director
Gary J. Kulesza........................... 46 Executive Vice President, Chief Operating
Officer and Secretary
Thomas D. Nugent.......................... 54 Executive Vice President, Chief Financial
Officer and Treasurer
Larry W. Davidson......................... 59 Vice President of Purchasing/Merchandising
George A. Evans........................... 52 Vice President of Corporate Development
Charles E. Baker.......................... 54 Vice President of Store Development
Stephen T. Carlson........................ 37 Vice President and Controller
Mary Ann Milton........................... 35 Vice President of Human Resources
Hershel A. Manning........................ 57 Western Regional Director of Store
Operations
James J. Conley........................... 54 Eastern Regional Director of Store
Operations
Darcy A. Erickson......................... 46 Director of Marketing
Richard M. Tyler(2)....................... 39 Director
Craig J. Zoellner(1)...................... 40 Director
Thomas E. Galuhn(2)....................... 47 Director
James A. Gordon(1)........................ 47 Director
William P. Sutter, Jr.(1)................. 40 Director
Margaret G. Fisher........................ 47 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Arnold A. Bernstein has been President and Chief Executive Officer of the
Company since November 1996 and a director since September 1997. From August
1982 until August 1994, he held various senior management positions with
Musicland Stores Corp., a specialty retail chain with a variety of product lines
including prerecorded music, prerecorded videos, blank audio and video tapes,
books, software and accessories. At Musicland Stores Corp., he served as
President from March 1992 to August 1994, Executive Vice President of Operations
and Marketing from March 1989 to March 1992, Senior Vice President of Store
Operations from March 1985 to March 1989, and Senior Vice President of
Merchandising and Marketing from August 1982 to March 1985. During Mr.
Bernstein's employment, Musicland grew from approximately 350 to approximately
1,200 stores. Prior to that, Mr. Bernstein was Senior Vice President of Frank's
Nursery and Crafts, Inc., a large lawn, garden and crafts chain which grew from
six to 90 stores during the 14 years that Mr. Bernstein was employed. From
August 1994 until November 1996, Mr. Bernstein pursued personal interests.
Gary J. Kulesza has been Executive Vice President and Chief Operating
Officer of the Company since April 1996 and Secretary since July 1997. From May
1994 to January 1996, Mr. Kulesza was the owner of GJK Investment & Advisory
Services, which provided advisory and consulting services to companies and
entrepreneurs. From November 1992 to May 1994, he was Chief Financial Officer of
Sweet Life Foods, Inc., a privately held food distribution company. Prior to
that he served as President and Chief Operating Officer -- International of
Computerland Corp., a specialty retail chain of computer stores. In that
capacity, he directed the operations of Computerland in 40 countries and managed
its acquisition and expansion program. In 1988 and 1989, Mr. Kulesza served as
Vice President
54
<PAGE> 56
and Corporate Controller of Coast America Inc., which operated the
Coast-to-Coast Hardware store chain. In that capacity, he was actively involved
in financial management, systems and controls, acquisitions and the ultimate
sale of the company.
Thomas D. Nugent has been Executive Vice President and Chief Financial
Officer of the Company since April 1997 and Treasurer since July 1997. From
October 1993 until November 1996, he was Executive Vice President and Chief
Financial Officer of Teach & Play Smart, Inc., an education superstore chain
that he co-founded. Prior to that, from July 1991 to May 1993, he served as
Senior Vice President of Operations and Chief Financial Officer of Bizmart
Office Products, an office products superstore chain, which grew from 57 stores
in 1991 to 105 stores in 1993, when it was purchased by Office Max, Inc., a
subsidiary of K-Mart Corporation. From March 1986 to March 1991, Mr. Nugent
served as Executive Vice President -- Administration, Chief Financial Officer,
Secretary/Treasurer and a Director of The Wholesale Club, Inc., a public company
in the cash-and-carry wholesale membership industry.
Larry W. Davidson has been Vice President of Purchasing/Merchandising of
the Company since May 1996, when the Company acquired the assets of Zodiac
Rentals, Inc., a rental company that he co-founded with Mr. Evans in 1974. Mr.
Davidson served as Director of Marketing of Zodiac from its inception until it
was acquired by the Company.
George A. Evans has been Vice President of Corporate Development of the
Company since May 1996, when the Company acquired the assets of Zodiac Rentals,
Inc., a rental company that he co-founded with Mr. Davidson in 1974. Mr. Evans
served as Director of Operations of Zodiac from its inception until it was
acquired by the Company. He is the Immediate Past President and current Chairman
of the American Rental Association.
Charles E. Baker has been Vice President of Store Development of the
Company since March 1997. From November 1995 to April 1996, he was an executive
recruiter for Kenzer Corp., an executive recruiting firm. From March 1995 to
October 1995, he was a partner in Twin City Consulting, a business consulting
firm. From October 1984 to February 1995, Mr. Baker was Vice President, Human
Resources and Administration and Store Operations/Field Merchandising of
Musicland Stores Corp., a specialty retail chain. Before joining Musicland, Mr.
Baker held various positions with B. Dalton Booksellers, Inc., including Vice
President/Store Director.
Stephen T. Carlson has been Vice President/Controller of the Company since
April 1997. From September 1996 to April 1997, he was Controller of Coors
Ceramics Co., a manufacturer of ceramic products. From February 1996 until
September 1996, he served as a financial consultant to Wynkoop Brewing Company
L.L.C. and Broadway Brewing Company L.L.C. Prior to that time, Mr. Carlson was
Vice President of Manufacturing and Distribution for two years and Vice
President, Controller for five years at Vicorp Restaurants, Inc., a restaurant
operating company and integrated food manufacturer.
Mary Ann Milton has been Vice President of Human Resources of the Company
since July 1996. Prior to joining the Company, Ms. Milton was Director of Human
Resources at Cahners Publishing Company, a business-to-business technical trade
publisher, from July 1990 to June 1996. From June 1987 until July 1990, she was
Personnel Manager for Lechmere, Inc. Mrs. Milton has 14 years of human resources
experience and is a Senior Professional in Human Resources.
Hershel A. Manning has been Western Regional Director of Store Operations
of the Company since May 1997, when the Company acquired the assets of A-1
Rental Centers, a rental company in New Mexico he founded in 1974. Mr. Manning
served as President and CEO of A-1 Rental Centers from its inception until it
was acquired. He is a former President and Chairman of the Board of the American
Rental Association.
James J. Conley has been Eastern Regional Director of Store Operations of
the Company since August 1997. For more than five years prior to joining the
Company, Mr. Conley served as Operations Manager of Handy Rent All Centers in
New York, a prominent general rental group in the Hudson Valley. He has also
served as a consultant for rental companies in other areas of the country.
55
<PAGE> 57
Mr. Conley has over 30 years of experience in the rental industry and currently
serves the American Rental Association as Chairman of the General Tool Special
Interest Group and as a member of the Board of Directors.
Darcy A. Erickson has been Director of Marketing of the Company since
September 1997. From April 1991 to August 1997 Ms. Erickson was Vice President
of Marketing for Grease Monkey International, Inc., a quick lube franchise
organization with more than 200 centers in the United States and Mexico. From
November 1987 to March 1991 she served as senior partner in Marketing Savvy, a
marketing consulting group she co-founded. Prior to that she was Creative
Director and Director of Advertising Services of Kinzley-Hughes Inc., an
advertising and public relations firm.
Richard M. Tyler has been a director of the Company since May 1996. From
May 1996 until November 1996, Mr. Tyler served as President of the Company and
from November 1996 to July 1997, he served as a Vice President and Secretary.
Since November 1988, he has been a member of BACE (or a partner in its
predecessor partnership), a private investment group that pursues consolidations
in targeted fragmented industries, and since October 1995 has been a member of
BACE Investments, LLC, which is a principal stockholder of the Company.
Craig J. Zoellner has been a director of the Company since May 1996. From
May 1996 until July 1997, Mr. Zoellner served as a Vice President and Treasurer
of the Company. Since November 1988, he has been a member of BACE (or a partner
in its predecessor partnership), a private investment group that pursues
consolidations in targeted fragmented industries, and since October 1995 has
been a member of BACE Investments, LLC, which is a principal stockholder of the
Company.
Thomas E. Galuhn has been a director of the Company since May 1996. Mr.
Galuhn is a Senior Managing Director of Mesirow Private Equity Investments, Inc.
and Vice President of Mesirow Financial Services, Inc. Mr. Galuhn has been
associated with affiliates of Mesirow Financial Holdings, Inc. since 1987.
Mesirow Financial Services is the General Partner of Mesirow Capital Partners VI
("Mesirow"), which is a principal stockholder of the Company. Mr. Galuhn serves
on the board of directors of Mesirow Financial Holdings, Inc.
James A. Gordon has been a director of the Company since May 1996. Since
February 1992, Mr. Gordon has been President of Gordon Management, Inc. ("GMI"),
a company he formed to serve as the general partner of the Edgewater private
equity and venture capital funds. Mr. Gordon has been active in the venture
capital and private equity markets since 1982. Prior to forming GMI, Mr. Gordon
was an executive officer of Gordon Wholesale, Inc. ("GWI") from May 1971 to
February 1992, working in all departments before assuming the Presidency in
1976. GWI was a distributing company which was sold to a multinational
conglomerate in 1986. Mr. Gordon serves on the boards of directors of Imnet
Systems, Inc., Advanced Photonix, Inc., Microware Systems Corporation and
HealthDesk Corporation, all of which are public companies.
William P. Sutter, Jr. has been a director of the Company since May 1996.
Mr. Sutter is a Senior Managing Director of Mesirow Private Equity Investments,
Inc. and a Vice President of Mesirow Financial Services, Inc. Mr. Sutter has
been associated with affiliates of Mesirow Financial Holdings, Inc. since 1984.
He serves on the board of directors of New West Eyeworks, Inc.
Margaret G. Fisher has been a director of the Company since September 1997.
Ms. Fisher is a co-founder and general partner of INROADS Capital Partners,
L.P., a venture capital fund that has made equity investments in electronics,
financial services, specialty retailing and manufacturing industries. Ms. Fisher
has been active in the venture capital industry for seventeen years. Prior to
founding INROADS, Ms. Fisher was a founding general partner of Seidman Fisher &
Co., a venture capital firm. Before co-founding Seidman Fisher & Co., Ms. Fisher
was a portfolio manager with Allstate Venture Capital.
Officers of the Company serve at the discretion of the Board of Directors.
Directors hold office until the next annual meeting of stockholders and until
their successors are elected and qualified.
56
<PAGE> 58
There are no family relationships among any of the directors, officers or key
employees of the Company.
Pursuant to a Stockholders Agreement among the Company, BACE Investments,
LLC, Mesirow, the Edgewater Private Equity Fund II, L.P. ("Edgewater") and each
of the other existing stockholders of the Company (the "Stockholders
Agreement"), each party has agreed, for a period of two years following the
offering, to vote its shares of Common Stock in each election of directors for
three designees of BACE Investments LLC, four designees of Mesirow and
Edgewater, the Chief Executive Officer of the Company and a ninth director
selected by the directors so designated. Currently, Messrs. Tyler and Zoellner
serve on the Board of Directors as the designees of BACE Investments, LLC and
Messrs. Galuhn, Gordon and Sutter and Ms. Fisher serve on the Board of Directors
as the designees of Mesirow and Edgewater. BACE Investments LLC has not yet
exercised its right to designate a third director, but has indicated that it
intends to do so within 90 days after the offering. The current directors have
also indicated that they intend to add an additional independent director to the
Board within 90 days after the offering. Those two new directors will fill the
existing vacancies on the Company's nine-person Board of Directors. The parties
to the Stockholders Agreement hold an aggregate of 5,722,018 shares of Common
Stock, which will represent approximately 63.2% of the Common Stock outstanding
after the offering. See "Certain Transactions -- Stockholders Agreement."
From January 1995 until November 1996, Richard M. Tyler and Craig J.
Zoellner were Vice President and Secretary and Vice President and Assistant
Secretary, respectively, of SoftWorld Services Corporation, which provided
turnkey manufacturing and fulfillment services to software developers. In April
1997, SoftWorld filed a petition for relief under the Federal Bankruptcy Code
and is currently in the process of liquidation.
COMMITTEES
The Company has an Audit Committee composed of Messrs. Gordon, Sutter and
Zoellner. The Audit Committee has the responsibility of making recommendations
to the Board of Directors concerning the engagement of independent public
accountants, reviewing the overall scope and results of the annual audit and
performing such other functions as may be prescribed by the Board of Directors.
The Company has a Compensation Committee composed of Messrs. Galuhn and
Tyler. The Compensation Committee is authorized to review the compensation of
the officers of the Company and to make recommendations to the Board of
Directors concerning officers' salaries, stock options and any other forms of
compensation, to review recommendations to the Board of Directors concerning the
compensation of the directors and to perform such other functions as the Board
of Directors may direct.
COMPENSATION OF DIRECTORS
Prior to the offering, the Company has not paid any fees or remuneration to
directors for their service on the Board of Directors or any Board committee,
but has reimbursed directors for their out-of-pocket expenses incurred in
connection with attending meetings of the Board. After the offering, the Company
intends to pay directors who are not employees of the Company (and are not
employees, members, officers, directors, managers or partners of BACE
Investments, LLC, Mesirow, Edgewater, Inroads Capital Partners, L.P.
("Inroads"), Trustees of Grinnell College ("Grinnell") or any affiliate of any
thereof) an annual retainer of $5,000 in cash plus $1,000 for each regular or
special meeting attended and $500 for each committee meeting attended. Under
this policy, none of the Company's current directors are entitled to
compensation. The Company will continue to reimburse all directors for
out-of-pocket expenses incurred in attending meetings. Each director who is
entitled to compensation as described above also will receive stock options to
purchase 5,000 shares of common stock upon election to the Board of Directors
and an annual grant of options to purchase 2,500 shares thereafter.
57
<PAGE> 59
The exercise price of such options will be the fair market value of the Common
Stock on the date of grant. See "-- Stock Option Plans."
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or
paid to the Chief Executive Officer of the Company and the only other executive
officer of the Company who held office during fiscal 1996 and earned a salary
and bonus in excess of $100,000 during fiscal 1996 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------- LONG-TERM COMPENSATION AWARDS
NAME AND PRINCIPAL POSITION(1) SALARY BONUS SECURITIES UNDERLYING OPTIONS(#)
------------------------------ -------- -------- --------------------------------
<S> <C> <C> <C>
Arnold A. Bernstein(2)...................... $41,538 $20,003 103,446
President and Chief Executive Officer
Gary J. Kulesza(3).......................... $81,730 $44,271 51,763
Executive Vice President
and Chief Operating Officer
</TABLE>
- ---------------
(1) The Company's other executive officers are Messrs. Nugent, Evans, Davidson
and Carlson, who are currently being compensated at the rate of $130,000
(with a guaranteed bonus for fiscal 1997 of $35,000), $104,500, $104,500 and
$80,000 (with a guaranteed bonus of $25,000 payable in April 1998) per year,
respectively. Mr. Bernstein's salary is currently $180,000 per year and Mr.
Kulesza's salary is currently $140,000 per year.
(2) Mr. Bernstein joined the Company in November 1996.
(3) Mr. Kulesza joined the Company in April 1996.
OPTION GRANTS
The following table sets forth information concerning individual grants of
stock options made by the Company during fiscal 1996 to the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS MARKET ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE ON DATE OPTION TERM
OPTIONS IN FISCAL PRICE PER OF EXPIRATION ------------------------------
NAME(1) GRANTED YEAR SHARE GRANT DATE 0% 5% 10%
------- ---------- ---------- --------- ------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arnold A. Bernstein... 38,462(2) 20% $0.15 $1.61 11/11/06 $56,155 $95,091 $154,824
64,984(3) 34% $8.00 $1.61 11/11/06 --(4) --(4) --(4)
Gary J. Kulesza....... 19,231(2) 10% $0.10 $1.61 04/01/06 $29,039 $48,507 $ 78,374
32,532(3) 17% $8.00 $1.61 04/01/06 --(4) --(4) --(4)
</TABLE>
58
<PAGE> 60
- ---------------
(1) The Company has also granted the following options to executive officers
other than the Named Executive Officers: on January 31, 1997, each of
Messrs. Evans and Davidson were granted options to purchase 2,000 shares at
$1.00 per share; on April 14, 1997, Mr. Carlson was granted options to
purchase 2,500 shares at $1.00 per share; and on May 19, 1997, Mr. Nugent
was granted options to purchase 40,000 shares at $7.00 per share. All of
these options become exercisable as to 20% of the shares on each of the
first five anniversaries of the date of grant. See "-- Stock Option Plans."
(2) The option was vested and exercisable with respect to all of the option
shares on the grant date. See "-- Employment Agreements."
(3) The option will vest and become exercisable as to 50 percent of the shares
on January 31, 1999 and as to 25 percent of the shares on each of January
31, 2000 and 2001. See "-- Employment Agreements."
(4) Based on the $1.61 per share market price on the date of grant, at the
assumed rates of appreciation, the market value of the stock would be less
than the exercise price of the option at the end of the option term.
The following table sets forth certain information with respect to stock
options held by the Named Executive Officers as of January 31, 1997. No options
were exercised by the Named Executive Officers during fiscal 1996.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT JANUARY 31, 1997 OPTIONS AT JANUARY 31, 1997(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --------------------------- ------------------------------
<S> <C> <C>
Arnold A. Bernstein.......................... 38,462/64,984 $56,155/$0
Gary J. Kulesza.............................. 19,231/32,532 $29,039/$0
</TABLE>
- ---------------
(1) Based on the deemed fair market value of the Company's Common Stock at
January 31, 1997, less the exercise price payable per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Bernstein, Galuhn and Tyler served as members of the Compensation
Committee during the 1996 fiscal year. Mr. Bernstein is Chief Executive Officer
and President of the Company. Mr. Galuhn is a principal of Mesirow and Mr. Tyler
is a member of BACE and BACE Investments, LLC and was President or a Vice
President and Secretary of the Company during the fiscal year ended January 31,
1997. Messrs. Tyler and Zoellner, who served as executive officers of the
Company during the fiscal year ended January 31, 1997, are directors and
executive officers of Pride Industries, Inc. and participated in compensation
decisions for that company. See "Certain Transactions" for a description of
certain transactions involving these individuals and certain of these entities.
EMPLOYMENT AGREEMENTS
In connection with their initial employment by the Company, each of Messrs.
Bernstein, Kulesza and Nugent entered into a letter agreement with the Company
describing the terms of his employment. The employment relationships are at will
and can be terminated by the employee or the Company at any time. The stock
options granted to Messrs. Bernstein, Kulesza and Nugent as described under
"-- Option Grants," were granted pursuant to those agreements rather than under
the Stock Option Plans. In connection with the granting of those options,
Messrs. Bernstein, Kulesza and Nugent entered into noncompetition agreements
under which they are prohibited from competing with the Company anywhere in the
United States during the term of their employment and for a period of two years
thereafter. The Company has no further material obligations under these letter
agreements, other than to pay salaries at the levels described under
"-- Executive Compensation" while the employment relationships continue.
59
<PAGE> 61
The Company has an Employment and Noncompetition Agreement with each of
George A. Evans and Larry W. Davidson, Vice President of Corporate Development
and Vice President of Purchasing/ Merchandising, respectively, of the Company,
which were entered into in conjunction with the Company's acquisition of Zodiac
from Mr. Evans and Mr. Davidson in May 1996. See "Certain Transactions -- Zodiac
Acquisition." Each such Agreement provides for minimum compensation of $8,334
per month during the 24-month term of the Agreement. Each Agreement is
terminable by the Company at any time with or without cause, but cannot be
terminated by the employee prior to the end of the 24-month term.
401(K) PLAN
Effective November 1, 1996, the Company adopted a 401(k) Retirement Savings
Plan (the "401(k) Plan") to provide retirement and other benefits to employees
of the Company. The 401(k) Plan is intended to be a tax-qualified plan under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Employees of the Company become eligible to participate in the 401(k) Plan and
to have salary deferral contributions made on their behalf after they complete
six months of service and attain the age of 18.
Participants may elect to defer, in the form of contributions to the 401(k)
Plan, up to the $9,500 limitation imposed by Code Section 402(g). Under the
401(k) Plan, the Company may make discretionary profit sharing contributions on
behalf of participants who have completed 1,000 hours of service during the plan
year and are employed on the last day of the plan year (or have retired after
attaining age 65, died or incurred a disability in a plan year), based on
compensation. The Company did not make a contribution to the 401(k) Plan in
fiscal 1997.
The contributions by participants are fully vested and nonforfeitable.
Participants become vested in the Company's profit sharing and matching
contributions based on a five year vesting schedule (or upon a participant's
retirement after attaining age 65, death or disability, if earlier).
Participants are entitled to receive the vested amounts in their accounts in a
single lump-sum payment on death, disability, retirement or termination of
employment. In certain circumstances, participants may receive loans and
hardship withdrawals from their accounts in the 401(k) Plan.
STOCK OPTION PLANS
Nonqualified Plans. In January, May and June 1997 the Company adopted the
Nonqualified Stock Option Plan -- January 1997, the Nonqualified Stock Option
Plan -- May 1997 and the Nonqualified Stock Option Plan -- June 1997 (the
"Nonqualified Plans"). Under the Nonqualified Plans, a total of 53,099 shares of
the Company's Class B Common Stock were available for option grants to key
employees and consultants on such terms as the Board of Directors determined.
Options to purchase all of the shares of Class B Common Stock available under
the Nonqualified Plans have been granted. All of the options granted under the
Nonqualified Plans become exercisable as to 20% of the shares covered thereby on
each of the first five anniversaries of the date of grant. As a result of the
conversion of the Class B Common Stock to Common Stock upon consummation of this
offering, the outstanding options under the Nonqualified Plans will represent
the right to purchase 53,099 shares of Common Stock at a weighted average
exercise price of $2.48 per share.
Employee Plan. In September 1997, the Board adopted and the stockholders
approved the Stock Option Plan For Employees (the "Employee Plan"). An aggregate
of 277,000 shares are available for grant under the Employee Plan. No options
have yet been granted under the Employee Plan, but upon the completion of this
offering, the Company intends to grant options to purchase a total of 193,400
shares with an exercise price equal to the offering price. The Employee Plan is
administered by the Compensation Committee (the "Committee"). Options may be
granted under the Employee Plan as incentive stock options ("ISOs") or
non-qualified stock options. The Employee Plan expires in September 2007, unless
it is terminated earlier by the Committee, but options granted prior to such
date may extend beyond that date.
60
<PAGE> 62
The Committee determines the number of shares underlying an option as well
as the exercise date, the exercise price and the exercise period of an option,
subject to the following restrictions: (i) options will not be exercisable for
more than 10 years from the date of grant (five years if the optionee is a
holder of more than 10% of the combined voting power of the Company and any
parent or subsidiary (a "10% stockholder") and the option is an ISO); and (ii)
the exercise price of an ISO may not be less than the fair market value of the
underlying shares on the date of grant (110% of fair market value if the
optionee is a 10% stockholder). ISOs are subject to additional requirements
under the Employee Plan and the Code.
Payment for options granted under the Employee Plan may be made (i) in cash
or by check, (ii) through delivery of unencumbered shares of Common Stock, or
(iii) any combination of the consideration provided for in (i) and (ii).
In the event of a merger or consolidation of the Company with or into
another corporation, if the stockholders of the Company will own less than a
majority of the stock of the surviving corporation, all outstanding options
under the Employee Plan become exercisable immediately prior to the effective
date of the transaction and any unexercised options will terminate on such
effective date. In the event of the acquisition by another corporation or person
of all or substantially all of the Company's assets or 50% or more of the
Company's then outstanding voting stock, or the liquidation or dissolution of
the Company, the Committee may, in its discretion, make any provision for
outstanding options it deems appropriate, including, without limitation,
accelerating exercisability, settling the options for cash or exchanging the
options for similar options of the acquiring company.
Non-Employee Directors Plan. In September 1997 the Board adopted and the
stockholders approved the Stock Option Plan for Non-Employee Directors (the
"Directors Plan"). As defined in the Directors Plan, a Non-Employee Director
includes any director who is not an employee of the Company (and is not an
employee, member, officer, director, manager or partner of BACE Investments,
LLC, Mesirow, Edgewater, Inroads, Grinnell or any affiliate of any thereof). A
total of 25,000 shares of Common Stock are available for grant under the
Directors Plan. Each Non-Employee Director automatically receives options to
purchase 5,000 shares of Common Stock upon election to the Board of Directors,
which are immediately exercisable as to 2,500 shares on the date of grant and
become exercisable as to an additional 500 shares on each of the first five
anniversaries of the date of grant. Thereafter, each Non-Employee Director
automatically receives an annual grant of options to purchase 2,500 shares of
Common Stock, which become exercisable as to 500 shares on each of the first
five anniversaries of the date of grant. The exercise price of all options
granted under the Directors Plan is equal to the fair market value of the Common
Stock on the date of grant and all options have a ten-year term. Upon a merger,
consolidation, sale of assets or stock or liquidation or dissolution of the
Company, outstanding options under the Directors Plan will or may be accelerated
or otherwise affected as described above for options granted under the Employee
Plan.
INDEMNIFICATION OF DIRECTORS AND LIMITATION OF LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty as
a director. At this time, Delaware General Corporation Law does not permit
indemnification for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for
any transaction from which the director derived an improper personal benefit.
As permitted by Section 145 of the Delaware General Corporation Law, the
Certificate of Incorporation and Bylaws of the Company provide that (i) the
Company is required to indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law, (ii) the Company is
required, with certain exceptions, to advance expenses, as incurred, to its
directors and officers in connection with a legal proceeding to the fullest
extent permitted by the Delaware
61
<PAGE> 63
General Corporation Law, (iii) the rights conferred in the Bylaws are not
exclusive and (iv) the Company is authorized to enter into indemnity agreements
with its directors, officers, employees and agents.
The Company plans to enter into indemnity agreements with each of its
directors and officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Company's Bylaws and to provide additional procedural protection. At present
there is no pending litigation or proceeding involving a director, officer or
employee of the Company regarding which indemnification is sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
CERTAIN TRANSACTIONS
CONSULTING AGREEMENT
Pursuant to a Consulting Agreement, BACE provides consulting services to
the Company concerning acquisitions, financing and other matters. Messrs. Tyler
and Zoellner, who are directors of the Company, are members of BACE and are also
the members of BACE Investments, LLC, which is the beneficial owner of
approximately 32% of the Company's outstanding Common Stock prior to this
offering. Services provided by BACE under the Consulting Agreement include the
identification, negotiation and consummation of the Company's acquisitions,
working in conjunction with Company management. BACE is compensated for its
services under a fee structure with two components. The first component varies
from $150,000 to $300,000 per year (subject to increase based on the Consumer
Price Index) depending on the Company's annual sales. The first component of the
fee is paid monthly based on the Company's annualized sales rate for each month.
The second component is paid at the end of each fiscal year and is based on the
relationship between the trailing 12-month earnings of the companies acquired by
RentX during the year and a target established by the Company each year. In no
event can the total fees under both components exceed $600,000 in any year
(subject to increase based on the Consumer Price Index). For fiscal 1996, the
Company paid a total of $242,680 in fees to BACE under the Consulting Agreement.
Fees during that year were determined based on factors other than those
considered by the components described above and included a $120,000 payment
approved by the Board of Directors in addition to the fees resulting from the
application of these factors. The Company does not expect to make payment to
BACE in excess of the fees determined by this formula in future years. The
Company is also obligated to reimburse BACE for expenses incurred in providing
services under the Consulting Agreement and to provide insurance benefits for
certain employees of BACE who render services to the Company.
The Consulting Agreement continues in effect until terminated according to
its terms. The Company may terminate the Consulting Agreement for cause
(including gross negligence, willful disregard of instructions from the Board of
Directors and material breach). The Consulting Agreement terminates
automatically if Messrs. Tyler and Zoellner (or their affiliates, including BACE
and BACE Investments, LLC, or family members) own less than 603,846 shares of
the Company's Common Stock, the Company sells all or substantially all of its
assets or is acquired for cash by an unaffiliated party, or the Company becomes
the subject of a proceeding under Chapter 11 of the Federal Bankruptcy Code.
SALES OF PREFERRED STOCK
In May 1996, the Company entered into an Investment Agreement with Mesirow
and Edgewater covering the sale to those entities (and other investors to be
designated by them) of shares of the Company's Series A Preferred Stock at a
price of $1,000 per share to fund a portion of the purchase price of the
Company's acquisitions. Other investors have subsequently become parties to that
Agreement, including Inroads, Grinnell and certain former owners of businesses
acquired and executive officers of the Company. Pursuant to the Investment
Agreement, during the period from May 1996 until June 1997, the Company sold
17,195 shares of Series A Preferred Stock for a total of
62
<PAGE> 64
$17,195,000. The outstanding Series A Preferred Stock will convert into a total
of 3,439,000 shares of Common Stock upon consummation of this offering. The
following table summarizes the shares of Series A Preferred Stock purchased by
each person who is an executive officer or director of the Company or who
beneficially owns 5% or more of the Company's Common Stock or may be deemed an
affiliate of such persons and the number of shares of Common Stock into which
such Series A Preferred Stock will be converted upon consummation of this
offering:
<TABLE>
<CAPTION>
SHARES OF SHARES OF
SERIES A COMMON STOCK
INVESTOR PREFERRED STOCK ISSUABLE UPON CONVERSION
-------- --------------- ------------------------
<S> <C> <C>
Mesirow Capital Partners VI.................... 4,065 813,000
The Edgewater Private Equity Fund II, L.P...... 4,065 813,000
Trustees of Grinnell College................... 4,065 813,000
Inroads Capital Partners, L.P.................. 2,805 561,000
Arnold A. Bernstein............................ 250 50,000
Gary J. Kulesza................................ 100 20,000
Thomas D. Nugent............................... 125 25,000
George A. Evans................................ 300 60,000
Larry W. Davidson.............................. 200 40,000
</TABLE>
The Investment Agreement contains customary types of representations and
warranties by the Company and obligates the Company to indemnify the purchasers
against certain matters, including breaches of those representations and
warranties and claims under environmental laws.
In June 1997, the Company sold 813 shares of Series C Preferred Stock to
Mesirow, 813 shares of Series C Preferred Stock to Edgewater, 813 shares of
Series C Preferred Stock to Grinnell and 561 shares of Series C Preferred Stock
to Inroads for aggregate consideration of $3,000,000. Upon completion of this
offering, the Series C Preferred Stock sold to Mesirow, Edgewater, Grinnell and
Inroads will convert into 127,771, 127,771, 127,771 and 88,167 shares of Common
Stock, respectively.
Messrs. Galuhn and Sutter, who are directors of the Company, are officers
or principals of Mesirow, and Mr. Gordon, who is a director of the Company, is a
principal of Edgewater. After this offering, each of Mesirow, Edgewater,
Grinnell and Inroads will own more than 5% of the Company's outstanding Common
Stock. See "Management" and "Principal Stockholders."
In May 1996, the Company sold 1,000 shares of Class A Common Stock and 200
shares of Series B Preferred Stock to BACE Investments, LLC for $500 and
$200,000, respectively. Upon completion of this offering, the Class A Common
Stock will be reclassified as Common Stock, without change in the number of
shares, and the Series B Preferred Stock will convert into a total of 1,810,538
shares of Common Stock. Messrs. Tyler and Zoellner, both directors of the
Company, are members of BACE Investments, LLC, After this offering, BACE
Investments, LLC will own more than 5% of the Company's outstanding Common
Stock. See "Management" and "Principal Stockholders."
STOCKHOLDERS AGREEMENT
The Company, BACE Investments, LLC, Mesirow, Edgewater and all other
stockholders of the Company prior to this offering are parties to a Stockholders
Agreement pursuant to which they have agreed to vote their shares for the
election of three directors designated by BACE, four directors designated by
Mesirow and Edgewater, the Chief Executive Officer of the Company and a ninth
director selected by the other directors. To date, BACE Investments, LLC has
designated only two directors pursuant to this provision. In addition, the
Stockholders Agreement obligates each party to give the other parties the
opportunity to participate in proportion to their respective holdings in any
proposed sale of Common Stock, other than sales pursuant to a registration
statement or under Rule 144 under the Securities Act. The Stockholders Agreement
expires two years after this offering.
63
<PAGE> 65
ZODIAC ACQUISITION
On May 15, 1996 the Company acquired all of the assets of Zodiac, of which
George A. Evans and Larry W. Davidson were equal co-owners, for $11,327,241 in
cash and the Company's subordinated promissory note in the principal amount of
$936,517, bearing interest at 5.37% per annum, payable in 24 monthly
installments. As part of the asset purchase transaction, Messrs. Evans and
Davidson have leased seven stores and a related building in the Denver
metropolitan area to the Company. Each lease is for an initial term of three
years, with four options to renew for terms of three years each. The aggregate
annual rent for the initial three-year term is $336,253. Rent for the option
periods will be adjusted to reflect any increase in the Consumer Price Index.
Messrs. Evans and Davidson also entered into employment agreements with the
Company. See "Management -- Employment Agreements."
64
<PAGE> 66
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1997 and as adjusted to
reflect the sale of the Common Stock offered hereby by: (i) each person known by
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock; (ii) each director and Named Executive Officer of the Company; and (iii)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(1)
------------------------
BEFORE AFTER
NAME AND ADDRESS NUMBER OF SHARES(1) OFFERING OFFERING
---------------- ------------------- -------- --------
<S> <C> <C> <C>
Mesirow Capital Partners VI(2)............ 940,771 16.44% 9.93%
The Edgewater Private Equity
Fund II, L.P.(3)........................ 940,771 16.44% 9.93%
Trustees of Grinnell College.............. 940,771 16.44% 9.93%
Inroads Capital Partners, L.P.(4)......... 649,167 11.35% 6.85%
BACE Investments, LLC(5).................. 1,811,538 31.66% 19.13%
Arnold A. Bernstein(6).................... 88,462 1.54% *
Gary J. Kulesza(7)........................ 39,231 * *
Richard M. Tyler(5)....................... 1,811,538 31.66% 19.13%
Craig J. Zoellner(5)...................... 1,811,538 31.66% 19.13%
Thomas E. Galuhn(2)....................... 940,771 16.44% 9.93%
James A. Gordon(3)........................ 940,771 16.44% 9.93%
William P. Sutter, Jr.(2)................. 940,771 16.44% 9.93%
Margaret G. Fisher(4)..................... 649,167 11.35% 6.85%
Directors and executive officers
as a group (10 persons)(8).............. 4,594,940 79.50% 48.51%
</TABLE>
- ---------------
* Less than 1.0%.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options that are currently exercisable or
exercisable within 60 days of the date of the table set forth above are
deemed to be outstanding and to be beneficially owned by the holder of such
options in calculating the percentage ownership of such stockholder, but are
not deemed to be outstanding as to any other person.
(2) Messrs. Galuhn and Sutter are officers of the general partner of Mesirow and
the shares reflected in the table for Messrs. Galuhn and Sutter are the
shares owned by Mesirow. The address of Mesirow and of Messrs. Galuhn and
Sutter is 350 North Clark Street, Chicago, Illinois 60610.
(3) Mr. Gordon is an officer of the general partner of Edgewater and the shares
reflected in the table for Mr. Gordon are the shares owned by Edgewater. The
address of Edgewater and of Mr. Gordon is 666 Grand Avenue, Suite 200, Des
Moines, Iowa 50309.
(4) Ms. Fischer is a general partner of Inroads and the shares reflected in the
table for Ms. Fisher are the shares owned by Inroads. The address of Inroads
and Ms. Fisher is 1603 Orrington Avenue, Suite 2030, Evanston, Illinois
60221.
(5) Messrs. Tyler and Zoellner are members of BACE Investments, LLC, and the
shares reflected in the table for Messrs. Tyler and Zoellner are the shares
owned by BACE Investments, LLC. The address of BACE Investments, LLC and of
Messrs. Tyler and Zoellner is 1522 Blake Street, Denver, Colorado 80202.
(6) Includes 38,462 shares issuable under options that are currently
exercisable. See "Management -- Option Grants."
(7) Includes 19,231 shares issuable under options that are currently
exercisable. See "Management -- Option Grants."
(8) Includes 57,693 shares issuable under options owned by executive officers
that are currently exercisable. See "Management -- Option Grants."
65
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
The discussion below does not purport to be complete, and is subject to and
qualified in its entirety by reference to applicable Delaware law and to the
provisions of the Amended and Restated Certificate of Incorporation and Bylaws
of the Company, which are filed as exhibits to the Registration Statement of
which this Prospectus is a part.
At the closing of this offering, the authorized capital stock of the
Company will consist of 19,000,000 shares of Common Stock, $.01 par value per
share, and 1,000,000 shares of Preferred Stock, $.01 par value per share (the
"Preferred Stock"). Immediately following the completion of this offering, an
aggregate of 9,472,018 shares of Common Stock will be issued and outstanding and
no shares of Preferred Stock will be issued and outstanding. All of the Series
A, Series B and Series C Preferred Stock and Class A and Class B Common Stock
outstanding prior to this offering will automatically be converted or
reclassified into shares of Common Stock, and such series and classes will no
longer be authorized.
COMMON STOCK
Each share of Common Stock is entitled to one vote at all meetings of
stockholders of the Company for the election of directors and all other matters
submitted to stockholder vote. There are no cumulative voting rights.
The rights, privileges and preferences of the holders of Common Stock are
subject to the rights of the holders of any shares of preferred stock that may
be designated and issued by the Company in the future. Subject to any
restrictions contained in preferred stock issued by the Company, if any, and to
restrictions imposed by certain debt agreements of the Company, holders of
Common Stock are entitled to receive dividends when and if declared by the Board
of Directors out of legally available assets of the Company. See "Dividend
Policy."
The Common Stock has no preemptive or similar rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. Holders of
Common Stock are not liable to further call or assessment by the Company. Upon
any liquidation, dissolution or winding up of the Company, after payment of the
debts and other liabilities of the Company and subject to the rights of holders
of shares of preferred stock, if any, holders of Common Stock are entitled to
share pro rata in any distribution to the stockholders. All outstanding shares
of Common Stock are, and the shares offered hereby will be, when issued and
sold, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors, without the approval of the holders of
the Common Stock, is authorized to issue from time to time, in one or more
designated series, any or all of the authorized but unissued shares of Preferred
Stock, in such number of series and with such rights, preferences, privileges
and any qualifications, limitations or restrictions thereon (including without
limitation voting rights) as the Board of Directors may determine. Issuance of
Preferred Stock, while providing flexibility in connection with possible
acquisitions, may adversely affect the rights, privileges and preferences
afforded the holders of Common Stock, including a decrease in the amount
available for distribution to holders of the Common Stock in the event of a
liquidation or payment of preferred stock dividends. Issuance of Preferred Stock
may also have the effect of preventing or delaying a change in control of the
Company.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "DGCL"). Section 203 of the DGCL contains certain
provisions which may make more
66
<PAGE> 68
difficult the acquisition of control of the Company by means of a tender offer,
open market purchase, proxy fight or otherwise. These provisions are designed to
encourage persons seeking to acquire control of the Company to negotiate with
the Board of Directors. However, these provisions could have the effect of
discouraging a prospective acquirer from making a tender offer or otherwise
attempting to obtain control of the Company. To the extent that these provisions
discourage takeover attempts, they could deprive stockholders of opportunities
to realize takeover premiums for their shares or could depress the market price
of shares. Set forth below is a description of the relevant provisions of
Section 203 of the DGCL. This description is intended as a summary only and is
qualified in its entirety by reference to Section 203 of the DGCL.
Section 203 of the DGCL prevents an "interested stockholder" (defined in
Section 203, generally, as a person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business combination" with a
publicly-held Delaware corporation for three years following the date such
person became an interested stockholder unless (i) before such person became an
interested stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested stockholder
or approved the business combination, (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange offer),
or (iii) following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder. A "business combination"
includes mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. Section 203 could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
The Company's Bylaws will generally require 50 days advance notice of any
action to be proposed at any meeting of stockholders and set forth other
specific procedures that a stockholder must follow. There are also specific
procedures, including advance notice, for the nomination of a person to the
Board of Directors when such person is nominated other than at the direction of
the Board. In addition, the Company's Bylaws provide that a special meeting of
the Company's stockholders may only be called by certain officers of the Company
or by the Board of Directors; no such meeting may be called by the stockholders.
These provisions could have the effect of delaying, deferring or preventing a
change in control of the Company or the removal of existing management. See
"Risk Factors -- Control by Existing Stockholders" and "-- Anti-Takeover
Provisions."
REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement dated May 15, 1996, as
amended, by and among the Company, BACE Investments, LLC, Mesirow, Edgewater and
certain other stockholders of the Company (the "Rights Agreement"), holders of
5,722,018 shares of Common Stock (the "Registrable Securities") have been
granted piggyback registration rights with respect to Common Stock owned by such
stockholders as of such date. Subject to the 180-day lock-up period described
under "Underwriting," if the Company proposes to register any of its securities
under the Securities Act, either for its own account or the account of other
stockholders, the holders of Registerable Securities are entitled to notice of
such registration and are entitled to include their Registrable Securities
therein. In addition, if at any time after May 15, 1999, the Company receives a
request from holders of at least 50% or more of the then outstanding Registrable
Securities, the Company is obligated to cause such shares to be registered under
the Securities Act. Holders of Registrable Securities have the right to cause
two such demand registrations. The holders' rights with respect to all such
registrations are subject to certain conditions, including the right of the
underwriters to limit the number of shares included in any such
67
<PAGE> 69
registration. The Company has agreed to pay all expenses related to the
registration of the shares, except for underwriting discounts and commissions to
effect the sale of the Registrable Securities.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Harris Trust Company of California.
68
<PAGE> 70
SHARES AVAILABLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after this offering. Future sales
of substantial amounts of Common Stock in the public market could adversely
affect market prices prevailing from time to time and could impair the Company's
ability to raise capital through sale of its equity securities. As described
below, no shares outstanding prior to this offering will be available for sale
immediately after this offering due to certain contractual restrictions on
resale. Sales of substantial amounts of Common Stock of the Company in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon the consummation of this offering, the Company will have outstanding
9,472,018 shares of Common Stock (10,034,518 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, all of the shares
sold in this offering will be freely tradeable without restriction under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining shares held by
existing stockholders are subject to lock-up agreements providing that, with
certain limited exceptions, the stockholder will not offer, sell, contract to
sell, grant an option to purchase, make a short sale or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of Common Stock or any option or
warrant to purchase shares of Common Stock or any securities exchangeable for or
convertible into shares of Common Stock for a period of 180 days after the date
of this Prospectus without the prior written consent of BancAmerica Robertson
Stephens. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and 701,
none of these shares will be saleable until 180 days after the date of this
Prospectus. Beginning 180 days after the date of this Prospectus, 4,758,738 of
these shares will be eligible for sale in the public market, subject to certain
volume limitations. The remaining 963,280 of such shares will become eligible
for sale under Rule 144 at various times through June 1998, subject to certain
volume limitations.
In general, under Rule 144 as in effect after April 29, 1997, beginning 90
days after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
(including the holding period of any prior owner except an affiliate) would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal 94,720 shares immediately after this offering); or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the filing of a Form 144 which respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. Under Rule 144(k), a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period requirement,
of Rule 144. Any employee, officer or director of or consultant to the Company
who purchased his or her shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of Rule 701 shares are
required to wait until 90 days after the date of this Prospectus before selling
such shares. However, all shares issued pursuant to Rule 701 are subject to
lock-up agreements and will only become eligible for sale upon the expiration of
the 180 day lock-up agreements unless sooner released by BancAmerica Robertson
Stephens.
69
<PAGE> 71
No earlier than 180 days after this offering, the Company intends to file a
registration statement under the Securities Act covering shares of Common Stock
subject to outstanding options under the Company's Employee Plan or reserved for
issuance under the Company's stock option and stock purchase plans. Based on the
number of shares subject to outstanding options at July 31, 1997 and currently
reserved for issuance under all such plans, such registration statement would
cover approximately 550,308 shares. Such registration statement will
automatically become effective upon filing. Accordingly, shares registered under
such registration statement will, subject to Rule 144 volume limitations
applicable to affiliates of the Company, be available for sale in the open
market immediately after the 180 day lock-up agreements expire. Also, beginning
six months after the date of this offering, certain holders of shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares of Common Stock for offer and sale to the public. See "Description
of Capital Stock -- Registration Rights."
70
<PAGE> 72
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company and each of the underwriters named below (the "Underwriting
Agreement"), the Company has agreed to sell to each of the Underwriters, and
each of the Underwriters, for whom BancAmerica Robertson Stephens and BT Alex.
Brown Incorporated are acting as the Representatives, severally have agreed to
purchase from the Company the number of shares of Common Stock set forth
opposite its name below. In the Underwriting Agreement, the Underwriters have
severally agreed, subject to the terms and conditions set forth therein, to
purchase all of the shares of Common Stock offered hereby, if any are purchased.
In the event of default by an Underwriter, the Underwriting Agreement provides
that, in certain circumstances, purchase commitments of the nondefaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
BancAmerica Robertson Stephens..............................
BT Alex. Brown Incorporated.................................
---------
Total............................................. 3,750,000
=========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share of Common
Stock. The Underwriters may allow, and such dealers may reallow, a discount not
in excess of $ per share of Common Stock on sales to certain other
dealers. After the initial public offering, the public offering price,
concessions and discount may be changed.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an additional 562,500
shares of Common Stock to cover over-allotments, if any, at the initial public
offering price set forth on the cover page hereof, less the underwriting
discount. If the Underwriters exercise this option, each Underwriter will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the 3,750,000 shares of
Common Stock initially offered hereby.
The Company, all officers and directors of the Company, all stockholders of
the Company and certain optionholders of the Company have agreed, subject to
certain exceptions, not to, directly or indirectly, (i) sell or grant any option
to purchase or otherwise transfer or dispose of any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock or
file a registration statement under the Securities Act with respect to the
foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock, without the prior written consent of BancAmerica Robertson
Stephens, for a period of 180 days after the date of this Prospectus.
The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of the Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Prior to this offering, there has been no market for the Common Stock of
the Company. The initial public offering price will be determined through
negotiations among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price/earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the
71
<PAGE> 73
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the offering at or above the
initial public offering price.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when the shares of Common Stock sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on The Nasdaq National Market, in the over-the-counter market, or otherwise.
Such stabilizing, if commenced, may be discontinued at any time.
Application has been made for quotation of the Common Stock on The Nasdaq
National Market under the symbol "RNTX."
72
<PAGE> 74
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters in connection with this offering will be passed upon for the Company by
Sherman & Howard L.L.C., Denver, Colorado. Certain legal matters in connection
with this offering will be passed upon for the Underwriters by Brobeck Phleger &
Harrison LLP, Palo Alto, California.
EXPERTS
The following financial statements appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein:
- RentX Industries, Inc. as of January 31, 1997 and for the period from May
15, 1996 (commencement of operations) through January 31, 1997
- Rental Country U.S.A., Inc., Rifle Rentals, Inc., G.R.M. Company, Inc.,
and Rocky Mountain Rentals, Inc., each dba E-Z Way Rentals, for the years
ended December 31, 1994 and 1995 and the seven months ended July 31, 1996
- Redwine Enterprises, Inc., fka U-Rent, Inc., for the period from January
1, 1996 through October 31, 1996
- Hays Rental and Sales of El Dorado, Inc., Hays Rental and Sales of
Camden, Inc., Hays Rental and Sales of Magnolia, Inc., Hays Rental and
Sales of Hot Springs, Inc., Hays Rental and Sales of Arkadelphia, Inc.
and Hays Leasing Company, Inc. (each dba Hays Rental and Sales) as of
October 31, 1996 and 1995 and for each of the three years in the period
ended October 31, 1996
- CVR, Inc., fka Central Virginia Rental Company, as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996
- Newmanco, Inc. (dba A-1 Rental Centers) as of September 30, 1995 and 1996
and for each of the three years in the period ended September 30, 1996
- Titus Rental Service Companies, Inc. (dba Suburban Rent-It and Able Party
Rental) as of March 31, 1996 and 1997 and for each of the three years in
the period ended March 31, 1997
- Mer-Cal Enterprises, Inc. (dba Duncan Rent-Alls) as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31,
1996
- Redi Rentals, Inc. as of May 31, 1996 and 1997 and for the years ended
May 31, 1995, 1996 and 1997.
These financial statements are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The combined financial statements of Zodiac Rentals as of December 31, 1995
and May 14, 1996 and for the years ended December 31, 1994 and 1995 and the
period from January 1, 1996, to May 14, 1996, appearing in this Prospectus and
Registration Statement have been audited by Pester & Company Certified Public
Accountants, P.C., independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The financial statements of A to Z Rentals and Sales, Inc., for the years
ended December 31, 1994 and 1995 and the period from January 1, 1996 to May 28,
1996, appearing in this Prospectus and Registration Statement have been audited
by LeMaster & Daniels PLLC, independent auditors, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
73
<PAGE> 75
The combined statements of income and changes in equity of U-Do-It Rental
Centers, Inc. and Affiliate for the years ended December 31, 1994, 1995 and
1996, appearing in this Prospectus and Registration Statement have been audited
by Williams & Parsons, PA, independent auditors, as set forth in their report
thereon appearing elsewhere herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules thereto, certain items of which are omitted in accordance with the
rules and regulations of the Commission. For further information pertaining to
the Company and the Common Stock offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. Statements contained in
this Prospectus regarding the contents of any contract or any other document to
which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement and the exhibits and
schedules thereto may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549;
at its Chicago Regional Office, 500 W. Madison Street, 14th Floor, Chicago,
Illinois 60661; and at its New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that file
electronically with the Commission. Information concerning the Company is also
available for inspection at the offices of the Nasdaq National Market Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
74
<PAGE> 76
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
RENTX UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction to Unaudited Pro Forma Financial
Information............................................ F-3
Unaudited Pro Forma Income Statement for the Six Months
Ended July 31, 1997.................................... F-5
Unaudited Pro Forma Income Statement for fiscal 1996...... F-6
Unaudited Pro Forma Balance Sheet......................... F-7
Notes to Unaudited Pro Forma Financial Statements......... F-8
RENTX INDUSTRIES, INC.
Report of Independent Auditors............................ F-10
Balance Sheets............................................ F-11
Statements of Operations.................................. F-12
Statements of Stockholders' Deficit....................... F-13
Statements of Cash Flows.................................. F-14
Notes to Financial Statements............................. F-15
ZODIAC RENTALS
Independent Auditors' Report.............................. F-26
Combined Balance Sheets................................... F-27
Combined Statements of Operations......................... F-28
Combined Statements of Stockholders' Equity............... F-29
Combined Statements of Cash Flows......................... F-30
Notes to Combined Financial Statements.................... F-31
A TO Z RENTALS AND SALES, INC.
Independent Auditors' Report.............................. F-35
Statements of Income...................................... F-36
Statements of Stockholders' Equity........................ F-37
Statements of Cash Flows.................................. F-38
Notes to Financial Statements............................. F-39
E-Z WAY RENTALS
Report of Independent Auditors............................ F-42
Combined Statements of Income............................. F-43
Combined Statements of Stockholders' Equity............... F-44
Combined Statements of Cash Flows......................... F-45
Notes to Combined Financial Statements.................... F-46
REDWINE ENTERPRISES, INC., dba U-RENT, INC.
Report of Independent Auditors............................ F-48
Statement of Income....................................... F-49
Statement of Stockholders' Equity......................... F-50
Statement of Cash Flows................................... F-51
Notes to Financial Statements............................. F-52
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
Independent Auditor's Report.............................. F-54
Combined Income Statements................................ F-55
Combined Statements of Changes in Equity.................. F-56
Combined Statements of Cash Flows......................... F-57
Notes to Combined Financial Statements.................... F-59
</TABLE>
F-1
<PAGE> 77
<TABLE>
<S> <C>
HAYS RENTAL AND SALES AND AFFILIATES
Report of Independent Auditors......................................................................... F-63
Combined Balance Sheets................................................................................ F-64
Combined Statements of Income.......................................................................... F-65
Combined Statements of Stockholders' Equity............................................................ F-66
Combined Statements of Cash Flows...................................................................... F-67
Notes to Combined Financial Statements................................................................. F-68
CVR, INC.
Report of Independent Auditors......................................................................... F-73
Balance Sheets......................................................................................... F-74
Statements of Income................................................................................... F-75
Statements of Stockholders' Equity..................................................................... F-76
Statements of Cash Flows............................................................................... F-77
Notes to Financial Statements.......................................................................... F-78
NEWMANCO, INC., dba A-1 RENTAL CENTERS
Report of Independent Auditors......................................................................... F-82
Balance Sheets......................................................................................... F-83
Statements of Operations............................................................................... F-84
Statements of Stockholders' Equity..................................................................... F-85
Statements of Cash Flows............................................................................... F-86
Notes to Financial Statements.......................................................................... F-87
TITUS RENTAL SERVICES COMPANIES, INC., dba SUBURBAN
Report of Independent Auditors......................................................................... F-91
Balance Sheets......................................................................................... F-92
Statements of Operations............................................................................... F-93
Statements of Stockholders' Equity..................................................................... F-94
Statements of Cash Flows............................................................................... F-95
Notes to Financial Statements.......................................................................... F-96
MER-CAL ENTERPRISES, INC., dba DUNCAN RENT-ALLS
Report of Independent Auditors......................................................................... F-99
Balance Sheets......................................................................................... F-100
Statements of Operations............................................................................... F-101
Statements of Stockholders' Deficit.................................................................... F-102
Statements of Cash Flows............................................................................... F-103
Notes to Financial Statements.......................................................................... F-104
REDI RENTALS, INC.
Report of Independent Auditors......................................................................... F-109
Balance Sheets......................................................................................... F-110
Statements of Operations............................................................................... F-111
Statements of Stockholders' Equity..................................................................... F-112
Statements of Cash Flows............................................................................... F-113
Notes to Financial Statements.......................................................................... F-114
</TABLE>
F-2
<PAGE> 78
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of the Company
presents the unaudited pro forma statements of operations for the fiscal year
ended January 31, 1997 ("fiscal 1996"), and the six months ended July 31, 1997,
and the unaudited pro forma balance sheet at July 31, 1997. The pro forma
statement of operations for fiscal 1996 has been adjusted to give effect to (i)
the Company's acquisition of 14 separate rental businesses with a total of 57
stores on or before July 31, 1997 (the "Completed Acquisitions") and (ii) the
Company's proposed acquisition of an additional business with two stores under
an existing letter of intent (the "Pending Acquisition"), in each case, as if
such transactions had occurred on February 1, 1996. See "Background of the
Company" and "Business -- Acquisition History" for information as to the dates
of and companies acquired in the Completed Acquisitions and to be acquired in
the Pending Acquisition. The pro forma statement of operations for the six
months ended July 31, 1997 has been adjusted to give effect to the Completed
Acquisitions that were consummated after January 31, 1997 and the Pending
Acquisition as if such acquisitions had occurred on February 1, 1997. The pro
forma balance sheet gives effect to the Pending Acquisition as if such
acquisition had occurred on July 31, 1997. There can be no assurance that the
Pending Acquisition will be consummated. Pro forma adjustments relating to the
Completed Acquisitions and the Pending Acquisition are referred to herein as the
"Completed Acquisition Adjustments" and the "Pending Acquisition Adjustments,"
respectively.
Since inception in March 1996, the Company has effected the Completed
Acquisitions as follows: (i) Zodiac, acquired on May 15, 1996, with nine
locations in and around Denver, Colorado; (ii) A to Z, acquired on May 29, 1996,
with four locations in Spokane, Washington; (iii) E-Z Way, acquired on August 2,
1996 (four locations) and January 31, 1997 (one location), located in five
Colorado mountain and resort towns; (iv) U-Rent, acquired on November 1, 1996,
with four locations in Oklahoma; (v) U-Do-It, acquired on December 20, 1996 and
January 6, 1997, with two locations in Idaho; (vi) Hays, acquired on February
14, 1997, with five locations in Arkansas; (vii) CVR, acquired on March 14,
1997, with six locations in Virginia; (viii) A-1 acquired on May 22, 1997, with
five locations in New Mexico; (ix) Suburban, acquired on June 26, 1997, with
seven locations in and around Detroit, Michigan; (x) Duncan, acquired on July
31, 1997, with one location in Oklahoma; and (xi) and four other insignificant
acquisitions with nine locations in Colorado, California and Texas.
The Company has entered into a letter of intent with respect to the Pending
Acquisition, which would add two locations in Tennessee. The audited financial
statements of the business to be acquired in the Pending Acquisition are
included elsewhere herein. The Company is a party to a letter of intent relating
to another acquisition, which would add one store in Colorado, but financial
information concerning that business is not included herein because it is not
material to the Company.
The pro forma as adjusted statements of operations for fiscal 1996 and the
six months ended July 31, 1997, and the pro forma as adjusted balance sheet give
additional effect to (i) the sale by the Company of 3,750,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $9.00 per
share, (ii) a reduction in interest expense as a result of a reduction in
indebtedness upon application of a portion of the net proceeds from the offering
and (iii) the conversion of all of the Company's Series A, Series B and Series C
Preferred Stock and Class A Common Stock into a total of 5,722,018 shares of
Common Stock upon the consummation of this offering and the payment of the
related accrued preferred stock dividends, as though they had occurred at the
beginning of the periods covered by such statements of operations or as of the
date of such balance sheet. The pro forma adjustments relating to the
transactions referred to in clauses (i), (ii) and (iii) are referred to herein
collectively as the "Offering Adjustments." See "Use of Proceeds."
The Completed Acquisition Adjustments, Pending Acquisition Adjustments and
Offering Adjustments represent the Company's determination of all adjustments
necessary to present fairly the Company's pro forma results of operations and
financial position and are based upon available information and certain
assumptions considered reasonable under the circumstances. The pro forma
financial information presented herein does not purport to present what the
Company's financial
F-3
<PAGE> 79
position or results of operations would actually have been had the events
leading to such adjustments in fact occurred on the date or at the beginning of
the periods indicated or to project the Company's financial position or results
of operations for any future date or period.
The unaudited pro forma financial information should be read in conjunction
with the historical financial statements of the Company and the notes thereto
and management's discussion thereof contained elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements and the notes thereto.
The results of operations reflected in the pro forma financial information
for certain of the acquired businesses differ from those reflected in the
historical financial statements for those businesses elsewhere in this
Prospectus. These differences result from three different adjustments. First,
all of the businesses acquired in fiscal 1996 (Zodiac, A to Z, E-Z Way, U-Rent
and U-Do-It) were calendar year companies so that, if their historical results
were added to the Company's results, a thirteen-month period would result. In
these cases, one month's operations were removed. Second, the business that is
the subject of the Pending Acquisition (Redi) and one of the insignificant
Completed Acquisitions had fiscal years that ended more than 93 days from the
Company's year end, and therefore their income statements could not be
consolidated with the Company's income statement. For pro forma purposes, the
historical financial statements of these acquired businesses have been adjusted
to year ends within 93 days of RentX's fiscal year end. A similar adjustment was
made for A-1 for purposes of the pro forma information for the six months ended
July 31, 1997. Third, the Company did not acquire one location owned by CVR and
the results of operations for that location were eliminated for purposes of the
pro forma information. In addition, the income statement information for
Suburban for the period from January 1 through March 31, 1997, and for the
Pending Acquisition and one of the insignificant Completed Acquisitions for the
period from December 1, 1996 through April 30, 1997 are included in both the pro
forma income statements for the year ended January 31, 1997 and the six months
ended July 31, 1997.
F-4
<PAGE> 80
RENTX INDUSTRIES, INC.
PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997
-------------------------------------------------------------------------------------
Completed
Historical Insignificant Acquisition Pro Forma
Company A-1 Suburban Duncan Acquisitions Adjustments Combined
---------- ---------- -------- ------ ------------- ----------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue................ $13,598 $ 611 $1,072 $344 $2,176 $ -- $17,801
Rental equipment sales........ 537 -- 85 -- 74 -- 696
Merchandise revenues.......... 1,933 146 160 84 302 -- 2,625
------- ----- ------ ---- ------ ------ -------
Total revenues.......... 16,068 757 1,317 428 2,552 -- 21,122
Cost of revenues
Rental equipment expense...... 1,634 210 -- 28 228 -- 2,100
Rental equipment
depreciation................ 1,176 80 146 84 322 (227)(1) 1,581
Cost of rental equipment
sales....................... 512 -- 60 -- 7 76(2) 655
Cost of merchandise and new
equipment sales............. 1,204 76 121 79 253 -- 1,733
Direct operating expense...... 6,763 340 799 92 1,190 16(3) 9,200
------- ----- ------ ---- ------ ------ -------
Total cost of
revenues.............. 11,289 706 1,126 283 2,000 (135) 15,269
Store contribution.............. 4,779 51 191 145 552 135 5,853
Selling, general and
administrative expenses....... 3,504 180 570 71 512 (455)(4) 4,382
Depreciation and amortization,
excluding rental equipment
depreciation.................. 422 15 35 14 38 (15)(5) 509
------- ----- ------ ---- ------ ------ -------
Operating income................ 853 (144) (414) 60 2 605 962
Other (income) expense, net..... (38) -- -- -- -- -- (38)
Interest expense, related
parties....................... 6 -- -- -- -- -- 6
Interest expense, other......... 1,289 19 5 30 67 251(7) 1,661
------- ----- ------ ---- ------ ------ -------
Income (loss) before income
taxes......................... (404) (163) (419) 30 (65) 354 (667)
Income tax expense............ -- -- (80) -- (15) (190)(8) (285)
------- ----- ------ ---- ------ ------ -------
Net income (loss)............... (404) (163) (339) 30 (50) 544 (382)
Preferred stock dividends....... (384) -- -- -- -- (116) (500)
------- ----- ------ ---- ------ ------ -------
Net income (loss) available to
common stockholders........... $ (788) $(163) $ (339) $ 30 $ (50) $ 428 $ (882)
======= ===== ====== ==== ====== ====== =======
Store contribution margin....... 29.7% 6.7% 14.5% 33.9% 21.6% 27.7%
Operating margin................ 5.3% -19.0% -31.4% 14.0% 0.1% 4.6%
Net income (loss) per common
share(12)..................... $ (.07) $ (.07)
======= =======
Common shares used in computing
net income (loss) per common
share(12)..................... 5,812 5,812
======= =======
<CAPTION>
Six Months Ended July 31, 1997
------------------------------------------------------
Pending
Pending Acquisition Offering Pro Forma
Acquisition Adjustments Adjustments As Adjusted
------------ ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Rental revenue................ $1,517 $ -- $ -- $19,318
Rental equipment sales........ -- -- -- 696
Merchandise revenues.......... 278 -- -- 2,903
------ ------- ------- -------
Total revenues.......... 1,795 -- -- 22,917
Cost of revenues
Rental equipment expense...... 112 -- -- 2,212
Rental equipment
depreciation................ 174 (78)(1) -- 1,677
Cost of rental equipment
sales....................... -- -- -- 655
Cost of merchandise and new
equipment sales............. 223 -- -- 1,956
Direct operating expense...... 1,035 -- -- 10,235
------ ------- ------- -------
Total cost of
revenues.............. 1,544 (78) -- 16,735
Store contribution.............. 251 78 -- 6,182
Selling, general and
administrative expenses....... 516 (297)(4) -- 4,601
Depreciation and amortization,
excluding rental equipment
depreciation.................. 38 (9) -- 538
------ ------- ------- -------
Operating income................ (303) 384 -- 1,043
Other (income) expense, net..... -- -- -- (38)
Interest expense, related
parties....................... -- -- -- 6
Interest expense, other......... 15 145(7) (1,140)(10) 681
------ ------- ------- -------
Income (loss) before income
taxes......................... (318) 239 1,140 394
Income tax expense............ (117) 85(8) 474(8) 157
------ ------- ------- -------
Net income (loss)............... (201) 154 666 237
Preferred stock dividends....... -- -- 500(11) --
------ ------- ------- -------
Net income (loss) available to
common stockholders........... $ (201) $ 154 $ 1,166 $ 237
====== ======= ======= =======
Store contribution margin....... 14.0% 27.0%
Operating margin................ -16.9% 4.6%
Net income (loss) per common
share(12)..................... $ .02
=======
Common shares used in computing
net income (loss) per common
share(12)..................... 3,750 9,562
======= =======
</TABLE>
F-5
<PAGE> 81
RENTX INDUSTRIES, INC.
PRO FORMA INCOME STATEMENT
<TABLE>
<CAPTION>
RENT X
MAY 15, 1996
(COMMENCEMENT FISCAL 1996
OF OPERATIONS) -----------------------------------------------------------------------
THROUGH
JANUARY 31,
1997 ZODIAC A TO Z E-Z WAY U-RENT U-DO-IT HAYS CVR A-1
-------------- ------ ------ ------- ------ ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue...................... $ 9,221 $1,808 $1,167 $1,199 $1,659 $ 953 $2,533 $4,467 $2,776
Rental equipment sales.............. 280 193 -- 59 5 82 -- -- --
Merchandise revenues................ 1,337 379 -- 68 -- 126 854 532 621
------- ------ ------ ------ ------ ------ ------ ------ ------
Total revenues.................... 10,838 2,380 1,167 1,326 1,664 1,161 3,387 4,999 3,397
Cost of revenues
Rental equipment expense............ 1,285 175 223 160 262 173 234 485 652
Rental equipment depreciation....... 436 356 34 196 254 116 165 703 240
Cost of rental equipment sales...... 272 143 -- 40 -- 55 -- -- --
Cost of merchandise and new
equipment sales................... 625 168 -- -- 62 99 651 411 336
Direct operating expense............ 4,864 1,179 302 155 -- -- 1,023 2,297 1,274
------- ------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues............ 7,482 2,021 559 551 578 443 2,073 3,896 2,502
Store contribution................... 3,356 359 608 775 1,086 718 1,314 1,103 895
Selling, general and administrative
expense............................. 2,351 442 265 539 755 709 895 557 503
Depreciation and amortization,
excluding rental equipment
depreciation........................ 293 19 4 22 5 12 191 30 43
------- ------ ------ ------ ------ ------ ------ ------ ------
Operating income..................... 712 (102) 339 214 326 (3) 228 516 349
Other (income) expense, net.......... 4 -- (548) 8 13 (55) (9) -- --
Interest expense, related parties.... 28 -- -- -- -- -- -- -- --
Interest expense, other.............. 756 76 (4) -- 119 82 113 128 140
------- ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes.... (76) (178) 891 206 194 (30) 124 388 209
Income tax expense.................. -- -- 35 21 57 (14) 59 167 96
------- ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).................... (76) (178) 856 185 137 (16) 65 221 113
Preferred stock dividends............ (302) -- -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) available to common
stockholders........................ $ (378) $(178) $ 856 $ 185 $ 137 $ (16) $ 65 $ 221 $ 113
======= ====== ====== ====== ====== ====== ====== ====== ======
Store contribution margin............ 31.0% 15.1% 52.1% 58.4% 65.3% 61.8% 38.8% 22.1% 26.3%
Operating margin..................... 6.6% -4.3% 29.0% 16.1% 19.6% -0.3% 6.7% 10.3% 10.3%
Net income (loss) per common
share(12)........................... $ (0.01)
=======
Common shares used in computing net
income (loss) per common
share(12)........................... 5,812
=======
<CAPTION>
FISCAL 1996
---------------------------------------------------------------------------------------
COMPLETED PENDING
INSIGNIFICANT ACQUISITION PENDING ACQUISITION
SUBURBAN DUNCAN ACQUISITIONS ADJUSTMENTS PRO FORMA ACQUISITION ADJUSTMENTS
-------- ------ ------------- ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue...................... $3,284 $ 698 $6,836 $ -- $36,601 $3,547 $ --
Rental equipment sales.............. 147 -- 220 -- 986 -- --
Merchandise revenues................ 454 224 808 -- 5,403 518 --
------ ----- ------ ------- ------- ------ -------
Total revenues.................... 3,885 922 7,864 -- 42,990 4,065 --
Cost of revenues
Rental equipment expense............ -- 125 878 -- 4,652 243 --
Rental equipment depreciation....... 264 130 954 (1,265)(1) 2,583 342 (150)(1)
Cost of rental equipment sales...... 106 -- 85 206(2) 907 -- --
Cost of merchandise and new
equipment sales................... 312 209 617 -- 3,490 414 --
Direct operating expense............ 2,085 184 3,830 94(3) 17,287 2,182 --
------ ----- ------ ------- ------- ------ -------
Total cost of revenues............ 2,767 648 6,364 (965) 28,919 3,181 (150)
Store contribution................... 1,118 274 1,500 965 14,071 884 150
Selling, general and administrative
expense............................. 700 141 1,062 (511)(4) 8,408 677 (364)(4)
Depreciation and amortization,
excluding rental equipment
depreciation........................ 79 28 129 32(5) 887 76 (19)(5)
------ ----- ------ ------- ------- ------ -------
Operating income..................... 339 105 309 1,444 4,776 131 533
Other (income) expense, net.......... -- -- 14 603(6) 30 -- --
Interest expense, related parties.... -- -- -- -- 28 -- --
Interest expense, other.............. 12 52 221 975(7) 2,670 20 300(7)
------ ----- ------ ------- ------- ------ -------
Income (loss) before income taxes.... 327 53 74 (134) 2,048 111 233
Income tax expense.................. 120 -- 38 294(8) 873 41 96(8)
------ ----- ------ ------- ------- ------ -------
Net income (loss).................... 207 53 36 (428) 1,175 70 137
Preferred stock dividends............ -- -- -- (697) (999) -- --
------ ----- ------ ------- ------- ------ -------
Net income (loss) available to common
stockholders........................ $ 207 $ 53 $ 36 $(1,125) $ 176 $ 70 $ 137
====== ===== ====== ======= ======= ====== =======
Store contribution margin............ 28.8% 29.7% 19.1% 32.7% 21.7%
Operating margin..................... 8.7% 11.4% 3.9% 11.1% 3.2%
Net income (loss) per common
share(12)........................... $ 0.20
=======
Common shares used in computing net
income (loss) per common
share(12)........................... 5,812
=======
<CAPTION>
FISCAL 1996
-------------------------
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Rental revenue...................... $ -- $40,148
Rental equipment sales.............. -- 986
Merchandise revenues................ -- 5,921
------- -------
Total revenues.................... -- 47,055
Cost of revenues
Rental equipment expense............ -- 4,895
Rental equipment depreciation....... -- 2,775
Cost of rental equipment sales...... -- 907
Cost of merchandise and new
equipment sales................... -- 3,904
Direct operating expense............ -- 19,469
------- -------
Total cost of revenues............ -- 31,950
Store contribution................... -- 15,105
Selling, general and administrative
expense............................. -- 8,721
Depreciation and amortization,
excluding rental equipment
depreciation........................ -- 944
------- -------
Operating income..................... -- 5,440
Other (income) expense, net.......... -- 30
Interest expense, related parties.... -- 28
Interest expense, other.............. (2,280)(10) 710
------- -------
Income (loss) before income taxes.... 2,280 4,672
Income tax expense.................. 855(8) 1,865
------- -------
Net income (loss).................... 1,425 2,807
Preferred stock dividends............ 999(11) --
------- -------
Net income (loss) available to common
stockholders........................ $ 2,424 $ 2,807
======= =======
Store contribution margin............ 32.1%
Operating margin..................... 11.6%
Net income (loss) per common
share(12)........................... $ 0.29
=======
Common shares used in computing net
income (loss) per common
share(12)........................... 3,750 9,562
======= =======
</TABLE>
F-6
<PAGE> 82
RENTX INDUSTRIES, INC.
PRO FORMA BALANCE SHEET
AS OF JULY 31, 1997
ASSETS
<TABLE>
<CAPTION>
HISTORICAL PREFERRED PRO FORMA
HISTORICAL PENDING PURCHASE STOCK OFFERING AS
COMPANY ACQUISITION ADJUSTMENTS(13) PRO FORMA CONVERSION ADJUSTMENTS(9) ADJUSTED
---------- ----------- --------------- --------- ---------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.......................... $ 2,671 $ 338 $ (338) $ 2,671 $ -- $ 492 $ 3,163
Accounts receivable, net...... 3,519 395 (275) 3,639 3,639
Prepaid expenses.............. 312 13 (13) 312 312
Prepaid income taxes.......... 386 -- 386 386
Merchandise inventories....... 1,395 149 (29) 1,515 1,515
Rental equipment, net......... 27,261 919 461 28,641 28,641
Property and equipment, net... 2,093 259 (159) 2,193 2,193
Intangible assets, net........ 28,697 -- 2,280 30,977 30,977
Other assets.................. 1,656 100 (100) 1,656 -- (840) 816
------- ------ ------- ------- -------- -------- -------
Total assets.......... $67,990 $2,173 $ 1,827 $71,990 $ -- $ (348) $71,642
======= ====== ======= ======= ======== ======== =======
LIABILITIES AND EQUITY
Accounts payable.............. $ 3,339 $ 86 $ (86) $ 3,339 $ -- $ -- $ 3,339
Payroll and other accrued
expenses.................... 3,475 390 (390) 3,475 -- (750) 2,725
Accrued dividends............. 686 -- 686 -- (686) --
Accrued interest payable...... 131 -- 131 131
Bank debt and other long term
obligations................. 40,798 188 3,812 44,798 -- (28,500)(10) 16,298
Notes payable related
parties..................... 323 93 (93) 323 323
------- ------ ------- ------- -------- -------- -------
Total liabilities..... 48,752 757 3,243 52,752 -- (29,936) 22,816
Preferred stock............... 20,295 -- -- 20,295 (20,295)(11) --
Common stock.................. -- 12 (12) -- 57(11) 38 95
Other paid in capital......... 108 -- 108 20,238 29,550 49,896
Accumulated deficit........... (1,165) 1,404 (1,404) (1,165) (1,165)
------- ------ ------- ------- -------- -------- -------
Stockholders'
(deficit) equity.... (1,057) 1,416 (1,416) (1,057) 20,295 29,588 48,826
------- ------ ------- ------- -------- -------- -------
Total liabilities and
equity.............. $67,990 $2,173 $ 1,827 $71,990 $ -- $ (348) $71,642
======= ====== ======= ======= ======== ======== =======
</TABLE>
F-7
<PAGE> 83
NOTES TO UNAUDITED PRO FORMA INCOME STATEMENTS
(1) For each acquisition, the historical book values of the rental
equipment acquired (approximately $17 million for the Completed Acquisitions and
$900,000 for the Pending Acquisition) were revalued to estimated fair market
value (approximately $20 million for the Completed Acquisitions and $1.5 million
for the Pending Acquisition). The Company utilizes several methods to estimate
fair market value, including independent appraisals, the Company's actual
experience in selling used rental equipment and analytical review. The rental
equipment acquired is depreciated generally over a six-year period, with salvage
value estimated at 22%. The equipment of Zodiac is being depreciated over a
seven-year life because the equipment was generally newer than that acquired in
other acquisitions.
For fiscal 1996, historical rental equipment depreciation of $3.4 million
for the Completed Acquisitions was reversed and $2.1 million of recomputed
depreciation expense was recorded, and historical rental equipment depreciation
expense of $342,000 for the Pending Acquisition was replaced by $192,000 of
recomputed depreciation expense. For the six-months ended July 31, 1997,
historical rental equipment depreciation expense of $631,000 for the Completed
Acquisitions was replaced by recomputed depreciation expense of $404,000, and
historical rental equipment depreciation expense of $174,000 for the Pending
Acquisition was replaced by recomputed depreciation expense of $96,000.
(2) Although the cost of goods sold for used rental equipment sales by the
acquired businesses was approximately 60% on a combined historical basis, for
purposes of the pro forma presentation, the cost of used rental equipment sales
was recalculated, as necessary, to equal approximately 93% of revenues from the
sale of used rental equipment, the Company's estimate of the cost of used rental
equipment sold for the year.
(3) For each acquisition, facility rentals were adjusted to rental rates
currently being paid by the Company.
(4) As necessary, salary and benefits paid to former owners of the acquired
businesses or members of their families were reduced or eliminated to reflect
employment arrangements entered into at the time of the acquisitions. For the
Completed Acquisitions, the adjustment reduced selling, general and
administrative expense by $1.2 million and $505,000 for fiscal 1996 and the six
months ended July 31, 1997, respectively. For the Pending Acquisition, the
adjustments for those periods were $364,000 and $297,000, respectively.
Additionally, Zodiac incurred $34,000 for accounting and legal services related
to its sale to the Company in 1996, which were eliminated. These adjustments
were partially offset by $740,000 of incremental infrastructure costs in 1996
and $50,000 in the six months for 1997.
(5) For each acquisition, the historical book values of the non-rental
depreciable assets acquired (approximately $1.7 million for the Completed
Acquisitions and $200,000 for the Pending Acquisition) were valued based upon
purchase accounting (approximately $30 million for the Completed Acquisitions
and $2.3 million for the Pending Acquisition). The tangible assets acquired
(approximately $800,000) were depreciated over periods ranging from five to ten
years. The intangible assets acquired were goodwill (approximately $28.5 million
for the Completed Acquisitions and $2.3 million for the Pending Acquisition) and
covenants not to compete (approximately $500,000). Goodwill is amortized over a
forty-year period and covenants not to compete are amortized over periods
ranging from two to five years.
For fiscal 1996, historical non-rental depreciation and amortization
expense of $562,000 for the Completed Acquisitions was reversed and $594,000 of
recomputed depreciation and amortization expense was recorded, and historical
non-rental depreciation and amortization expense of $76,000 for the Pending
Acquisition was replaced by $57,000 of recomputed depreciation and amortization
expense. For the six-month period ended July 31, 1997, historical non-rental
depreciation and amortization expense of $102,000 for the Completed Acquisitions
was replaced by recomputed depreciation and amortization expense of $87,000, and
historical non-rental depreciation and amortization expense of $38,000 for the
Pending Acquisition was replaced by recomputed depreciation and amortization
expense of $29,000.
F-8
<PAGE> 84
(6) For the A to Z acquisition, historical results were adjusted to
eliminate $548,000 in gains recognized on the distribution of assets to the
prior owner in conjunction with the acquisition. For U-Do-It, the historical
results included a $55,000 gain on the sale of assets to RentX which was
eliminated for pro forma purposes.
(7) For each Completed Acquisition and the Pending Acquisition, historical
debt balances (approximately $12.8 million) and historical interest expense
($959,000 for fiscal 1996 and $136,000 for the six-month period in 1997) were
eliminated. They were replaced by acquisition debt of approximately $37 million
and interest expense computed as if the acquisition debt had been outstanding
for all periods presented at an effective interest rate of 8%, which
approximates the rate paid on the Company's credit facility for the periods. For
fiscal 1996, the historical interest expense eliminated was $939,000 for the
Completed Acquisitions and $20,000 for the Pending Acquisition, and the
recomputed interest expense was $1.9 million for the Completed Acquisitions and
$320,000 for the Pending Acquisition. For the six-months ended July 31, 1997,
the historical interest expense eliminated was $121,000 for the Completed
Acquisitions and $15,000 for the Pending Acquisition, and the recomputed
interest expense was $372,000 for the Completed Acquisitions and $160,000 for
the Pending Acquisition.
(8) The Completed Acquisitions included companies that were S corporations
or partnerships for income tax purposes. Accordingly, the income or loss for
these entities was included in the income tax returns of their respective
owners, and no income tax expense was recorded at the entity level. Other
acquired businesses were taxable C Corporations, which recorded income tax
expense (benefit) at effective rates ranging from zero to 46%. In determining
pro forma effective income taxes, the Company eliminated historical income tax
expense (benefit) recorded at the entity level and recalculated income tax
expense based on the new basis in the acquired assets and the effect of the
non-deductibility of goodwill, if applicable, for income tax purposes.
(9) Assumes the sale of 3,750,000 shares of Common Stock in the offering at
an assumed initial public offering price of $9.00 per share, resulting in gross
proceeds of $33,750,000 less underwriting discount of $2,362,000. The Offering
Adjustments also reflect a $1.8 million charge to stockholders' equity for the
other offering expenses, including $840,000 of offering expenses previously
included in other assets, of which $750,000 are reflected as accrued expenses in
the historical balance sheet. In addition, the Offering Adjustments reflect the
application of $28.5 million of the offering proceeds to pay down the Company's
bank line of credit and $686,000 in proceeds to pay accrued Preferred Stock
dividends.
(10) Represents a reduction in interest expense and bank debt as a result
of utilizing a portion of the estimated net proceeds of the offering to reduce
the debt of the Company. For both periods, the debt reduction was assumed to
take place at the start of the period and interest on the amount of the debt
reduction was calculated at 8% per annum, which approximates the interest on the
Company's borrowings during the periods. Assuming an $8 per share initial public
offering price, the pro forma adjustment to interest expense would have been
approximately $2.0 million for fiscal 1996 and $1.0 million for the six months
ended July 31, 1997, resulting in pro forma as adjusted net income of
approximately $2.6 million or $0.28 per share for fiscal 1996 and $153,000 or
$0.02 per share for the six months ended July 31, 1997.
(11) Represents the conversion of the outstanding Preferred Stock to Common
Stock upon the occurrence of the offering.
(12) Historical and pro forma earnings per share were calculated by
assuming the conversion of the outstanding Preferred Stock of the Company into
Common Stock equivalents and the exercise of all stock options issued within one
year of the initial filing of the Registration Statement of which this
Prospectus is a part. The calculation utilizes the as-if converted method for
Preferred Stock and the treasury stock method for stock options. Pro forma as
adjusted earnings per share also assume the issuance of 3,750,000 shares of
Common Stock in this offering.
(13) As is its general practice, the Company will not assume any material
liabilities as part of the Pending Acquisition. The historical asset values were
eliminated and replaced by purchase accounting entries as discussed in footnotes
1 and 5.
F-9
<PAGE> 85
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
RentX Industries, Inc.
We have audited the accompanying balance sheet of RentX Industries, Inc.
(the "Company") as of January 31, 1997, and the related statements of
operations, stockholders' deficit, and cash flows for the period from May 15,
1996 (commencement of operations) through January 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at January 31,
1997, and the results of its operations and its cash flows for the period from
May 15, 1996 (commencement of operations) through January 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
August 29, 1997
F-10
<PAGE> 86
RENTX INDUSTRIES, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
STOCKHOLDERS'
JANUARY 31, JULY 31, EQUITY
1997 1997 JULY 31, 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash........................................................ $ 707,712 $ 2,670,887
Accounts receivable, net of allowance for doubtful accounts
of
$246,893 and $663,916..................................... 1,358,412 3,518,933
Prepaid expenses............................................ 399,800 312,269
Prepaid income taxes........................................ 380,400 386,230
Merchandise inventories..................................... 374,932 1,394,847
Rental equipment, net....................................... 9,086,540 27,261,094
Property and equipment, net................................. 1,146,217 2,093,051
Intangible assets, net...................................... 15,500,366 28,696,713
Other assets................................................ 128,186 1,655,543
----------- -----------
Total assets....................................... $29,082,565 $67,989,567
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Accounts payable............................................ $ 549,052 $ 3,338,889
Payroll and other accrued expenses.......................... 1,313,806 3,475,592
Accrued dividends........................................... 302,140 685,762
Accrued interest payable.................................... 89,480 130,573
Bank debt and other long-term obligations................... 16,443,288 40,798,032
Notes payable to related parties............................ 604,932 323,018
----------- -----------
Total liabilities........................................... 19,302,698 48,751,866
Commitments and contingencies (Note 7)
Redeemable preferred stock, cumulative, convertible, $1 par
value:
Series A preferred stock, 17,195 shares authorized, 9,950
and 17,195 shares issued and outstanding (entitled in
liquidation to $9,950,000 and $17,195,000) as of January
31, 1997 and
July 31, 1997, respectively; pro forma no shares issued
and outstanding......................................... 9,850,000 17,095,000 $ --
Series B preferred stock, 200 shares authorized, issued
and outstanding (entitled in liquidation to $200,000);
pro forma no shares issued and outstanding.............. 200,000 200,000 --
Series C preferred stock, 0 and 3,000 shares authorized,
issued and outstanding (entitled in liquidation to $0
and $3,000,000) as of January 31, 1997 and July 31,
1997, respectively; pro forma no shares issued and
outstanding............................................. -- 3,000,000 --
----------- ----------- -----------
Total redeemable preferred stock............................ 10,050,000 20,295,000 --
Stockholders' deficit:
Class A common stock, $.01 par value; 5,061,538 and
5,964,326 shares authorized, 1,000 shares issued and
outstanding............................................. 1 1 --
Class B common stock, $.01 par value; 192,308 and 242,308
shares authorized, none issued and outstanding.......... -- -- --
Common stock, $.01 par value; 19,000,000 shares
authorized; 5,722,018 shares issued and outstanding pro
forma................................................... -- -- 57,220
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding............ -- -- --
Paid-in capital........................................... 107,543 107,543 20,345,324
Accumulated deficit....................................... (377,677) (1,164,843) (1,164,843)
----------- ----------- -----------
Total stockholders' deficit (equity)........................ (270,133) (1,057,299) $19,237,701
----------- ----------- ===========
Total liabilities and stockholders' deficit........ $29,082,565 $67,989,567
=========== ===========
</TABLE>
See accompanying notes.
F-11
<PAGE> 87
RENTX INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM MAY 15, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH SIX MONTHS
-------------------------------- ENDED
JANUARY 31, 1997 JULY 31, 1996 JULY 31, 1997
---------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental revenue...................................... $ 9,221,035 $2,529,690 $ 13,598,456
Rental equipment sales.............................. 280,212 83,744 536,856
Merchandise sales................................... 1,337,117 387,762 1,933,337
----------- ---------- -------------
Total revenues.............................. 10,838,364 3,001,196 16,068,649
Cost of revenues:
Rental equipment expense............................ 1,284,902 230,949 1,633,675
Rental equipment depreciation....................... 436,250 127,492 1,175,538
Cost of rental equipment sales...................... 272,258 75,366 511,568
Cost of merchandise sales........................... 625,040 175,094 1,204,072
Direct operating expense............................ 4,863,825 1,159,131 6,763,689
----------- ---------- -------------
Total cost of revenues...................... 7,482,275 1,768,032 11,288,542
----------- ---------- -------------
Store contribution.................................... 3,356,089 1,233,164 4,780,107
Selling, general and administrative expense........... 2,351,023 655,982 3,504,061
Depreciation and amortization, excluding rental
equipment depreciation.............................. 293,364 79,091 421,748
----------- ---------- -------------
Operating income...................................... 711,702 498,091 854,298
Other income (expense), net........................... (4,117) 1,337 38,397
Interest expense, related parties..................... (28,102) (11,754) (6,581)
Interest expense, other............................... (755,020) (174,011) (1,289,658)
----------- ---------- -------------
Income (loss) before income taxes..................... (75,537) 313,663 (403,544)
Income taxes.......................................... -- -- --
----------- ---------- -------------
Net income (loss)..................................... (75,537) 313,663 (403,544)
Preferred stock dividends............................. (302,140) (70,625) (383,622)
----------- ---------- -------------
Net income (loss) attributable to common
stockholders........................................ $ (377,677) $ 243,038 $ (787,166)
=========== ========== =============
Net income (loss) per common share.................... $ (0.01) $ 0.05 $ (0.07)
=========== ========== =============
Common shares used in computing net income (loss) per
common share........................................ 5,811,808 5,811,808 5,811,808
=========== ========== =============
</TABLE>
See accompanying notes.
F-12
<PAGE> 88
RENTX INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- PAID-IN ACCUMULATED STOCKHOLDERS'
CLASS A CLASS B CAPITAL DEFICIT DEFICIT
------- ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of 1,000 Class A common shares
at inception........................... 1 -- -- -- 1
Issuance of compensatory stock options... -- -- 107,543 -- 107,543
Net loss................................. -- -- -- (75,537) (75,537)
Preferred stock dividends................ -- -- -- (302,140) (302,140)
---- ---- -------- ----------- -----------
Balance at January 31, 1997.............. 1 -- 107,543 (377,677) (270,133)
Net loss (unaudited)..................... -- -- -- (403,544) (403,544)
Preferred stock dividends (unaudited).... -- -- -- (383,622) (383,622)
---- ---- -------- ----------- -----------
Balance at July 31, 1997 (unaudited)..... $ 1 $ -- $107,543 $(1,164,843) $(1,057,299)
==== ==== ======== =========== ===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 89
RENTX INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM MAY 15, 1996
(COMMENCEMENT OF OPERATIONS)
THROUGH SIX MONTHS
-------------------------------- ENDED
JANUARY 31, 1997 JULY 31, 1996 JULY 31, 1997
---------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $ (75,537) $ 313,663 $ (403,544)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 729,614 207,583 1,623,495
(Gain) loss on sale/disposal of rental
equipment...................................... 19,753 (950) (25,288)
Provision for doubtful accounts................... 73,172 29,991 169,252
Issuance of compensatory stock options............ 85,193 29,038 --
Changes in operating assets and liabilities, net
of effect of business acquisitions:
Accounts receivable............................ (235,034) (469,888) (1,130,480)
Prepaid expenses............................... (224,800) (9,319) 87,531
Prepaid income taxes........................... (380,400) -- (5,830)
Other assets................................... (85,835) -- --
Merchandise inventories........................ (87,493) (71) 125,131
Accounts payable............................... 549,052 427,530 2,789,838
Payroll and other accrued expenses............. 1,298,438 666,083 1,212,976
----------- ------------ -------------
Net cash provided by operating activities........... 1,666,123 1,193,660 4,443,081
INVESTING ACTIVITIES
Acquisitions of rental operations, net of cash
acquired.......................................... (26,525,768) (18,755,878) (27,747,247)
Purchases of rental equipment and operating
equipment......................................... (1,468,766) (97,781) (7,911,660)
Purchases of fixed assets and other................. (342,309) (189,362) (1,675,685)
Proceeds from sale of rental equipment.............. 280,212 76,316 536,856
----------- ------------ -------------
Net cash used in investing activities............... (28,056,631) (18,966,705) (36,797,736)
FINANCING ACTIVITIES
Borrowings on bank debt............................. 17,552,288 10,658,629 27,557,591
Payments on bank debt............................... (1,109,000) -- (3,202,847)
Borrowings on notes payable......................... 1,161,726 844,925 --
Payments on notes payable........................... (556,794) (91,591) (281,914)
Proceeds from issuance of preferred stock, net of
issuance costs.................................... 10,050,000 7,107,000 10,245,000
----------- ------------ -------------
Net cash provided by financing activities........... 27,098,220 18,518,963 34,317,830
----------- ------------ -------------
Net increase in cash................................ 707,712 745,918 1,963,175
Cash at beginning of period......................... -- -- 707,712
----------- ------------ -------------
Cash at end of period............................... $ 707,712 $ 745,918 $ 2,670,887
=========== ============ =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................... $ 681,699 $ 26,201 $ 144,672
Income taxes paid................................... 380,400 -- 5,830
</TABLE>
See accompanying notes.
F-14
<PAGE> 90
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997 AND JULY 31, 1997
(INFORMATION SUBSEQUENT TO JANUARY 31, 1997
IS UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
RentX Industries, Inc. (the "Company"), a Delaware corporation, was formed
on March 7, 1996 and commenced operations on May 15, 1997. No significant
expenses were incurred by the Company from the date of formation until the date
of commencement of operations. The Company is primarily involved in
consolidating businesses that focus upon the short-term rental of small tools,
general purpose construction and special event equipment, and to a lesser
extent, selling complementary merchandise, parts, and new and used equipment. At
January 31, 1997, the Company operated 24 equipment rental stores located in
four states across the western region of the United States.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheet is presented
on an unclassified basis.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
REVENUE RECOGNITION
Rental revenue is recorded under the operating method. Rental revenue in
the statement of operations includes revenue earned on equipment rentals, fuel
sales, and rental equipment delivery fees. Revenue from the sale of rental
equipment, merchandise and new equipment is recorded at the time of delivery or
pickup by the customer.
ACCOUNTS RECEIVABLE
A significant portion of the Company's business is on a credit basis. The
Company extends credit to its commercial customers based on evaluations of
ability to pay and generally no collateral is required. These evaluations are
conducted at the store level. The Company has diversified its customer base by
operating rental locations in four states as of January 31, 1997. Subsequent to
period end, the Company furthered its diversification by acquiring businesses in
five additional states. The Company maintains reserves it believes adequate for
potential credit losses.
The activity in the Company's allowance for doubtful accounts is as
follows:
<TABLE>
<S> <C>
Balance at May 15, 1996 (Commencement of Operations)........ $ --
Bad Debt Expense............................................ 73,172
Allowance recorded related to acquired accounts
receivable................................................ 351,721
Accounts written-off........................................ (178,000)
---------
Balance at January 31, 1997................................. $ 246,893
=========
</TABLE>
F-15
<PAGE> 91
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
RENTAL EQUIPMENT, NET
Rental equipment purchased new by the Company is recorded at cost. Rental
equipment obtained through acquisition of a subsidiary is recorded at estimated
fair market value at the time of acquisition. Acquired rental equipment is
depreciated on a straight-line basis averaging six years to an estimated salvage
value of 22% of acquired cost. Purchased rental equipment is depreciated on a
straight-line basis over four to ten years to an estimated salvage value of
0%-30% of original cost. Accumulated depreciation on rental equipment at January
31, 1997 was $411,878.
Ordinary maintenance and repair costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales and cost
of rental equipment sales in the statement of operations.
INTANGIBLE ASSETS
Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated useful lives of five years for
covenants not to compete and 40 years for goodwill. The recoverability of
goodwill attributable to the Company's acquisitions is analyzed periodically
based on actual and projected levels of profitability and cash flows of the
businesses acquired on an undiscounted basis.
PROPERTY AND EQUIPMENT
Property and equipment purchased new by the Company is recorded at cost.
Property and equipment obtained through acquisition of a subsidiary is recorded
at estimated fair market value at the time of acquisition. Depreciation is
computed on a straight-line basis over the following estimated useful lives:
<TABLE>
<S> <C>
Vehicles, machinery and equipment........................... 10 years
Furniture and fixtures...................................... 10 years
Computer equipment.......................................... 5 years
</TABLE>
Ordinary maintenance and repair costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gains
or losses are included in results of operations.
MERCHANDISE INVENTORIES
Merchandise inventories consist principally of parts, commodity type
supplies and small- to medium-sized equipment for sale. All merchandise
inventories are valued at the lower of cost (first-in, first-out) or market.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, deferred taxes are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be realizable, more likely than not in future
periods.
F-16
<PAGE> 92
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DEBT COSTS
Deferred financing costs are amortized using the effective interest method
over the life of the related debt.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews its valuation for long-lived assets used
in operations when indicators of impairment are present. If the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying amount, the Company records impairment as required under generally
accepted accounting principles.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was
$144,850 for the period ended January 31, 1997.
CONCENTRATIONS OF CREDIT RISK
The Company's primary financial instrument that is potentially subject to
significant concentrations of credit risk is accounts receivable. The
concentration of credit risk is limited due to the large number of customers the
Company maintains and the Company's geographic dispersion.
EARNINGS PER COMMON SHARE
Pursuant to Securities and Exchange Commission Staff Accounting Bulletins
and Staff Policy, common equivalent shares issued during the 12-month period
prior to initial public offering at prices below the public offering price are
presumed to have been issued in contemplation of the public offering, even if
antidilutive, and have been included in the calculation as if these common
equivalent shares were outstanding for all periods presented (using the as-if
converted method for preferred stock and the treasury stock method for stock
options, and the estimated initial public offering price for the Company's
Common Stock).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the immediate or short-term maturity of these financial instruments.
The fair value of long-term debt is determined using current applicable interest
rates as of January 31, 1997 and approximates the carrying value of such debt
because the underlying instruments include provisions to adjust note balances
and interest rates to approximate fair value.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at July 31, 1997 and the statements of
operations, stockholders' deficiency and cash flows for the period from May 15,
1996 (Commencement of Operations) through July 31, 1996 and the six month period
ended July 31, 1997 are unaudited and have been prepared on the same basis as
the audited financial statements included herein. In the opinion of management,
such unaudited financial statements include all adjustments necessary to present
fairly the information set forth therein, which consist solely of normal
recurring adjustments. The results of operations for such interim periods are
not necessarily indicative of results for the full respective year.
F-17
<PAGE> 93
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS
A principal component of the Company's business strategy is to grow through
acquisitions which augment its present operations as well as enter into new
geographic markets. In keeping with this strategy, the Company has made several
acquisitions of rental operations. These acquisitions have been accounted for as
purchases and, accordingly, the acquired tangible and identifiable intangible
assets and liabilities have been recorded at their estimated fair values at the
dates of acquisition with any excess purchase price being reflected as goodwill
in the accompanying financial statements. The operations of the acquired
businesses are included in the statements of operations from the date of
acquisition.
The following table sets forth the net assets acquired, liabilities assumed
and cash purchase price for these acquisitions:
<TABLE>
<S> <C>
Assets acquired............................................. $10,887,032
Goodwill and covenants not to compete....................... 15,743,584
Less liabilities assumed.................................... (104,848)
-----------
Cash purchase price......................................... $26,525,768
===========
Number of acquisitions...................................... 5
</TABLE>
3. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
<TABLE>
<S> <C>
Vehicles, machinery and equipment........................... $1,086,482
Furniture and fixtures...................................... 70,041
Computer equipment.......................................... 39,840
----------
Total............................................. 1,196,363
Less accumulated depreciation............................... (50,146)
----------
$1,146,217
==========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<S> <C>
Covenants not to compete.................................... $ 530,790
Goodwill.................................................... 15,212,794
-----------
Total............................................. 15,743,584
Less accumulated amortization............................... (243,218)
-----------
$15,500,366
===========
</TABLE>
The Company has entered into noncompetition agreements with the former
owners of certain acquired businesses. The agreements are generally for terms of
five years and prohibit the former owners from competing with the Company in the
business of renting equipment in certain counties located in the area of the
acquired business.
F-18
<PAGE> 94
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. BANK DEBT AND LONG-TERM OBLIGATIONS
Bank debt and long-term obligations consist of the following:
<TABLE>
<S> <C>
Notes payable to related parties:
Note payable to former owners, interest payable monthly at
5.37%, due in
April 1998............................................. $ 379,722
Note payable to related party for covenant not to compete,
payable monthly, due January 31, 2002.................. 225,210
-----------
604,932
Bank debt and other long-term obligations:
Revolving line of credit, interest payable monthly at
LIBOR plus 2.5% (8.25% at January 31, 1997)............ 429,000
Term credit commitment, interest payable monthly at LIBOR
plus 2.5% (8.25% at January 31, 1997).................. 406,500
Term credit commitment, interest payable monthly at
domestic rate plus 2% (8.0% at January 31, 1997)....... 14,686,629
American Equipment Leasing, Draws 1 and 2, interest
payable monthly in arrears at 9.08%.................... 524,746
American Equipment Leasing, Draw 3, interest payable
monthly in arrears
at 9.67%............................................... 396,413
-----------
16,443,288
-----------
Total notes payable to related parties, bank debt and other
long-term obligations..................................... $17,048,220
===========
</TABLE>
The Company's agreement with the bank provides for a revolving line of
credit of $5,620,408 maturing no later than May 31, 1999 and term loans up to
$39,342,857 that mature on May 31, 1999. In no event shall the total credit
facility exceed $39,342,857. The revolving and term credit commitment agreements
include restrictions as to limitations upon certain ratios of funded debt to
contributed equity and minimum ratios of debt to pro forma cash flows. The
credit facility also includes limitations upon lease terms, the number of new
stores developed versus those acquired, and the amounts of other debt and lease
financing the Company may obtain. Substantially all rental equipment, property
and equipment, and notes and accounts receivable of the Company are pledged as
collateral for the bank line of credit, senior notes, and notes related to
purchases of certain businesses. The Company pays a commitment fee of 0.5% on
the unused portion of the outstanding credit facility calculated quarterly based
on the average daily balance.
As of April 30, 1997, the Company was in violation of a debt covenant under
the debt agreement with the bank. Compliance with the covenant is measured at
the Company's year end and at the end of each fiscal quarter. The bank waived
compliance with this covenant for the quarter ended April 30, 1997. In addition,
the credit agreement was amended and the affected covenant was changed for each
of the quarters July 31, 1997 through April 30, 1998. At the same time, the bank
increased the total credit facility to $39,342,000. Accordingly, the maturity of
the bank indebtedness is shown as being due in accordance with the terms of the
credit agreement in the maturities of debt table.
The Company's secured loan agreement with American Equipment Leasing Co.
("AEL") provides for a line of credit not to exceed $3,000,000. Monthly payments
of principal and interest are made on the current outstanding balance.
Termination of the line of credit occurs when the $3,000,000 limit is reached or
at December 28, 1997, whichever occurs first. At the termination date, the line
of credit becomes a term loan and principal and interest payments continue as
before. The debt is secured by
F-19
<PAGE> 95
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
rental equipment. The loan agreement provides reporting and insurance
requirements and disallows third party liens against secured equipment. As of
May 7, 1997, the line of credit was fully drawn and converted to a term loan as
described above.
The Company incurred interest expense of $28,102 on borrowings from related
parties for the period ended January 31, 1997.
Maturities of debt are as follows at January 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 601,032
1999........................................................ 15,787,829
2000........................................................ 287,262
2001........................................................ 297,508
2002........................................................ 74,589
Thereafter.................................................. --
-----------
$17,048,220
===========
</TABLE>
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
REDEEMABLE PREFERRED STOCK
The redeemable preferred stock is subject to redemption at the option of
the stockholder and can only occur in the event of default, as defined in the
Certificate, and is cumulative at a rate of 5% per annum (7% per annum during
the continuance of an Event of Default, as defined in the Certificate), computed
on a daily basis. The redeemable preferred stock is convertible at any time into
the number of fully paid and nonassessable shares of Class A common stock
determined by the class specific conversion rate. Holders of Series A preferred
stock shall be entitled to a number of votes equal to the respective number of
shares of Class A common stock that would have been issuable if converted on the
record date. Upon liquidation, the redeemable preferred stock carries a
liquidation preference of $1,000 per share, before any payment shall be made or
any assets distributed to the holders of common stock. After the payment or
distribution to the holders of redeemable preferred stock of the full
preferential amounts, the common stockholders are entitled to all remaining
assets of the Company to be distributed.
PROPOSED PUBLIC OFFERING OF COMMON STOCK
The Company's Board of Directors has authorized the Company to proceed with
an initial public offering of the Company's common stock. If the offering is
consummated, all of the currently outstanding preferred stock will automatically
convert into 5,721,018 shares of common stock. The unaudited pro forma
stockholders' equity at July 31, 1997 gives effect to the conversion of all
outstanding convertible preferred stock into 5,721,018 shares of common stock
upon the completion of the Company's initial public offering of shares.
COMMON STOCK
In the event of a public offering, as defined in the Certificate, all
shares of Class B common stock shall convert to Class A common stock on a
one-for-one basis. Holders of Class B common stock have no voting rights. The
unaudited pro forma stockholders' equity at July 31, 1997 also reflects the
conversion of the Company's Series A, Series B and Series C preferred stock and
Class A Common Stock, into a single class of Common Stock upon completion of an
initial public offering pursuant to the Company's Amended and Restated
Certificate of Incorporation dated June 25, 1997.
F-20
<PAGE> 96
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTION PLAN
In January, May and June 1997 the Company adopted the Nonqualified Stock
Option Plan -- January 1997, the Nonqualified Stock Option Plan -- May 1997 and
the Nonqualified Stock Option Plan -- June 1997 (the "Nonqualified Plans").
Under the Nonqualified Plans, a total of 53,099 shares of the Company's Class B
Common Stock were available for option grants to key employees and consultants
on such terms as the Board of Directors determined. Options to purchase 36,641
shares of Class B Common Stock available under the Nonqualified Plans were
granted as of January 31, 1997. All of the options granted under the
Nonqualified Plans become exercisable as to 20% of the shares covered thereby on
each of the first five anniversaries of the date of grant.
In September 1997, the Board adopted and the stockholders approved the
Stock Option Plan for Employees (the "Employee Plan"). An aggregate of 277,000
shares are available for grant under the Employee Plan. No options have yet been
granted under the Employee Plan, but upon the completion of the Company's
proposed initial public offering, the Company intends to grant options to
purchase a total of 193,400 shares with an exercise price equal to the offering
price.
In September 1997 the Board adopted and the stockholders approved the Stock
Option Plan for Non-Employee Directors (the "Directors Plan"). As defined in the
Directors Plan, a Non-Employee Director includes any director who is not an
employee of the Company (and is not an employee, member, officer, director,
manager or partner of certain organizations specified in the Directors Plan. A
total of 25,000 shares of Common Stock are available for grant under the
Directors Plan. Each Non-Employee Director automatically receives options to
purchase 5,000 shares of Common Stock upon election to the Board of Directors,
which are immediately exercisable as to 2,500 shares on the date of grant and
become exercisable as to an additional 500 shares on each of the first five
anniversaries of the date of grant. Thereafter, each Non-Employee Director
automatically receives an annual grant of options to purchase 2,500 shares of
Common Stock, which become exercisable as to 500 shares on each of the first
five anniversaries of the date of grant. The exercise price of all options
granted under the Directors Plan is equal to the fair market value of the Common
Stock on the date of grant and all options have a ten-year term. Upon a merger,
consolidation, sale of assets or stock or liquidation or dissolution of the
Company, outstanding options under the Directors Plan will or may be accelerated
or otherwise affected as described above for options granted under the Employee
Plan.
During the period ended January 31, 1997, the Company also granted options
to purchase the Company's nonvoting Class B common stock pursuant to executive
employment agreements. All stock options issued under the executive employment
agreements expire ten years from the date such options were granted. Of these
options, 57,693 vested upon grant and 97,516 will vest and become exercisable as
to 50 percent of the shares on January 31, 1999 and as to 25 percent of the
shares on each of January 31, 2000 and 2001. On May 19, 1997, the Company
granted an officer options to purchase 40,000 shares at $7.00 per share pursuant
to his executive employment agreement with these shares vesting 20% on each of
the first five anniversaries of the date of grant.
The Company has reserved shares of the Company's Common Stock equal to the
number of shares authorized pursuant to each of the above stock option plans and
executive compensation agreements.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation, requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of a portion of the
Company's employee stock options was less than the market price of
F-21
<PAGE> 97
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the underlying stock on the date of grant (assumed to be $1.61 during the period
ended January 31, 1997), compensation expense totaling $85,193 was recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123 under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.5%; a dividend yield of 0%; and a
weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
If Statement 123 had been adopted, for purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. The Company's pro-forma information for the period
ended January 31, 1997 is as follows:
<TABLE>
<S> <C>
Pro forma net loss.......................................... $(379,600)
Pro forma loss per share.................................... (0.01)
</TABLE>
The effects of applying Statement No. 123 during the period ended January
31, 1997 are not likely to be representative of the effect on pro forma net
income for future years because the vesting of options and additional option
grants will cause additional incremental expense to be recognized in future
periods.
A summary of the Company's stock option activity and related information
for the period ended January 31, 1997 follows:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTION PLAN
-----------------------------------------------
WEIGHTED AVERAGE
NUMBER WEIGHTED AVERAGE FAIR VALUE OF
OF SHARES EXERCISE PRICE OPTIONS GRANTED
--------- ---------------- ----------------
<S> <C> <C> <C>
Options outstanding at March 7, 1996......... --
Granted at $1.00 exercise price.............. 36,641
Granted at $0.15 exercise price.............. 38,462
Granted at $8.00 exercise price.............. 97,516
Granted at $0.10 exercise price.............. 19,231
-------
Options outstanding at January 31, 1997...... 191,850 $4.30 $ .62
=======
</TABLE>
F-22
<PAGE> 98
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of outstanding options, by year they become exercisable, follows:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTION PLAN
-----------------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
1997...................................................... 57,693 $0.13
1998...................................................... 7,328 1.00
1999...................................................... 56,087 7.09
2000...................................................... 31,707 6.38
2001...................................................... 31,707 6.38
2002...................................................... 7,328 1.00
-------
Options outstanding at January 31, 1997................... 191,850 4.30
=======
</TABLE>
Exercise price range of the options outstanding is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER WEIGHTED-AVERAGE REMAINING
OF SHARES EXERCISE PRICE CONTRACTUAL LIFE
- --------- ---------------- -----------------
<C> <C> <C>
19,231 $0.10 10 years
38,462 0.15 10 years
36,641 1.00 10 years
97,516 8.00 10 years
-------
191,850
</TABLE>
Exercise price range of the options exercisable is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER WEIGHTED-AVERAGE REMAINING
OF SHARES EXERCISE PRICE CONTRACTUAL LIFE
- --------- ---------------- -----------------
<C> <C> <C>
57,693 $0.13 10 years
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Future minimum rental commitments as of January 31, 1997 under
noncancelable operating leases are:
<TABLE>
<S> <C>
1998............................................. $1,397,694
1999............................................. 1,314,180
2000............................................. 757,963
2001............................................. 183,944
2002............................................. 132,138
Thereafter....................................... --
----------
$3,785,919
==========
</TABLE>
The Company leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $652,072 for the period ended January 31, 1997. Substantially all of
the Company's operating leases are with the prior owners of the businesses
acquired by the Company. In many instances, these individuals are now employees
of the Company. These leases require monthly payments aggregating approximately
$116,000.
F-23
<PAGE> 99
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LEGAL MATTERS
The Company is party to legal proceedings and potential claims arising in
the ordinary course of its business. In the opinion of management, the Company
has adequate legal defense, reserves or insurance coverage with respect to these
matters so that the ultimate resolution will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or lessee
of real estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in, or emanating from, such
property, as well as investigation of property damage. As part of the Company's
acquisition due diligence, the Company performs extensive environmental
analysis. The remediation has typically been the responsibility of the prior
owner and is addressed prior to closing.
8. RELATED PARTY TRANSACTIONS
In May 1996, the Company entered into a non-cancelable consulting agreement
(the "Consulting Agreement") with BACE Industries, LLC ("BACE"), which owns 100%
of the Company's Class A common stock and 2% of the Company's preferred stock.
Under the Management Agreement, BACE provided consulting services concerning
business planning, acquisitions, financing and other management matters to the
Company. The Company reimbursed BACE for any out-of-pocket costs incurred by
BACE in connection with such services. Additionally, the Company paid a fixed
consulting fee based on the Company's sales and a variable fee based on the
"Adjusted Income Exceeding the Minimum Hurdle" as defined by the Agreement, not
to exceed the amount of the fixed consulting fee. For the period ended January
31, 1997, no variable fee was earned under the Consulting Agreement, but the
Board of Directors approved a payment of $120,000 to BACE in lieu of the
variable fee. Total consulting fee expense, included in selling, general and
administrative expense, was $242,680 for the period ended January 31, 1997. As
of January 31, 1997, the consulting fee payable was $121,340. Subsequent to
year-end, the Consulting Agreement was amended to change the basis upon which
the variable fee is calculated from an income-based calculation to a calculation
based on the relationship between the trailing 12-month earnings of the
businesses acquired during the year and an acquisition target established by the
Board of Directors annually.
9. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan (the "Plan") covering all
full-time employees over the age of eighteen who have completed ninety days of
service. Employees may contribute up to 15% of their annual compensation,
limited to the maximum contribution allowable under Internal Revenue Service
guidelines. Employer contributions under the Plan are discretionary. There were
no employer contributions made during the period March 7, 1996 (date of
incorporation) through January 31, 1997.
10. INCOME TAXES
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company had no
significant temporary differences at January 31, 1997.
F-24
<PAGE> 100
RENTX INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
Subsequent to year end, the Company made additional business acquisitions.
As with the acquisitions which took place prior to year end, the following were
accounted for as purchase business combinations:
<TABLE>
<CAPTION>
NUMBER OF CASH
STORES DATE OF PURCHASE
NAME OF ENTITY ACQUIRED ACQUISITION PRICE
-------------- --------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Hays Rental and Sales.................... 5 February 14, 1997 $4,605
CVR, Inc................................. 6 March 14, 1997 4,585
Scotty Rents, Inc........................ 4 April 21, 1997 3,827
Newmanco, Inc............................ 5 May 22, 1997 3,686
Titus Rental Service Companies, Inc...... 7 June 26, 1997 5,186
AZ Rents It Fort Collins................. 1 July 17, 1997 2,091
A-1 Rent All of Tyler/Marshall........... 4 July 24, 1997 2,400
Mer-Cal Enterprises, Inc................. 1 July 31, 1997 1,030
</TABLE>
On July 15, 1997, the Company entered into a letter of intent to purchase
the Common Stock of Redi Rentals, Inc.
In an amendment to the Certificate of Incorporation dated June 24, 1997,
additional shares of stock were authorized by the Board of Directors. In
addition, a third series of preferred stock (Series C) was authorized. Series C
preferred stock has the same respective voting powers and preferences as Series
A and B preferred stock. The total authorized shares within each of the stock
classes are as follows:
<TABLE>
<CAPTION>
STOCK CLASS AUTHORIZED SHARES
----------- -----------------
<S> <C>
Class A common stock........................................ 5,964,326
Class B common stock........................................ 248,308
Series A preferred stock.................................... 17,195
Series B preferred stock.................................... 200
Series C preferred stock.................................... 3,000
</TABLE>
Additional draws on the Company's revolver and term loans were made
subsequent to year end to partially fund the above acquisitions and for general
operating expenses. Balances on the revolver and term loans at August 29, 1997
were $2,191,000 and $32,805,279, respectively.
F-25
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Zodiac Rentals
Denver, Colorado
We have audited the accompanying combined balance sheets of Zodiac Rentals
as of May 14, 1996 and December 31, 1995, and the related combined statements of
operations, stockholders' equity and cash flows for the period from January 1,
1996 to May 14, 1996, and the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the management of Zodiac Rentals.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Zodiac Rentals as
of May 14, 1996 and December 31, 1995, and the combined results of its
operations and cash flows for the period from January 1, 1996 to May 14, 1996
and the years ended December 31, 1995 and 1994, in accordance with generally
accepted accounting principles.
Pester & Company
Certified Public Accountants P.C.
Denver, Colorado
May 9, 1997, except for Note 6, as to which the date was May 15, 1997.
F-26
<PAGE> 102
ZODIAC RENTALS
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 14,
1995 1996
------------ ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 651,071 $ 201,680
Accounts receivable....................................... 717,072 573,177
Advances to shareholders.................................. 4,240 4,055
Inventory................................................. 163,582 155,869
Due from RentX............................................ -- 15,188
Payroll tax receivable.................................... 3,006 --
---------- ----------
Total Current Assets.............................. 1,538,971 949,969
---------- ----------
PROPERTY AND EQUIPMENT
Rental equipment and vehicles............................. 6,312,446 7,291,864
Furniture and fixtures.................................... 189,896 189,896
Leasehold improvements.................................... 44,775 47,650
---------- ----------
6,547,117 7,529,410
Less accumulated depreciation............................. 3,944,650 4,307,668
---------- ----------
Net Property and Equipment........................ 2,602,467 3,221,742
---------- ----------
OTHER ASSETS
Deposits.................................................. 1,332 1,332
Intangibles, less accumulated amortization................ 91,111 88,611
---------- ----------
Total Other Assets................................ 92,443 89,943
---------- ----------
TOTAL ASSETS...................................... $4,233,881 $4,261,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 162,693 $ 116,612
Accrued salaries, taxes and expenses...................... 186,639 181,592
Due to stockholders....................................... 5,030 1,859
Note payable, bank, current portion....................... 598,709 300,000
Long-term debt, current portion........................... 479,323 509,953
---------- ----------
Total Current Liabilities......................... 1,432,394 1,110,016
---------- ----------
LONG TERM DEBT
Note payable, bank, net of current portion................ 699,028 1,852,464
Long-term debt, net of current portion.................... 586,018 365,720
---------- ----------
TOTAL LIABILITIES........................................... 2,717,440 3,328,200
---------- ----------
STOCKHOLDERS' EQUITY
Common stock:
Zodiac Rentals, 49,000 shares of no par value
authorized, 1,724 shares issued and outstanding....... 600,276 600,276
Zodiac Three, Inc., 50,000 shares of no par value
authorized, 300 shares issued and outstanding......... 1,759 1,759
Retained earnings......................................... 914,406 331,419
---------- ----------
Total Stockholders' Equity........................ 1,516,441 933,454
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $4,233,881 $4,261,654
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 103
ZODIAC RENTALS
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
----------------------- TO
1994 1995 MAY 14, 1996
---------- ---------- ---------------
<S> <C> <C> <C>
Revenues:
Rental revenue....................................... $4,501,745 $6,215,264 $2,123,006
Merchandise sales.................................... 865,233 1,066,210 461,462
Other income......................................... 194,955 209,620 37,293
Rental equipment sales............................... 88,373 99,460 192,571
---------- ---------- ----------
Total revenues............................... 5,650,306 7,590,554 2,814,332
Cost of revenues:
Cost of rental equipment sales....................... 64,349 90,619 149,225
Rental equipment expense............................. 450,141 508,889 213,512
Rental equipment depreciation........................ 546,356 1,068,832 462,603
Cost of merchandise.................................. 628,806 461,997 203,192
Direct operating expense............................. 2,435,418 3,296,877 1,407,876
---------- ---------- ----------
Total cost of revenues....................... 4,125,070 5,427,214 2,436,408
Store contribution..................................... 1,525,236 2,163,340 377,924
Selling, general and administrative expense............ 1,093,918 1,486,200 554,360
Depreciation and amortization, excluding rental
equipment depreciation............................... 30,604 20,906 19,848
---------- ---------- ----------
Operating income (loss)................................ 400,714 656,234 (196,284)
Other expense, net
Interest expense..................................... 112,742 215,975 92,964
---------- ---------- ----------
Net income (loss)...................................... $ 287,972 $ 440,259 $ (289,248)
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 104
ZODIAC RENTALS
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ZODIAC RENTALS, INC. ZODIAC THREE, INC.
COMMON STOCK COMMON STOCK TOTAL
--------------------- ------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
-------- ---------- -------- -------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993...... 1,724 $600,276 300 $1,759 $ 564,682 $1,166,717
Net income........................ 287,972 287,972
Stockholder distributions......... (123,082) (123,082)
----- -------- --- ------ --------- ----------
Balance at December 31, 1994...... 1,724 600,276 300 1,759 729,572 1,331,607
Net income........................ 440,259 440,259
Stockholder distributions......... (255,425) (255,425)
----- -------- --- ------ --------- ----------
Balance at December 31, 1995...... 1,724 600,276 300 1,759 914,406 1,516,441
Net income........................ (289,248) (289,248)
Stockholder distributions......... (293,739) (293,739)
----- -------- --- ------ --------- ----------
Balance at May 14, 1996........... 1,724 $600,276 300 $1,759 $ 331,419 $ 933,454
===== ======== === ====== ========= ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 105
ZODIAC RENTALS
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
------------------------- TO
1994 1995 MAY 14, 1996
----------- ----------- ---------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................. $ 287,972 $ 440,259 $ (289,248)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization................... 576,960 1,089,738 482,451
(Increase) decrease in assets
Accounts receivable........................... (82,232) (178,481) 143,895
Inventory..................................... (20,344) (68,450) 7,713
Other current assets.......................... 116,858 9,301 3,006
Deposits...................................... -- 4,266 --
Net advances to (from) stockholders........... -- 8,907 (2,985)
Advance to related party...................... (29,400) 38,050 (15,188)
Increase (decrease) in liabilities
Accounts payable.............................. 156,973 17,459 (46,082)
Accrued expenses.............................. 35,925 54,303 (5,047)
----------- ----------- -----------
Total adjustments.......................... 754,740 975,093 567,763
Net cash provided by operating
activities............................... 1,042,712 1,415,352 278,515
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of intangibles............................ (100,000) -- --
Purchases of equipment............................. (1,536,088) (1,545,049) (1,099,225)
Net cash used by investing activities...... (1,636,088) (1,545,049) (1,099,225)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from bank and long-term debt.............. 1,684,991 1,322,626 1,050,000
Distributions to stockholders...................... (123,082) (255,425) (293,739)
Payments on note payable, bank..................... (216,621) (398,822) (195,273)
Payments on long-term debt......................... (421,261) (475,590) (189,669)
----------- ----------- -----------
Net cash provided by financing
activities............................... 924,027 192,789 371,319
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 330,651 63,092 (449,391)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD/YEAR........................................ 257,328 587,979 651,071
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD/YEAR........ $ 587,979 $ 651,071 $ 201,680
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 106
ZODIAC RENTALS
NOTES TO COMBINED FINANCIAL STATEMENTS
MAY 14, 1996
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Zodiac Rentals (the Companies) is a Colorado corporation whose principal
activities are short-term rentals of equipment and sales of related merchandise
to commercial and retail customers located in the Denver, Colorado metropolitan
area. Operations are conducted through the Companies' nine retail locations. A
significant portion of revenues is derived from rentals and sales to businesses
in the construction industry.
Summary of Significant Accounting Policies
a. Basis of Presentation. The combined financial statements consist of two
affiliated corporations under shared management and common ownership,
collectively referred to in these financial statements as the "Companies." The
corporations are Zodiac Rentals, Inc. and Zodiac Three, Inc.
Aurora Rentals, Inc. was incorporated on February 16, 1974. There are
49,000 shares of no par value common stock authorized with 1,724 shares issued
and outstanding as of May 14, 1996. As of January 1, 1995, Aurora Rentals, Inc.
changed its name to Zodiac Rentals, Inc.
Zodiac Three, Inc. was incorporated on January 1, 1990 with an outside
unrelated third party who owns one-third of the common stock. There are 50,000
shares of no par value common stock authorized with 300 shares issued and
outstanding as of May 14, 1996. Zodiac Three, Inc. operates one store located in
Parker, Colorado.
b. Year End. The Companies maintain a year ending on December 31 for
financial reporting and income tax purposes. As disclosed in Note 6, the
Companies sold all their assets to RentX Industries, Inc., effective May 15,
1996. Accordingly, the accompanying 1996 financial statements are presented for
the period from January 1, 1996 to May 14, 1996.
c. Combination of Entities under Common Control. As of January 1, 1995,
Zodiac Rentals, Inc. combined all the store locations except Zodiac Three, Inc.
into Zodiac Rentals, Inc. in a business combination accounted for as a
combination of entities under common control. The net assets of the entities
were transferred to Zodiac Rentals, Inc. at their historical cost basis and none
of the companies recognized a gain or loss, nor were any assets recognized at an
appreciated fair value.
d. Combining Policy. The accompanying combined financial statements include
the accounts of Zodiac Rentals, Inc. and Zodiac Three, Inc. All material
intercompany transactions and balances have been eliminated in the combination.
e. Cash and Cash Equivalents. Cash and cash equivalents include cash on
hand and cash in financial institutions with maturities of less than three
months. Balances on deposit with high-quality local banks exceed the amounts
insured by the Federal Deposit Insurance Corporation. Management does not
believe such uninsured amounts expose the Company to any material credit risk.
f. Accounts Receivable. Management believes that all accounts receivable as
of May 14, 1996 were fully collectible; therefore, no allowance for doubtful
accounts was recorded. The Companies rent equipment to its commercial customers,
the majority of which are in the construction business in Colorado. The
Companies perform ongoing credit evaluations of its customers and, generally,
require no collateral.
g. Inventories. Inventories consist primarily of parts, supplies and fuel
and are stated at the lower of cost or market on the FIFO (first in, first out)
basis.
F-31
<PAGE> 107
ZODIAC RENTALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
h. Property and Equipment. Property and equipment are stated at cost and
depreciated or amortized using the straight line method over their estimated
useful lives ranging from 5 to 10 years.
i. Advertising. Advertising costs are charged to expense as incurred. Such
expenses totaled $74,879 and $119,852 for the years ended December 31, 1994 and
1995, respectively, and $36,601 for the period ended May 14, 1996.
j. Revenue Recognition. Equipment rental revenue is recorded under the
operating method. Equipment rentals in the statements of income include revenue
earned on equipment rentals, fuel sales, and rental equipment delivery fees.
Revenue from the sale of parts, supplies and equipment is recorded at the time
of the delivery or pick-up by the customer.
k. Income Taxes. Zodiac Rentals, Inc. and Zodiac Three, Inc., with the
consent of their stockholders, have elected under the Internal Revenue Code to
be S corporations. In lieu of corporation income taxes, the stockholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for federal and state income taxes
has been included in these combined financial statements.
l. Intangible Assets. The Companies amortize a non-compete agreement and
goodwill acquired in the purchase of the Zodiac VII store. The intangible assets
are being amortized over the life of 15 years. Amortization expense for the
period ended May 14, 1996 was $2,500, $6,666 in 1995 and $2,222 in 1994.
m. Use of Estimates. Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities and the reported revenues and expenses. Actual results
could vary from the estimates that were assumed in preparing the financial
statements.
NOTE 2 -- NOTES PAYABLE, BANK
The Companies have consolidated notes payable with Bank One, Denver, NA
with the majority shareholders listed as co-makers. The notes have a balance
outstanding at May 14, 1996 of $2,152,464. The notes bear interest at prime plus
1% at May 14, 1996 (current rate of 9.5%). The notes mature on August 1, 1997
and are collateralized by a first lien security interest in all accounts
receivable, inventory, equipment, vehicles, and general intangibles. The
minority shareholder has also provided a limited guarantee in the amount of
$200,000. Payments are approximately $61,000 a month for principal and interest.
As of May 14, 1996, maturities of the notes payable, bank are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C> <C>
1997............................................................. $ 300,000
1998............................................................. 1,852,464
----------
Total.................................................. $2,152,464
==========
</TABLE>
Interest paid to the bank was $48,994 for the period ended May 14, 1996,
$113,610 in 1995 and $45,906 in 1994. The note payable, bank was paid off on May
15, 1996.
F-32
<PAGE> 108
ZODIAC RENTALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- LONG TERM DEBT
<TABLE>
<S> <C>
Long term debt consists of the following:
5.9% to 7% various notes payable to Case Power and Equipment
Company, payable in monthly installments of $2,015
principal and interest, collateralized by equipment, due
at various times through September, 1997.................. $ 20,217
7% to 9.6% various notes payable to Bank One Leasing,
payable in monthly installments of $7,716 principal and
interest, collateralized by equipment, due at various
times through February, 1997.............................. 77,799
11.3% to 11.8% notes payable to American Equipment Leasing,
payable in monthly installments of $16,680 principal and
interest, collateralized by equipment, due at various
times through May, 1998................................... 371,030
5.5% to 9.75% notes payable to Kubota Credit Corp, payable
in monthly installments of $9,010 principal and interest,
collateralized by equipment, due at various times through
July, 1997................................................ 77,973
12% note payable to Cathora Corporation, payable in monthly
installments of $9,341 principal and interest,
collateralized by the shareholders' real property, due
September, 1999........................................... 328,654
--------
Total long term debt.............................. 875,673
Less current portion.............................. 509,953
--------
Long Term Debt, net of current portion...................... $365,720
========
</TABLE>
Interest paid on long term debt, including notes that were paid off in
1996, was $43,970, $102,365 in 1995 and $66,837 in 1994.
As of May 14, 1996, maturities of long term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, AMOUNT
- ------------ --------
<S> <C> <C>
1996........................................................... $509,953
1997........................................................... 266,666
1998........................................................... 99,054
--------
Total..................................................... $875,673
========
</TABLE>
All the long-term debt was paid off on May 15, 1996.
NOTE 4 -- RELATED PARTY TRANSACTIONS AND LEASES
The Companies lease some of their operating facilities from a related party
partnership (D & E Enterprises) owned by the shareholders of Zodiac Rentals,
Inc.
F-33
<PAGE> 109
ZODIAC RENTALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1995, the Companies entered into leases with D & E
Enterprises for these facilities which expire December 31, 1999. The leases call
for minimum lease payments with adjustments for inflation in years 1996 through
1999. The future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1996........................................................ $ 234,870
1997........................................................ 375,792
1998........................................................ 375,792
1999........................................................ 375,792
----------
Total future minimum lease payments............... $1,362,246
==========
</TABLE>
Rent expense paid to the related party was $127,242 for the period ended
May 14, 1996, $310,774 in 1995 and $324,532 in 1994.
On January 1, 1995, the Companies opened two additional stores, one located
in Thornton, Colorado and one in Littleton, Colorado. The Companies entered into
a new lease for each location with unrelated third parties. The Thornton lease
is from January 1, 1995 to December 31, 1997 and calls for monthly lease
payments of $6,712. The Littleton store lease was from January 1, 1995 to April
16, 1996 and called for monthly lease payments of $7,266. This lease is
currently being renegotiated by the Company. This lease was extended on February
16, 1996 and expired on October 15, 1996. The future minimum lease payments for
these two stores is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- --------
<S> <C>
1996........................................................ $ 50,340
1997........................................................ 80,544
--------
Total future minimum lease payments............... $130,884
========
</TABLE>
Rent expense on these leases was $55,635 for the period ended May 14, 1996,
and $167,736 in 1995.
NOTE 5 -- INCENTIVE PAY POLICY
The Companies instituted a Team Incentive policy on January 1, 1995, based
on the overall profit of the combined entities on a monthly basis. The incentive
is calculated as 10% of the net profit plus depreciation. The incentive expense
was $32,915 for the period ended May 14, 1996 and $154,777 for the year ended
December 31, 1995.
NOTE 6 -- SUBSEQUENT EVENT
On May 15, 1996, the Companies sold all their assets to RentX Industries,
Inc., an unrelated third party. The terms of the agreement are that RentX
Industries, Inc. paid the Companies $12,263,757 in exchange for all the
inventory, accounts receivable, rental equipment and other assets of the
Companies. At the same time, the Companies used the proceeds from the sale to
pay off all their debt and liabilities. Of the sale price, $750,000 was put into
escrow to pay any unforeseen liabilities. The escrow money is scheduled to be
released to the shareholders on May 15, 1997.
F-34
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
Board of Directors
A to Z Rentals and Sales, Inc.
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of A to Z Rentals and Sales, Inc., for the period from
January 1, 1996 to May 28, 1996, and the years ended December 31, 1995 and 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of A to Z
Rentals and Sales, Inc., for the period from January 1, 1996 to May 28, 1996,
and the years ended December 31, 1995 and 1994, in accordance with generally
accepted accounting principles.
LEMASTER & DANIELS PLLC
Spokane, Washington
May 19, 1997
F-35
<PAGE> 111
A TO Z RENTALS AND SALES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1996
TO
YEARS ENDED MAY 28,
DECEMBER 31, 1996
----------------------- -----------
1994 1995
---------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income and sales.................................. $4,411,111 $4,171,595 $1,351,437
---------- ---------- ----------
COST OF REVENUES:
Rental equipment costs and expense....................... 951,115 638,114 254,845
Rental equipment depreciation............................ 192,095 156,640 43,010
Direct operating expense................................. 1,368,635 1,413,611 456,327
---------- ---------- ----------
Total cost of revenues........................... 2,511,845 2,208,365 754,182
---------- ---------- ----------
STORE CONTRIBUTION......................................... 1,899,266 1,963,230 597,255
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE............... 720,736 1,119,614 273,034
DEPRECIATION, excluding rental equipment depreciation...... 14,125 15,865 3,722
---------- ---------- ----------
INCOME FROM OPERATIONS..................................... 1,164,405 827,751 320,499
---------- ---------- ----------
OTHER INCOME:
Gain on distribution of investments and property......... - - 548,145
Interest and dividends................................... 56,400 78,447 4,094
---------- ---------- ----------
56,400 78,447 552,239
---------- ---------- ----------
INCOME BEFORE INCOME TAX................................... 1,220,805 906,198 872,738
FEDERAL INCOME TAX......................................... -- -- 35,000
---------- ---------- ----------
NET INCOME................................................. $1,220,805 $ 906,198 $ 837,738
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 112
A TO Z RENTALS AND SALES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 1, 1996 TO MAY 28, 1996 AND
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
UNREALIZED
COMMON RETAINED GAIN ON
STOCK EARNINGS INVESTMENTS
------- ----------- -----------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1993............................. $61,000 $ 1,967,864 $ 161,419
ADD (DEDUCT):
Net income for 1994................................... -- 1,220,805 --
Distributions......................................... -- (585,298) --
Unrealized loss on investments........................ -- -- (24,427)
------- ----------- ---------
BALANCES, DECEMBER 31, 1994............................. 61,000 2,603,371 136,992
ADD (DEDUCT):
Net income for 1995................................... -- 906,198 --
Distributions......................................... -- (1,379,957) --
Unrealized gain on investments........................ -- -- 164,569
------- ----------- ---------
BALANCES, DECEMBER 31, 1995............................. 61,000 2,129,612 301,561
ADD (DEDUCT):
Net income, period from January 1, 1996 to May 28,
1996............................................... -- 837,738 --
Distributions......................................... -- (2,681,245) --
Net decrease in unrealized gains on investments....... -- -- (301,561)
------- ----------- ---------
BALANCES, MAY 28, 1996.................................. $61,000 $ 286,105 $ --
======= =========== =========
</TABLE>
F-37
<PAGE> 113
A TO Z RENTALS AND SALES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
------------------------- JANUARY 1, 1996
1994 1995 TO MAY 28, 1996
---------- ----------- ---------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $1,220,805 $ 906,198 $ 837,738
---------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 206,224 172,506 46,732
Gain on sale/distribution of assets........... (3,916) (3,092) (548,145)
(Increase) decrease in assets:
Accounts receivable......................... (55,918) 88,886 (6,119)
Inventory................................... (1,031) (3,605) (304)
Prepaid expenses............................ -- -- (20,977)
Increase (decrease) in liabilities:
Accounts payable............................ (4,267) 8,968 14,456
Accrued expenses............................ (248,639) (11,854) 36,161
Accrued federal income tax.................. -- -- 35,000
---------- ----------- -----------
Total adjustments........................ (107,547) 251,809 (443,196)
---------- ----------- -----------
Net cash provided by operating
activities............................. 1,113,258 1,158,007 394,542
---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment........................... (208,930) (115,349) --
Proceeds from sales of equipment................. 17,001 3,092 --
Purchases of investments......................... (12,425) (6,289) --
Proceeds from sales of investments............... -- 174,558 --
---------- ----------- -----------
Net cash provided by (used in) investing
activities............................. (204,354) 56,012 --
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders.................... (585,298) (1,379,957) (1,694,439)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 323,606 (165,938) (1,299,897)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD/YEAR...................................... 1,143,829 1,467,435 1,301,497
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD/YEAR...... $1,467,435 $ 1,301,497 $ 1,600
========== =========== ===========
</TABLE>
F-38
<PAGE> 114
A TO Z RENTALS AND SALES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION:
A to Z Rentals and Sales, Inc. (the "Company") is a Washington corporation
whose principal activities are short-term rentals of equipment and sales of
related merchandise to businesses and individuals located in the Spokane,
Washington, area. Operations are conducted through the Company's four local
retail stores. A significant portion of revenues is derived from rentals and
sales to businesses in the construction industry.
Summary of Significant Accounting Policies:
a. Year end -- The Company maintains a year ending on December 31 for
financial reporting and income tax purposes. As discussed in note 6, the
Company was dissolved and merged into RentX Industries, Inc., effective May
29, 1996. Accordingly, the accompanying 1996 financial statements are
presented for the period from January 1, 1996 through May 28, 1996.
b. Cash and cash equivalents -- Cash and cash equivalents include cash
on hand, cash in financial institutions, and short-term cash investments
with original maturities of less than three months. Balances on deposit
with high-quality local banks often exceed the amounts insured by the
Federal Deposit Insurance Corporation. Management does not believe such
uninsured amounts expose the Company to any material credit risk.
c. Investment gains and losses -- Unrealized gains and losses on
investments available-for-sale (which are stated at quoted fair value) are
included as a separate component of stockholders' equity. Realized gains
and losses are reported in the statements of income.
d. Depreciation -- Depreciation (based on cost) is provided using
straight-line and accelerated methods over the assets' estimated useful
lives ranging from 5 to 15 years.
e. Advertising -- Advertising costs are charged to expense as
incurred. Such expenses totalled $9,642 in 1996, $47,350 in 1995, and
$50,550 in 1994.
f. Asset impairment -- Impairment losses on long-lived assets used in
operations are recognized when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. No such impairment losses were incurred
for the periods presented.
g. Revenue recognition -- Equipment rental revenue is recorded under
the operating method. Equipment rentals in the statements of income include
revenue earned on equipment rentals, fuel sales, and rental equipment
delivery fees. Revenue from the sale of parts, supplies, and equipment is
recorded at the time of delivery or pick-up by the customer.
h. Income tax -- Through May 15, 1996, the Company had elected to be
treated as an S corporation so the Company's income was taxable to the
stockholders individually. Accordingly, no provision for income tax was
applicable through that date. On May 15, 1996, the S corporation election
was voluntarily terminated, and the Company became a taxable entity
thereafter. The accompanying 1996 financial statements include a provision
for income tax for the period May 16 through 28, 1996, based on the
estimated taxable income earned for that period. There were no material
temporary differences at May 28, 1996, so deferred income tax has not been
provided.
i. Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from estimates.
F-39
<PAGE> 115
A TO Z RENTALS AND SALES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- DISTRIBUTIONS:
In 1996, the Company made various cash and noncash distributions to the
stockholders. Noncash distributions consisted of the Company's marketable equity
securities and certain property and equipment. Such distributions have been
reported in the accompanying financial statements based on the estimated fair
values of the assets distributed, with the resulting gains being reported in the
1996 statement of income. Following is a summary of the noncash assets
distributed:
<TABLE>
<CAPTION>
FINANCIAL
STATEMENT GAIN
BASIS RECOGNIZED
--------- ----------
<S> <C> <C>
Investments, at fair value...................... $533,301 $294,326
Property and equipment, at depreciated cost..... 199,685 253,819
-------- --------
Totals................................ $732,986 $548,145
======== ========
</TABLE>
NOTE 3 -- SUPPLEMENTARY CASH FLOWS DISCLOSURES:
Cash payments of interest and income tax:
The Company had no cash payments of interest or income tax for the periods
presented.
Noncash investing and financing activities:
In 1996, the Company distributed investments and certain property and
equipment to stockholders, as discussed in note 2.
NOTE 4 -- OPERATING LEASES:
Through May 28, 1996, the Company leased certain of its operating
facilities from stockholders and an unrelated party. Effective May 29, 1996 (see
note 5), new operating leases were executed with the now former stockholders.
The leases expire May 31, 1999, and the lessee has renewal options for up to
four additional consecutive three-year periods. Following are the future minimum
lease payments required under the leases in effect at May 29, 1996:
<TABLE>
<S> <C>
May 29, 1996 to December 31, 1996......................... $123,000
Calendar 1997............................................. 210,000
Calendar 1998............................................. 210,000
Calendar 1999............................................. 88,000
</TABLE>
Rent expense consisted of the following minimum rentals:
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1996
------------------- THROUGH
1994 1995 MAY 28, 1996
-------- -------- ---------------
<S> <C> <C> <C>
Related parties............................. $140,500 $184,860 $46,200
Unrelated party............................. 9,900 11,400 4,750
-------- -------- -------
Totals............................ $150,400 $196,260 $50,950
======== ======== =======
</TABLE>
NOTE 5 -- SUBSEQUENT EVENT:
Effective May 29, 1996, all of the Company's issued and outstanding common
stock was purchased by RentX Industries, Inc., a Delaware corporation. Also on
May 29, 1996, A to Z Rentals and Sales, Inc., was merged into RentX (and
continues to operate as a part of RentX), and its common stock was
F-40
<PAGE> 116
A TO Z RENTALS AND SALES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
cancelled. In connection with certain RentX financing, its assets were
subsequently pledged as collateral on such loans.
NOTE 6 -- RESTATEMENT:
The Company's financial statements for the years ended December 31, 1995
and 1994, were previously presented on the income tax basis of accounting, which
is a method of accounting other than generally accepted accounting principles.
The accompanying 1995 and 1994 financial statements have been restated to
reflect the presentation, principally for investments, in accordance with
generally accepted accounting principles. The restatement had no effect on
previously reported net income or retained earnings for 1995 and 1994. Income
tax did not apply to the restated items, as the Company was an S corporation
during such periods. Total assets and stockholders' equity were increased by
$301,561, $136,992, and $161,419 at December 31, 1995, 1994, and 1993,
respectively, to retroactively reflect the unrealized gains on investments at
those dates.
F-41
<PAGE> 117
REPORT OF INDEPENDENT AUDITORS
The Board of Directors of Rental Country U.S.A., Inc.,
Rifle Rentals, Inc., G.R.M. Company, Inc., and
Rocky Mountain Rentals, Inc. (dba E-Z Way Rentals)
We have audited the accompanying combined statements of income,
stockholders' equity, and cash flows of Rental Country U.S.A., Inc., Rifle
Rentals, Inc., G.R.M. Company, Inc., and Rocky Mountain Rentals, Inc. (dba E-Z
Way Rentals) (the "Company") for the years ended December 31, 1994 and 1995 and
the seven months ended July 31, 1996. These financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall combined financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined results of operations and cash flows of
the Company for the years ended December 31, 1994 and 1995 and the seven months
ended July 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Denver, Colorado
July 2, 1997
F-42
<PAGE> 118
RENTAL COUNTRY U.S.A., INC., RIFLE RENTALS, INC.,
G.R.M. COMPANY, INC., AND ROCKY MOUNTAIN RENTALS, INC.
(DBA E-Z WAY RENTALS)
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------- JULY 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental revenue........................................... $2,472,200 $2,538,903 $1,361,960
Rental equipment sales................................... -- 133,112 60,163
Merchandise sales........................................ 110,137 120,534 84,345
---------- ---------- ----------
Total revenues................................... 2,582,337 2,792,549 1,506,468
Cost of revenues:
Rental equipment expense................................. 434,445 495,255 209,847
Cost of rental equipment sales........................... -- 53,238 40,718
Rental equipment depreciation............................ 260,055 361,022 229,023
Direct operating expense................................. 425,810 457,459 256,284
---------- ---------- ----------
Total cost of revenues........................... 1,120,310 1,366,974 735,872
---------- ---------- ----------
Store contribution......................................... 1,462,027 1,425,575 770,596
Selling, general and administrative expense................ 917,509 840,849 547,070
Depreciation and amortization, excluding rental equipment
depreciation............................................. 33,710 37,942 22,033
---------- ---------- ----------
Operating income........................................... 510,808 546,784 201,493
Other income (expense)..................................... 9,946 25,674 (7,751)
---------- ---------- ----------
Income before income taxes................................. 520,754 572,458 193,742
Income tax expense......................................... 12,823 42,633 20,864
---------- ---------- ----------
Net income................................................. $ 507,931 $ 529,825 $ 172,878
========== ========== ==========
</TABLE>
See accompanying notes.
F-43
<PAGE> 119
RENTAL COUNTRY U.S.A., INC., RIFLE RENTALS, INC.,
G.R.M. COMPANY, INC., AND ROCKY MOUNTAIN RENTALS, INC.
(DBA E-Z WAY RENTALS)
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON RETAINED STOCKHOLDERS'
STOCK EARNINGS EQUITY
------- ---------- -------------
<S> <C> <C> <C>
Balance on December 31, 1993.......................... $97,586 $1,437,815 $1,535,401
Distributions to stockholders....................... -- (84,338) (84,338)
Net income.......................................... -- 507,931 507,931
------- ---------- ----------
Balance on December 31, 1994.......................... 97,586 1,861,408 1,958,994
Distributions to stockholders....................... -- (300,000) (300,000)
Net income.......................................... -- 529,825 529,825
------- ---------- ----------
Balance on December 31, 1995.......................... 97,586 2,091,233 2,188,819
Distributions to stockholders....................... -- (101,788) (101,788)
Net income.......................................... -- 172,878 172,878
------- ---------- ----------
Balance on July 31, 1996.............................. $97,586 $2,162,323 $2,259,909
======= ========== ==========
</TABLE>
See accompanying notes.
F-44
<PAGE> 120
RENTAL COUNTRY U.S.A., INC., RIFLE RENTALS, INC.,
G.R.M. COMPANY, INC., AND ROCKY MOUNTAIN RENTALS, INC.
(DBA E-Z WAY RENTALS)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ JULY 31,
1994 1995 1996
---------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 507,931 $ 529,825 $ 172,878
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 293,765 398,964 251,056
Changes in operating assets and liabilities:
Accounts receivable, net........................... (98,031) 18,726 (97,790)
Prepaid expenses................................... 9,083 (315) (7,206)
Other assets....................................... (25) 25 (22,232)
Merchandise inventories............................ -- (8,218) 7,992
Accounts payable and accrued expenses.............. 73,348 (36,779) (4,975)
Deferred tax liability............................. 960 10,093 4,634
--------- --------- ---------
Net cash provided by operating activities............... 787,031 912,321 304,357
INVESTING ACTIVITIES
Purchases of rental equipment and operating equipment... (287,210) (316,370) (15,123)
--------- --------- ---------
Net cash used in investing activities................... (287,210) (316,370) (15,123)
FINANCING ACTIVITIES
Payments on debt........................................ (228,811) (299,355) (242,446)
Distributions to stockholders........................... (84,338) (300,000) (101,788)
--------- --------- ---------
Net cash provided by financing activities............... (313,149) (599,355) (344,234)
--------- --------- ---------
Net increase (decrease) in cash......................... 186,672 (3,404) (55,000)
Cash and cash equivalents at beginning of period........ 321,796 508,468 505,064
--------- --------- ---------
Cash and cash equivalents at end of period.............. $ 508,468 $ 505,064 $ 450,064
========= ========= =========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during 1994, 1995 and 1996 for income taxes was $26,714, $0 and
$31,669, respectively.
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
The Company entered into debt obligations to purchase rental equipment in
the amounts of $299,500, $399,457 and $203,704 during 1994, 1995 and 1996,
respectively.
See accompanying notes.
F-45
<PAGE> 121
RENTAL COUNTRY U.S.A., INC., RIFLE RENTALS, INC.,
G.R.M. COMPANY, INC., AND ROCKY MOUNTAIN RENTALS, INC.
(DBA E-Z WAY RENTALS)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Rental Country U.S.A., Inc., Rifle Rentals, Inc., G.R.M. Company, Inc. and
Rocky Mountain Rentals, Inc. (dba E-Z Way Rentals) (collectively the "Company")
were formed between 1976 and 1980. The Company comprises four Colorado
corporations (Rental Country U.S.A., Inc., Rifle Rentals, Inc., G.R.M. Company,
Inc. and Rocky Mountain Rentals, Inc.), which have been combined due to common
ownership. All significant intercompany accounts and transactions have been
eliminated. The Company is primarily involved in the short-term rental of
construction related equipment and vehicles, and to a lesser extent special
event items, in the state of Colorado.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying combined balance sheets are
presented on an unclassified basis.
FINANCIAL STATEMENT PRESENTATION
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the combined
statements of income and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Equipment
rentals in the combined statements of income include revenue earned on equipment
rentals, fuel sales, and rental equipment delivery fees. Revenue from the sale
of parts, supplies, and equipment is recorded at the time of delivery or pickup
by the customer.
CREDIT POLICY
A portion of the Company's business is on a credit basis. The Company
extends credit to its commercial customers based on evaluations of their
financial condition and generally no collateral is required. The Company has
diversified its customer base by operating rental stores in five locations. The
Company maintains reserves it believes adequate for potential credit losses.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are determined based on the
difference between the combined financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be realizable.
F-46
<PAGE> 122
RENTAL COUNTRY U.S.A., INC., RIFLE RENTALS, INC.,
G.R.M. COMPANY, INC., AND ROCKY MOUNTAIN RENTALS, INC.
(DBA E-Z WAY RENTALS)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company's primary financial instrument that is potentially subject to
significant concentrations of credit risk is accounts receivable. The
concentration of credit risk is limited due to the large number of customers the
Company maintains.
2. RELATED PARTY TRANSACTIONS
The Company leases all of its facilities on a month-to-month basis from a
stockholder of the Company. The rental expense to related parties included in
the statements of income was $140,916, $143,774 and $89,782 for the years ended
December 31, 1994 and 1995 and the seven months ended July 31, 1996,
respectively.
3. INCOME TAXES
The Company consists of four corporations of which two are S corporations
(Rental Country U.S.A., Inc. and Rocky Mountain Rentals, Inc.) and two of which
are C corporations (Rifle Rentals, Inc. and G.R.M. Company, Inc.) for tax
purposes. The S corporations are not liable for federal or state taxes on
income. The earnings of the S corporations will be reported on the stockholders'
federal and state income tax returns.
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current.............................................. $11,863 $32,540 $16,230
Deferred............................................. 960 10,093 4,634
------- ------- -------
Total provision............................ $12,823 $42,633 $20,864
======= ======= =======
</TABLE>
The reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rates..................... $ 177,056 $ 194,636 $ 65,872
Earnings of S corporations...................... (164,464) (156,246) (49,635)
State taxes..................................... -- 3,954 4,138
Other........................................... 231 289 489
--------- --------- --------
$ 12,823 $ 42,633 $ 20,864
========= ========= ========
</TABLE>
4. SUBSEQUENT EVENTS
On August 2, 1996, the Company entered into an asset purchase agreement
with RentX Industries, Inc. and sold the net assets for three of the four
corporations to RentX Industries, Inc. On January 31, 1997, the Company sold the
net assets of the remaining entity, Rifle Rentals, Inc., to RentX Industries,
Inc.
F-47
<PAGE> 123
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Redwine Enterprises, Inc., fka U-Rent, Inc.
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of Redwine Enterprises, Inc. for the period from January
1, 1996 through October 31, 1996. These financial statements are the
responsibility of the Redwine Enterprises, Inc.'s management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Redwine
Enterprises, Inc. for the period from January 1, 1996 through October 31, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
July 18, 1997
F-48
<PAGE> 124
REDWINE ENTERPRISES, INC.
STATEMENT OF INCOME
PERIOD FROM JANUARY 1, 1996 THROUGH OCTOBER 31, 1996
<TABLE>
<S> <C>
Revenues:
Rental revenue............................................ $1,794,049
Gain on sales of rental equipment......................... 6,896
----------
Total revenues.................................... 1,800,945
----------
Cost of revenues:
Rental equipment expense.................................. 375,836
Rental equipment depreciation............................. 281,823
Cost of merchandise....................................... 66,442
----------
Total cost of revenues............................ 724,101
----------
Store contribution.......................................... 1,076,844
Selling, general and administrative expense................. 763,374
Depreciation, excluding rental equipment.................... 4,993
----------
Operating income............................................ 308,477
Loss on investments......................................... 12,992
Interest expense............................................ 119,075
----------
Income before income taxes.................................. 176,410
Income tax expense (Note 2)................................. 56,521
----------
Net income.................................................. $ 119,889
==========
</TABLE>
See accompanying notes.
F-49
<PAGE> 125
REDWINE ENTERPRISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 1, 1996 THROUGH OCTOBER 31, 1996
<TABLE>
<CAPTION>
TOTAL
CAPITAL PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996...................... $500 $192,496 $248,526 $441,522
Net income...................................... -- -- 119,889 119,889
---- -------- -------- --------
Balance at October 31, 1996..................... $500 $192,496 $368,415 $561,411
==== ======== ======== ========
</TABLE>
See accompanying notes.
F-50
<PAGE> 126
REDWINE ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1996 THROUGH OCTOBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 119,889
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 286,816
Gain on sale of fixed assets.............................. (6,896)
Loss on investments....................................... 12,992
Provision for doubtful accounts........................... 4,131
Changes in operating assets and liabilities
Accounts receivable.................................... (24,820)
Inventories............................................ (9,884)
Stockholder advance.................................... 3,194
Other assets........................................... (3,893)
Accounts payable and accrued expenses.................. 79,567
Income taxes payable................................... 56,526
---------
Net cash provided by operating activities................... 517,622
---------
INVESTING ACTIVITIES
Purchases of rental equipment............................... (913,737)
Proceeds from sales of rental equipment..................... 116,185
---------
Net cash used in investing activities....................... (797,552)
---------
FINANCING ACTIVITIES
Proceeds from notes payable................................. 688,032
Repayments of notes payable................................. (399,260)
---------
Net cash provided by financing activities................... 288,772
---------
Net increase in cash........................................ 8,842
Cash at beginning of period................................. 109,075
---------
Cash at end of period....................................... $ 117,917
=========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 101,701
Income taxes paid........................................... $ --
</TABLE>
See accompanying notes.
F-51
<PAGE> 127
REDWINE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Redwine Enterprises, Inc. (the "Company"), an Oklahoma corporation, was
formed on July 8, 1994. The Company owns and operates rental equipment stores
involved in the short-term rental of small tools, general purpose construction
and special event equipment, and to a lesser extent, selling complementary
merchandise, parts, and new and used equipment. At October 31, 1996, the Company
operated four equipment rental stores located in and around Oklahoma City.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Rental revenue is recorded under the operating method. Rental revenue in
the statement of operations includes revenue earned on equipment rentals, fuel
sales, and rental equipment delivery fees. Revenue from the sale of rental
equipment, merchandise and new equipment is recorded at the time of delivery or
pickup by the customer.
CREDIT POLICY
A significant portion of the Company's business is on a credit basis. The
Company extends credit to its commercial customers based on evaluations of
ability to pay and generally no collateral is required. These evaluations are
conducted at the store level.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be realizable in future periods.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was $35,548
for the period ended October 31, 1996.
CONCENTRATIONS OF CREDIT RISK
The Company's primary financial instrument that is potentially subject to
significant concentrations of credit risk is trade accounts receivable. The
concentration of credit risk is limited due to the large number of customers the
Company maintains.
F-52
<PAGE> 128
REDWINE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INCOME TAXES
Components of the provision for income taxes are as follows:
<TABLE>
<S> <C>
Current..................................................... $50,336
Deferred.................................................... 6,185
-------
$56,521
=======
</TABLE>
The reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense is:
<TABLE>
<S> <C>
Tax at U.S. statutory rates................................. $59,400
Other....................................................... (2,879)
-------
$56,521
=======
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
Future minimum rental commitments as of October 31, 1996 under
noncancelable operating leases are:
<TABLE>
<S> <C>
1996...................................................... $ 15,400
1997...................................................... 98,400
1998...................................................... 98,400
1999...................................................... 54,000
--------
$266,200
========
</TABLE>
The Company leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $57,750 for the period ended October 31, 1996.
The Company rents storefront and lot space facilities from a stockholder
under several rental agreements. The company paid rental fees of $29,750 for the
period ended October 31, 1996.
ENVIRONMENTAL MATTERS
The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or lessee
of real estate may be liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in, or emanating from, such
property, as well as investigation of property damage.
4. SUBSEQUENT EVENT
Subsequent to October 31, 1996, the Company signed an asset purchase
agreement with RentX Industries, Inc. to sell all the Company's assets,
excluding cash and cash equivalents and the note for the leasehold improvement,
for $2,396,676. In accordance with the agreement, all four stores will operate
as a part of RentX Industries, Inc. as of November 1, 1996.
Subsequent to October 31, 1996 and the sale of Redwine Enterprises, Inc. to
RentX Industries, Inc., all lease agreements for the lease of space were
transferred to RentX Industries, Inc.
F-53
<PAGE> 129
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of U-Do-It Rental Centers, Inc. and
The Partners of CAAR Partnership
Sandpoint, Idaho
We have audited the accompanying combined statements of income, statements
of changes in equity and statements of cash flows of U-Do-It Rental Centers,
Inc. and affiliate for the years ended December 31, 1994, 1995 and 1996. These
combined financial statements are the responsibility of the management of
U-Do-It Rental Centers, Inc. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the combined income statements, statements of
changes in equity and statements of cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined income statements, statements of
changes in equity and statements of cash flows. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the income statements, the
statements of changes in equity and statements of cash flows. We believe that
our audits of the statements of income, statements of changes in equity and
statements of cash flows provide a reasonable basis for our opinion.
In our opinion, the combined statements of income, statements of changes in
equity and statements of cash flows referred to above present fairly, in all
material respects, the results of the operations and cash flows of U-Do-It
Rental Centers, Inc. and affiliate for the years ended December 31, 1994, 1995
and 1996 in conformity with generally accepted accounting principles.
WILLIAMS & PARSONS, PA
Certified Public Accountants
Sandpoint, Idaho
June 26, 1997
F-54
<PAGE> 130
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
COMBINED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Rental revenue..................................... $ 850,962 $ 934,229 $1,000,119
Merchandise sales.................................. 65,619 98,840 130,746
Sales of rental equipment.......................... 110,420 73,403 84,645
Other revenue...................................... 3,482 7,606 12,866
---------- ---------- ----------
Total revenues............................. 1,030,483 1,114,078 1,228,376
---------- ---------- ----------
DIRECT COSTS OF REVENUE
Rental equipment expense........................... 157,584 144,414 227,971
Rental equipment depreciation...................... 196,995 167,107 126,421
Cost of merchandise sold........................... 44,929 78,235 101,969
Net book value of rental equipment sold............ 97,159 52,182 54,608
---------- ---------- ----------
Total direct cost of revenue............... 496,667 441,938 510,969
---------- ---------- ----------
Store contribution......................... 533,816 672,140 717,407
---------- ---------- ----------
Selling, general and administrative expenses......... 445,064 487,476 709,196
Depreciation and amortization (excluding rental
equipment)......................................... 27,897 21,368 12,286
---------- ---------- ----------
Operating income (loss).................... 60,855 163,296 (4,075)
---------- ---------- ----------
OTHER INCOME AND EXPENSE
Gain on sale of assets to RentX (note 2)........... -- -- 55,242
Interest expense, net of interest income........... (78,851) (81,386) (81,653)
---------- ---------- ----------
Total other income (expense)............... (78,851) (81,386) (26,411)
---------- ---------- ----------
Income (loss) before taxes................. (17,996) 81,910 (30,486)
---------- ---------- ----------
Income tax expense (benefit)....................... (7,917) 13,247 (14,087)
---------- ---------- ----------
Net income (loss).......................... $ (10,079) $ 68,663 $ (16,399)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this presentation.
F-55
<PAGE> 131
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN EQUITY
DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
PARTNERS' COMMON COMMON RETAINED
CAPITAL SHARES STOCK EARNINGS TOTAL
--------- ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
January 1, 1994........................... $ 19,908 5,000 $31,325 $ -- $ 51,233
Net income (loss) for the year ended
December 31, 1994....................... 20,536 (30,615) (10,079)
Partners' contribution.................... 10,000 10,000
-------- ------ ------- -------- --------
December 31, 1994....................... 50,444 5,000 31,325 (30,615) 51,154
-------- ------ ------- -------- --------
Net income for the year ended December 31,
1995.................................... 24,229 44,434 68,663
Distributions to partners................. (30,000) (30,000)
-------- ------ ------- -------- --------
December 31, 1995....................... 44,673 5,000 31,325 13,819 89,817
-------- ------ ------- -------- --------
Net income (loss) for the year ended
December 31, 1996....................... 19,690 (36,089) (16,399)
Distributions to partners................. (15,001) (15,001)
-------- ------ ------- -------- --------
December 31, 1996....................... $ 49,362 5,000 $31,325 $(22,270) $ 58,417
======== ====== ======= ======== ========
</TABLE>
F-56
<PAGE> 132
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ (10,079) $ 68,663 $ (16,399)
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization....................... 224,892 188,475 138,707
Amortization of loan fees included in interest...... 1,367 1,370 6,255
Gain on sale of rental and other fixed assets....... (13,261) (21,221) (85,279)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.......... (16,051) (34,782) (71,182)
Decrease (increase) in inventories.................. 2,019 (1,420) 8,130
Decrease (increase) in deferred taxes............... (8,313) 7,877 (10,463)
Decrease (increase) in other current assets......... (1,687)
Increase (decrease) in accounts payable and accrued
liabilities....................................... (24,194) 11,784 (9,435)
Increase (decrease) in pension payable.............. -- -- 56,989
Increase (decrease) in income tax payable........... 416 4,954 (5,370)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES......... 156,796 225,700 10,266
--------- --------- ---------
CASH FLOWS USED BY INVESTING ACTIVITIES:
Cash received on sale of assets........................ 61,648 73,399 572,618
Purchase of capital assets............................. (107,863) (87,611) (76,367)
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES..................................... (46,215) (14,212) 496,251
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed by partners of affiliate.............. 10,000
Cash distribution to partners of affiliate............. (30,000) (15,000)
Loans to related parties............................... (43,551) (6,192)
Issuance of note to related party...................... 85,000
Repayment of related party loans....................... 54,143
Issuance of long-term debt............................. 43,541 3,382 784
Repayment of long-term debt............................ (113,736) (160,555) (671,156)
Cash paid for financing fees and start-up costs........ (875) (270) (1,167)
--------- --------- ---------
NET CASH USED BY FINANCING ACTIVITIES............. (104,621) (193,635) (547,396)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH.......................... 5,960 17,853 (40,879)
CASH, BEGINNING OF PERIOD................................ 52,063 58,023 75,876
--------- --------- ---------
CASH, END OF PERIOD...................................... $ 58,023 $ 75,876 $ 34,997
========= ========= =========
</TABLE>
The accompanying notes are an integral part of this presentation.
F-57
<PAGE> 133
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NONCASH ITEMS
1994
The Company acquired rental equipment with a cost basis of $195,389, in
part through the trade in of assets with a net book value of $48,756 and through
the issuance of notes payable in the amount of $156,397.
The Company acquired rental equipment with a cost basis of $20,800, under a
capital lease obligation.
The Company acquired rental equipment with a cost basis of $24,006, in part
through the issuance of notes payable in the amount of $18,005.
1995
The Company satisfied a bank note payable in the amount of $12,433, through
the issuance of a note payable at a different bank.
The Company acquired operating equipment with a cost basis of $20,000,
through the issuance of a note payable.
1996
The Company acquired rental equipment with a cost basis of $38,593, under a
capital lease obligation.
The Company acquired rental and operating equipment with a cost basis of
$180,546, in part through the issuance of notes payable in the amount of
$156,397.
Notes receivable from related parties in the amount of $54,143, were
satisfied through employee payroll bonuses at year end.
The Company satisfied a bank note payable in the amount of $22,918, through
the issuance of a note payable at a different bank.
The Company acquired operating equipment with a cost basis of $53,480,
through the issuance of a note payable.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
OTHER DISCLOSURES
Cash paid for interest............................. $77,537 $81,178 $76,753
Cash paid for income tax........................... $ 20 $ 416 $ 1,725
</TABLE>
The accompanying notes are an integral part of this presentation.
F-58
<PAGE> 134
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
U-Do-It Rental Centers, Inc. (the Company) is engaged in the rental of
machinery, equipment and household items. The Company has two facilities; one in
the northern portion of Coeur d'Alene, Idaho and the other in Ponderay, Idaho
(approximately one mile north of Sandpoint, Idaho).
The Company was incorporated in the State of Idaho in January 1994. One
shareholder owns 100% of the outstanding stock.
Affiliated Entity
The sole stockholder of the Company is also a 50% owner and managing
partner of the CAAR Partnership (the Affiliate). The other partner in the
Affiliate is the son-in-law of the stockholder. The Partnership was formed in
July, 1993. The Company rents certain pieces of heavy equipment from CAAR and
re-rents the equipment to third party customers. The Company provides all lease
sales and support in return for 15% of the rent revenue. All maintenance and
repair on the Affiliate's assets is paid by the Affiliate.
Combined Affiliate
The combined financial statements include the accounts of U-Do-It Rental
Centers, Inc. and CAAR Partnership (the Affiliate). Material inter-company
transactions and balances have been eliminated.
Cash Equivalents
For the purposes of the statements of cash flows the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.
Revenue Recognition
Revenue is recognized as items are rented to the customer. On rentals of
greater than one month the customer is billed and revenue recognized monthly.
Inventory
Merchandise inventory is stated at the lower of cost or market, on a
first-in, first-out basis. Inventories consist principally of consumable items
and safety equipment associated with the equipment to be rented. Examples
include sandpaper, fuels, lubricants, paints, hard-hats and safety supplies.
Equipment
Depreciation expense is calculated using accelerated and straight-line
methods based on the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment.................................. 5-10 years
Trucks................................................... 5 years
</TABLE>
Expenditures for maintenance and repairs are charged to expense as
incurred. Renewals and betterments that materially extend the life of the asset
are capitalized. When property, plant and equipment are sold or retired, the
related cost and accumulated depreciation are removed from the accounts, and the
resulting gains or losses are reflected in operations.
F-59
<PAGE> 135
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for taxes in conformity with Financial Accounting
Standards Board Statement Number 109.
Income taxes are provided for the tax effect of transactions reported in
the financial statements and consist of taxes currently payable plus deferred
taxes related primarily to net operating losses carried forward for tax purposes
and differences between the tax and financial accounting basis of certain assets
and liabilities.
Use of Estimates
The preparation of financial statements in conformance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results can and probably will differ from those
estimates.
The most significant area of estimates in these financial statements
involves the issues of depreciation methods and depreciable lives of the rental
and operating equipment. The Company also made significant estimates when it
allocated the purchase price to the individual assets (mainly rental equipment),
following the acquisition of the business in 1993.
Concentrations of Credit Risk
Essentially all of the Company's sales (and hence accounts receivable) are
to customers in the Sandpoint and Coeur d'Alene, Idaho areas. The Company
requires no collateral from customers when granting credit terms. The Company
has not experienced significant losses from uncollectible accounts.
NOTE 2 -- SUBSEQUENT EVENTS
The Company sold substantially all of the assets (other than accounts
receivable) of the two rental locations and the Affiliate near the end of 1996,
to RentX Industries, Inc. The sale of the Coeur d'Alene location closed on
December 19, 1996. Total sale proceeds of $490,500 were received. Proceeds from
this sale were used in part to repay $489,313 of the Company's long-term debt.
The sale of the Sandpoint location closed January 8, 1997. Total proceeds
of $490,500 were received and a gain of approximately $283,000 will be
recognized in 1997. Proceeds from this sale were used to repay $249,195 of the
Company's long-term debt and capital lease obligations.
The assets of the Affiliate were acquired by RentX on the January 8, 1997
closing.
Subsequent to the sale the Company has been renamed and it has limited
assets, liabilities and operations. The Affiliate has been liquidated.
The sale of the assets of the Company was accompanied by the signing of
employment contracts, containing noncompetition agreements with each of the
shareholder's sons (who manage the two locations). A five year noncompetition
agreement with the shareholder was also signed. Compensation for the
noncompetition agreement will be five annual payments of $45,042.
NOTE 3 -- ECONOMIC DEPENDENCE
The overwhelming majority (approximately 70%) of the Company's sales and
accounts receivable are from customers engaged in the building and construction
industries. Approximately 9% of the Company's revenue is derived from customers
in the wood products industries.
F-60
<PAGE> 136
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No single customer makes up more than 10% of total sales. The Company's
largest 5 customers make up approximately 15% of total sales. It is the nature
of the Company's business that certain construction industry customers may do a
large volume of business with the Company as a result of one contract, and
therefore be a very large customer in one year. After that contract is complete,
the customer may then revert to a minor customer in subsequent periods.
NOTE 4 -- LEASE COMMITMENTS
The Company leased its locations under noncancelable operating leases.
Lease expense was based on a formula involving base rents and an escalation
factor that involved sales from each of the locations. Rent expense was $67,704,
$64,735, and $59,060 for the years ended December 31, 1996, 1995 and 1994
respectively. The leases were acquired by RentX, when RentX acquired the
business at the end of 1996. Accordingly, the Company has no lease commitments
for the locations subsequent to 1996.
The Company leased a truck under a noncancelable operating lease. Rent
expense was $3,755 for each of the years ended December 31, 1995 and 1994
respectively. The truck was acquired by the Company at the conclusion of the
lease term. Accordingly, the Company has no lease commitment for the truck
subsequent to 1995.
The Company leased certain equipment under noncancelable capital leases:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1996
------------ ------------
<S> <C> <C>
Cost of assets acquired under capital lease............... $ -- $38,593
Capital lease commitment amounts, net of interest at rates
from 3% to 18%.......................................... $5,286 $34,769
</TABLE>
The amortization related to assets acquired under capital lease is included
with depreciation in the financial statements.
The Company repaid its capital lease obligation at the time of the closing
of the sale of the Sandpoint location in January, 1997 (note 2).
NOTE 5 -- INCOME TAXES
For income tax reporting the Company has a net operating loss carry forward
of $49,000, which will expire in 2011. The Company also has (for state reporting
purposes only), investment tax credit carry forwards in the amount of $3,770
which will expire between 1999 and 2001. It is expected that the net operating
loss will be utilized and the investment tax credit recaptured as a result of
the sale to RentX (note 2).
The income tax provision at December 31, 1995 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax asset due to net operating loss carry
forward................................................. $ -- $10,681
Deferred tax asset due to increase in allowance........... 436 218
Deferred tax asset due to investment tax credit carry
forwards................................................ 7,155 3,770
Valuation allowance....................................... (7,155) (3,770)
------- -------
Deferred tax asset...................................... $ 436 $10,899
======= =======
</TABLE>
F-61
<PAGE> 137
U-DO-IT RENTAL CENTERS, INC. AND AFFILIATE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Affiliate (a partnership) is not a tax paying entity for the purpose of
federal and state income taxes; accordingly no provision for income taxes is
recorded in these combined statements related to the operations of the
Affiliate. The income from the Affiliate will be aggregated with the other
income and expense of the partners and will be reported on the partners'
individual income tax returns.
NOTE 6 -- DEFINED CONTRIBUTION PENSION PLANS
The Company adopted two defined contribution pension plans in 1996. The
Money Purchase Plan covers all employees meeting certain eligibility
requirements. The plan requires mandatory contributions of 3.5% of each covered
employee's annual salary in 1996 and in succeeding years, until such time as the
plan is revoked or modified. A contribution of $10,823 was accrued for the year
ended December 31, 1996.
The Profit Sharing Plan covers all employees meeting certain eligibility
requirements. The plan allows for discretionary contributions of up to 15% of
each covered employee's annual salary. A contribution of $46,166 was accrued for
the year ended December 31, 1996. Both plans allow for full and immediate
vesting.
NOTE 7 -- RELATED PARTY TRANSACTIONS
The shareholder loaned $85,000 to the Company in late December of 1996; the
loan was subsequently repaid on January 6, 1997.
The sole stockholder and his two sons each owed amounts to the Company. The
notes were satisfied during 1996 through the payment of bonuses to the
shareholder and his sons.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
As part of the sale of the business to RentX the Company is obliged to
arrange and pay for certain improvements to the wastewater systems at the two
locations and for certain remediation efforts related to underground fuel
storage tanks. The Company's commitment is limited to a maximum cost of $16,000.
As of the date of this report much of the work had already been performed and
the Company expects the cost of the items to be somewhat less than $16,000.
The agreement with RentX contains a variety of warranties and
representations, regarding a wide variety of operational and financial matters.
If at a later time these warranties and representations were found to be
breached or misrepresented, RentX would have a cause to proceed against the
Company and the stockholder for damages.
F-62
<PAGE> 138
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Hays Rental and Sales of El Dorado, Inc., Hays
Rental and Sales of Camden, Inc., Hays Rental and Sales of Magnolia, Inc., Hays
Rental and Sales of Hot Springs, Inc., Hays Rental and Sales of Arkadelphia,
Inc. and Hays Leasing Company, Inc.
We have audited the accompanying combined balance sheets of Hays Rental and
Sales of El Dorado, Inc., Hays Rental and Sales of Camden, Inc., Hays Rental and
Sales of Magnolia, Inc., Hays Rental and Sales of Hot Springs, Inc., Hays Rental
and Sales of Arkadelphia, Inc. and Hays Leasing Company, Inc. (dba Hays Rental
and Sales) (the "Company") as of October 31, 1996 and 1995, and the related
combined statements of income, stockholders' equity and cash flows for each of
the three years in the period ended October 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Company
at October 31, 1996 and 1995, and the combined results of its operations and its
cash flows for each of the three years in the period ended October 31, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
July 11, 1997
F-63
<PAGE> 139
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 31 JANUARY 31
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash................................................... $ 212,093 $ 172,956 $ 238,429
Accounts receivable, net of allowance for doubtful
accounts of $8,808 in 1995, $29,710 in 1996 and
$29,710 at January 31, 1997.......................... 284,783 307,538 239,002
Receivable from shareholder............................ 171,437 148,290 148,290
Merchandise inventories................................ 145,033 165,230 136,863
Rental equipment, net of accumulated depreciation of
$822,697 in 1995, $801,141 in 1996 and $846,875 at
January 31, 1997..................................... 1,145,291 1,245,352 1,259,051
Property and equipment, net of accumulated depreciation
of $382,630 in 1995, $274,423 in 1996 and $289,499 at
January 31, 1997..................................... 255,370 242,820 227,276
Prepaid expenses and other assets...................... 11,242 25,894 27,227
---------- ---------- ----------
Total assets................................. $2,225,249 $2,308,080 $2,276,138
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable....................................... $ 145,297 $ 86,801 $ 62,632
Accrued expenses....................................... 165,685 111,778 121,524
Deferred tax liability................................. 35,648 56,256 56,256
Notes payable.......................................... 1,139,456 1,260,081 1,271,991
Notes payable to related parties....................... 90,000 79,856 --
---------- ---------- ----------
Total liabilities............................ 1,576,086 1,594,772 1,512,403
Commitments and contingencies
Stockholders' equity:
Common stock, at stated value........................ 5,670 5,670 5,670
Paid-in capital...................................... 90,731 90,731 90,731
Retained earnings.................................... 552,762 616,907 667,334
---------- ---------- ----------
Total stockholders' equity................... 649,163 713,308 763,735
---------- ---------- ----------
Total liabilities and stockholders' equity... $2,225,249 $2,308,080 $2,276,138
========== ========== ==========
</TABLE>
See accompanying notes.
F-64
<PAGE> 140
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31
OCTOBER 31 OCTOBER 31 OCTOBER 31 -------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue............. $1,676,029 $1,936,860 $2,239,630 $ 488,497 $ 537,446
Merchandise and equipment
sales................... 714,619 738,543 854,253 207,878 210,120
Other revenue.............. 192,296 235,524 292,894 62,295 65,009
---------- ---------- ---------- ---------- ----------
Total revenues..... 2,582,944 2,910,927 3,386,777 758,670 812,575
Cost of revenues:
Rental equipment expense... 191,736 190,275 233,821 52,757 63,192
Cost of merchandise and
equipment sold.......... 526,726 518,559 650,690 151,259 157,590
Rental equipment
depreciation............ 180,988 175,511 165,183 42,002 45,734
Direct expenses............ 739,084 901,320 1,023,365 245,914 255,979
---------- ---------- ---------- ---------- ----------
Total cost of
revenues......... 1,638,534 1,785,665 2,073,059 491,932 522,495
Store contribution........... 944,410 1,125,262 1,313,718 266,738 290,080
Selling, general and
administrative expense..... 692,902 797,928 895,277 175,830 130,454
Non-rental depreciation and
amortization............... 87,189 163,677 190,758 45,502 43,251
---------- ---------- ---------- ---------- ----------
Operating income............. 164,319 163,657 227,683 45,406 116,375
Other income................. 2,747 16,814 8,566 -- --
Interest expense............. (84,599) (85,719) (113,272) (22,298) (21,229)
---------- ---------- ---------- ---------- ----------
Income before taxes.......... 82,467 94,752 122,977 23,108 95,146
Income tax expense........... 33,536 67,386 58,832 16,407 44,719
---------- ---------- ---------- ---------- ----------
Net income................... $ 48,931 $ 27,366 $ 64,145 $ 6,701 $ 50,427
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-65
<PAGE> 141
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- --------
<S> <C> <C> <C> <C>
Balance, October 31, 1993.......................... $5,670 $90,731 $476,465 $572,866
Net income......................................... -- -- 48,931 48,931
------ ------- -------- --------
Balance, October 31, 1994.......................... 5,670 90,731 525,396 621,797
Net income......................................... -- -- 27,366 27,366
------ ------- -------- --------
Balance, October 31, 1995.......................... 5,670 90,731 552,762 649,163
Net income......................................... -- -- 64,145 64,145
------ ------- -------- --------
Balance, October 31, 1996.......................... 5,670 90,731 616,907 713,308
Net income (unaudited)............................. -- -- 50,427 50,427
------ ------- -------- --------
Balance, January 31, 1997 (unaudited).............. $5,670 $90,731 $667,334 $763,735
====== ======= ======== ========
</TABLE>
See accompanying notes.
F-66
<PAGE> 142
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED YEAR ENDED YEAR ENDED JANUARY 31
OCTOBER 31 OCTOBER 31 OCTOBER 31 ---------------------------------------
1994 1995 1996 1996 1997
----------------- ----------------- ----------------- ------------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................. $ 48,931 $ 27,366 $ 64,145 $ 6,701 $ 50,427
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and
amortization........... 268,177 339,188 355,941 87,504 88,985
Changes in operating
assets and liabilities:
Accounts receivable....... (61,850) (25,265) 392 33,400 68,536
Merchandise inventories... (12,429) 3,983 (20,197) (1,111) 28,367
Prepaid expenses and other
assets................. 20,943 4,409 (14,652) -- (1,333)
Accounts payable and other
liabilities............ (5,468) 208,740 (91,795) (125,588) (14,423)
--------- --------- --------- --------- --------
Net cash provided by
operating
activities................ 258,304 558,421 293,834 906 220,559
INVESTING ACTIVITIES
Purchases of rental
equipment and operating
equipment................. -- (77,107) (23,810) (21,762) (87,140)
--------- --------- --------- --------- --------
Net cash used in investing
activities................ -- (77,107) (23,810) (21,762) (87,140)
FINANCING ACTIVITIES
Borrowings on note
payable................... 140,952 -- 358,607 -- --
Repayments on notes
payable................... (361,731) (437,522) (667,768) (28,413) (67,946)
--------- --------- --------- --------- --------
Net cash provided by (used
in) financing
activities................ (220,779) (437,522) (309,161) (28,413) (67,946)
Net increase (decrease) in
cash...................... 37,525 43,792 (39,137) (49,269) 65,473
Cash at beginning of
period.................... 130,776 168,301 212,093 212,093 172,956
--------- --------- --------- --------- --------
Cash at end of period....... $ 168,301 $ 212,093 $ 172,956 $ 162,824 $238,429
========= ========= ========= ========= ========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for:
Interest............... $ 84,599 $ 85,719 $ 113,272 $ 22,298 $ 21,229
Income taxes........... 19,842 51,832 19,862 -- --
</TABLE>
Supplemental schedule of noncash financing activities:
The Company entered into debt obligations to purchase rental equipment in
the amounts of $370,299, $360,241 and $419,642 during 1994, 1995 and 1996,
respectively and $225,000 for the three months ended January 31, 1997.
See accompanying notes.
F-67
<PAGE> 143
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(THE INFORMATION AS OF JANUARY 31, 1997 AND FOR THE THREE-MONTH PERIODS
ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Hays Rental and Sales of El Dorado, Inc., Hays Rental and Sales of Camden,
Inc., Hays Rental and Sales of Magnolia, Inc., Hays Rental and Sales of Hot
Springs, Inc., Hays Rental and Sales of Arkadelphia, Inc. and Hays Leasing
Company, Inc. (dba as Hays Rental and Sales) (the "Company") have been combined
in these financial statements due to common ownership. The Company is primarily
involved in the short-term rental of general purpose construction equipment, and
to a lesser extent, selling complementary parts, merchandise, new and used
equipment to commercial and residential construction, industrial and homeowner
customers.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying combined balance sheets are
presented on an unclassified basis.
The accompanying combined financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Equipment
rentals in the combined statements of operations include revenue earned on
equipment rentals, fuel sales, and rental equipment delivery fees. Revenues from
the sale of parts, supplies, and equipment are recorded at the time of delivery
or pick up by the customer.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment is depreciated on a
straight-line basis over the estimated useful lives of the assets. The estimated
useful lives for rental equipment range from 5 to 10 years.
Ordinary maintenance and repair costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts. Proceeds from the
disposal and the related net book value of the equipment are
F-68
<PAGE> 144
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
recognized in the period of disposal and reported as merchandise and rental
equipment sales and cost of merchandise and rental equipment sold in the
statements of income.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, estimating no
salvage value.
The estimated useful lives for property and equipment range from 3 to 5
years for vehicles, 5 to 7 years for furniture, fixtures and computer equipment,
and 15 to 27 years for buildings.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gains
or losses are included in results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheets for cash,
accounts receivable, accounts payable and accrued liabilities and notes payable
approximate the fair value because of the short-term maturity of these financial
instruments.
INVENTORIES
Inventory consists of merchandise for sale at the store locations. Parts
and supplies inventories for repairing and maintaining rental equipment are
expensed as incurred. All inventories are valued at the lower of cost (first-in,
first-out) or market.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are determined based on the
difference between the combined financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be realizable.
CONCENTRATIONS OF CREDIT RISK
The Company's primary financial instrument that is potentially subject to
significant concentrations of credit risk is accounts receivable. The
concentration of credit risk is limited due to the large number of customers the
Company maintains.
ADVERTISING COSTS
The Company advertises primarily through the media. Advertising costs are
expensed as incurred. The Company incurred $62,448, $55,578 and $71,552 in
advertising costs during the years ending October 31, 1994, 1995 and 1996,
respectively.
F-69
<PAGE> 145
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at January 31, 1997 and the statements of
operations, stockholder's equity and cash flows for the three-month periods
ended January 31, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
2. NOTES PAYABLE
Bank debt and long-term obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 31
1995 1996
---------- ----------
<S> <C> <C>
Notes payable secured by rental equipment:
Notes payable to First Financial with interest rates
ranging from 7.5% to 9.75%, due in monthly payments
through dates ranging from March 1997 to October
2001................................................... $ 507,420 $ 561,197
8.5% notes payable to Horizon, due in monthly payments
through August 2000.................................... -- 85,906
7.5% notes payable to Merchant and Planters, paid off
during fiscal year 1996................................ 113,991 --
Notes payable to First Bank of Arkansas with interest
rates ranging from 8.0% to 10.25%, due in monthly
payments through dates ranging from May 1997 to July
1999................................................... 46,531 59,168
Notes payable to Clark Credit, interest at 10.25%, due in
monthly payments through April 1998.................... 11,567 6,487
Notes payable to Arkansas Bank and Trust with interest
rates ranging from 8.5% to 10.25%, due in monthly
payments through dates ranging from July 1997 to June
2000................................................... 13,444 34,459
Notes payable to Ingersoll Rand with interest rates
ranging from 8% to 10%, due in monthly payments through
dates ranging from January 1997 to June 1999........... 60,820 70,088
Notes payable to Kubota with interest rates ranging from
6.0% to 8.0%, due in monthly payments through dates
ranging from April 1997 to November 1999............... 141,410 154,931
Notes payable to Case Credit with interest rates ranging
from 4.9% to 8.9%, due in monthly payments through
dates ranging from June 1999 to May 2000............... -- 78,697
Notes payable to GMAC, interest at 8%, paid off during
fiscal
year 1996.............................................. 11,903 --
Notes payable to Contractors Finance, interest at 7.5%,
due in monthly payments through August 1997............ 22,251 10,675
Notes payable to First Financial with interest at 8.25%
due in monthly payments through June 2007.............. 171,437 148,290
</TABLE>
F-70
<PAGE> 146
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31 OCTOBER 31
1995 1996
---------- ----------
<S> <C> <C>
Notes payable to Chase Manhattan with interest rates
ranging from 8.3% to 8.5%, due in monthly payments
through dates ranging from October 1998 to June 2001... $ 38,682 $ 50,183
---------- ----------
1,139,456 1,260,081
Notes payable to related parties:
Note payable to Mary Clogston with interest at 9%, due in
monthly payments through January 2002.................. 50,000 39,856
Note payable to Vivian Hays with interest at 9%, due in
monthly payments through January 2003.................. 40,000 40,000
---------- ----------
90,000 79,856
---------- ----------
$1,229,456 $1,339,937
========== ==========
</TABLE>
The Company incurred interest expense of $84,599, $85,719 and $113,272 on
borrowings for the years ended October 31, 1994, 1995 and 1996, respectively.
Interest paid approximated interest expensed.
3. CAPITAL STOCK
Common stock of the Company combines the six corporations Hays Rental and
Sales of El Dorado, Inc., Hays Rental and Sales of Camden, Inc., Hays Rental and
Sales of Magnolia, Inc., Hays Rental and Sales of Hot Springs, Inc., Hays Rental
and Sales of Arkadelphia, Inc. and Hays Leasing Company, Inc. and has 37, 760,
310, 300, 300 and 300 shares issued and outstanding, respectively, and 100,
1,000, 100,000, 100,000, 100,000 and 300 shares authorized, respectively, at
October 31, 1996.
4. INCOME TAXES
The Company consists of six corporations of which two are S corporations
and four are C corporations for tax purposes. The S corporations are not liable
for federal or state taxes on income. The earnings of the S corporations will be
reported on the stockholders' federal and state income tax returns.
Significant components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax liability:
Depreciation................................................ $20,738 $32,011
Other....................................................... 14,910 24,245
------- -------
Total deferred tax liability................................ 35,648 56,256
------- -------
Net deferred tax liability.................................. $35,648 $56,256
======= =======
</TABLE>
F-71
<PAGE> 147
HAYS RENTAL AND SALES OF EL DORADO, INC., HAYS RENTAL AND SALES OF
CAMDEN, INC., HAYS RENTAL AND SALES OF MAGNOLIA, INC., HAYS RENTAL AND
SALES OF HOT SPRINGS, INC., HAYS RENTAL AND SALES OF ARKADELPHIA, INC. AND
HAYS LEASING COMPANY, INC. (DBA HAYS RENTAL AND SALES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current............................................... $18,416 $46,858 $38,224
Deferred.............................................. 15,120 20,528 20,608
------- ------- -------
Total provision............................. $33,536 $67,386 $58,832
======= ======= =======
</TABLE>
The reconciliation of income tax attributable to operations computed at the
statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rates........................... $30,246 $60,957 $49,821
State taxes........................................... 3,112 5,653 8,102
Other................................................. 178 776 909
------- ------- -------
$33,536 $67,386 $58,832
======= ======= =======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
BUILDING LEASE WITH RELATED PARTY
The Company leases buildings from the Company's president for monthly
rentals of $10,879 under operating leases expiring in 1998.
Future minimum lease payments required under the building leases are as
follows: 1997 -- $130,550; 1998 -- $130,550. Total rent expense was $106,200,
$121,200 and $130,550 for the years ended October 31, 1994, 1995 and 1996,
respectively.
6. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) retirement plan (the
"Plan") which is subject to the provisions of ERISA. Under the Plan, which was
implemented in January 1994, employees qualify after one year of service. The
Company matches on a discretionary basis as determined by the Board of
Directors. Company contributions to the plan were $5,819, $19,231 and $4,237 for
each of the years ended October 31, 1994, 1995 and 1996, respectively.
7. SUBSEQUENT EVENT
On February 14, 1997 the Company entered into an asset purchase agreement
with RentX Industries, Inc. and sold its net assets for $4.5 million.
F-72
<PAGE> 148
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
CVR, Inc. (formerly Central Virginia Rental Company)
We have audited the accompanying balance sheets of CVR, Inc., formerly
Central Virginia Rental Company (the "Company") as of December 31, 1995 and
1996, and the related statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of CVR, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 31,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
May 28, 1997
F-73
<PAGE> 149
CVR, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash........................................................ $ 2,925 $ --
Accounts receivable, net of allowance for doubtful accounts
of $92,820 and $125,679 at December 31, 1995 and 1996,
respectively.............................................. 320,737 356,254
Prepaid expenses............................................ 350 5,834
Merchandise inventories..................................... 97,904 161,803
Rental equipment, net of accumulated depreciation of
$3,219,817 and $3,975,118 at December 31, 1995 and 1996,
respectively.............................................. 1,501,051 2,351,634
Furniture, fixtures and computer equipment, net of
accumulated depreciation of $216,334 and $246,631 at
December 31, 1995 and 1996, respectively.................. 134,644 166,765
Other assets................................................ 2,325 4,371
---------- ----------
Total assets...................................... $2,059,936 $3,046,661
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 271,619 $ 160,047
Payroll and other accrued expenses.......................... 32,957 73,545
Bank debt and other notes payable........................... 383,753 802,876
Capital lease obligations................................... 563,772 850,912
Deferred tax liability...................................... 117,650 224,043
---------- ----------
Total liabilities................................. 1,369,751 2,111,423
Stockholders' equity:
Common stock, $10 par value, 5,000 shares authorized,
1,200 shares issued and outstanding.................... 12,000 12,000
Additional paid-in capital................................ 30,289 30,289
Retained earnings......................................... 647,896 892,949
---------- ----------
Total stockholders' equity........................ 690,185 935,238
---------- ----------
Total liabilities and stockholders' equity........ $2,059,936 $3,046,661
========== ==========
</TABLE>
See accompanying notes.
F-74
<PAGE> 150
CVR, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental revenue....................................... $3,199,756 $3,830,181 $4,722,087
Merchandise and rental equipment sales............... 396,119 491,446 532,135
Labor, commissions and other......................... 335,019 377,831 402,592
---------- ---------- ----------
Total revenues............................... 3,930,894 4,699,458 5,656,814
Cost of revenues:
Rental equipment expense............................. 644,121 686,723 610,044
Rental equipment depreciation........................ 371,633 496,433 755,367
Cost of merchandise and rental equipment sales....... 240,403 385,288 410,874
Direct operating expense............................. 2,038,861 2,362,043 2,691,173
---------- ---------- ----------
Total cost of revenues....................... 3,295,018 3,930,487 4,467,458
---------- ---------- ----------
Store contribution..................................... 635,876 768,971 1,189,356
Selling, general and administrative expense............ 312,271 386,962 557,008
Depreciation and amortization, excluding rental
equipment depreciation............................... 27,350 30,077 30,231
---------- ---------- ----------
Operating income....................................... 296,255 351,932 602,117
Interest expense....................................... 68,306 136,218 171,975
---------- ---------- ----------
Income before income taxes............................. 227,949 215,714 430,142
Income tax expense..................................... 46,027 63,272 185,089
---------- ---------- ----------
Net income............................................. $ 181,922 $ 152,442 $ 245,053
========== ========== ==========
</TABLE>
See accompanying notes.
F-75
<PAGE> 151
CVR, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance on December 31, 1993.......... 1,200 $12,000 $30,289 $313,532 $355,821
Net income............................ -- -- -- 181,922 181,922
----- ------- ------- -------- --------
Balance on December 31, 1994.......... 1,200 12,000 30,289 495,454 537,743
Net income............................ -- -- -- 152,442 152,442
----- ------- ------- -------- --------
Balance on December 31, 1995.......... 1,200 12,000 30,289 647,896 690,185
Net income............................ -- -- -- 245,053 245,053
----- ------- ------- -------- --------
Balance on December 31, 1996.......... 1,200 $12,000 $30,289 $892,949 $935,238
===== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-76
<PAGE> 152
CVR, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 181,922 $ 152,442 $ 245,053
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 398,983 526,510 785,598
Deferred taxes.......................................... 38,860 39,352 106,393
Changes in operating assets and liabilities:
Accounts receivable.................................. (51,855) (55,218) (35,517)
Prepaid expenses and other assets.................... 12,779 3,376 (7,530)
Merchandise inventories.............................. (93,876) 26,795 (63,899)
Accounts payable..................................... (8,665) 191,855 (111,572)
Payroll and other accrued expenses................... 2,407 16,188 40,588
--------- --------- ----------
Net cash provided by operating activities................. 480,555 901,300 959,114
INVESTING ACTIVITIES
Net purchases of furniture, fixtures and computer
equipment............................................... (97,736) (17,674) (62,418)
Purchases of rental equipment............................. (230,837) (595,775) (792,545)
--------- --------- ----------
Net cash used by investing activities..................... (328,573) (613,449) (854,963)
FINANCING ACTIVITIES
Borrowings on debt........................................ 436,800 480,714 1,025,670
Payments on debt.......................................... (382,443) (419,789) (606,547)
Payments on capital lease obligations..................... (206,339) (345,851) (526,199)
--------- --------- ----------
Net cash used by financing activities..................... (151,982) (284,926) (107,076)
--------- --------- ----------
Net increase (decrease) in cash........................... -- 2,925 (2,925)
Cash at beginning of year................................. -- -- 2,925
--------- --------- ----------
Cash at end of year....................................... $ -- $ 2,925 $ --
========= ========= ==========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Company incurred capital lease obligations of $718,621, $397,341 and
$813,339 in 1994, 1995, and 1996, respectively, to acquire rental equipment.
The Company paid income taxes of $4,739, $12,052 and $51,047 for the years
ended December 31, 1994, 1995 and 1996, respectively.
See accompanying notes.
F-77
<PAGE> 153
CVR, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
CVR, Inc., formerly known as Central Virginia Rental Company (the
"Company"), is a Virginia corporation formed in February 1974. The Company is
primarily involved in the short-term rental of equipment, vehicles and special
event items in the state of Virginia. At December 31, 1996, the Company operated
through seven store locations in the state of Virginia.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are presented
on an unclassified basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Equipment
rentals in the statements of income include revenue earned on equipment rentals,
fuel sales, and rental equipment delivery fees. Revenues from the sale of parts,
supplies, and equipment are recorded at the time of delivery or pickup by the
customer.
ACCOUNTS RECEIVABLE
A significant portion of the Company's business is on a credit basis. The
Company extends credit to its commercial customers based on evaluations of their
financial condition and generally no collateral is required. The Company
operates almost exclusively in the state of Virginia. The Company maintains
reserves it believes adequate for potential credit losses. The Company's
provision for doubtful accounts receivable was $15,649, $15,803 and $25,631 for
the years ended December 31, 1994, 1995 and 1996, respectively.
RENTAL EQUIPMENT, NET
Rental equipment is recorded at cost. Rental equipment is depreciated on a
straight-line basis over the estimated useful lives of the assets, which
typically range from three to five years, with no salvage value.
Ordinary maintenance and repair costs are charged to operations as
incurred. Proceeds from disposal and the related net book value of the equipment
are recognized in the period of disposal and reported as revenue from
merchandise and rental equipment sales and cost of merchandise and rental
equipment sales, respectively, in the statements of income.
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT
Furniture, fixtures and computer equipment are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives for furniture, fixtures and
computer equipment range from seven to thirty-nine years.
F-78
<PAGE> 154
CVR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Ordinary maintenance and repair costs are charged to operations as
incurred.
MERCHANDISE INVENTORIES
Merchandise inventories consist principally of parts, tools, supplies and
small- to medium-sized equipment for sale. All merchandise inventories are
valued at the lower of cost (first-in, first-out) or market.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its operations on an ongoing basis. When indicators of
impairment are present, the Company analyzes the recoverability of those assets
by measuring estimated future undiscounted cash flows against the carrying value
of the assets.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was
$27,532, $42,537 and $44,014 for the years ended December 31, 1994, 1995 and
1996, respectively.
2. BANK DEBT AND OTHER NOTES PAYABLE
Notes payable and long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to bank, interest payable monthly at 8.25%, due
on demand................................................. $276,255 $ --
Note payable to bank, interest payable monthly at prime plus
.5% (9% at December 31, 1996), due on demand.............. -- 50,000
Note payable to financing company, principal and interest
due monthly at an interest rate of prime plus 2% (10.5% at
December 31, 1996), matures June 1997..................... 78,356 44,282
Note payable to individual, principal and interest due
monthly at an interest rate of 9.5%, matures May 1996..... 9,479 --
Note payable to bank, interest payable monthly at 8.5%,
monthly principal payments of $20,000, due on demand...... -- 673,481
Note payable to individual, interest payable monthly at an
interest rate of 9%, due on demand........................ -- 30,000
Note payable to financing company, principal and interest
due monthly at an interest rate of 8%, matures April
1997...................................................... 19,663 5,113
-------- --------
$383,753 $802,876
======== ========
</TABLE>
Certain long-term assets and cash of the Company are pledged as collateral.
Cash paid for interest was $68,306, $128,264 and $171,975 for the years
ended December 31, 1994, 1995 and 1996, respectively.
Maturities of debt are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997...................................................... $788,115
1998...................................................... 14,761
--------
$802,876
========
</TABLE>
F-79
<PAGE> 155
CVR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Of the above amount, $634,776 was repaid in conjunction with the Company's
asset sale to RentX Industries, Inc. (see Note 7). The remaining assets and
related debt were retained by the Company.
3. CAPITAL LEASES
Assets held under capital leases as of December 31 consist of:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Rental equipment............................................ $1,115,962 $1,476,521
Less accumulated amortization............................... 343,743 362,590
---------- ----------
$ 772,219 $1,113,931
========== ==========
</TABLE>
Amortization of assets held under capital leases is included in
depreciation expense.
Future minimum payments under capital leases are as follows:
<TABLE>
<S> <C>
1997..................................................... $ 458,368
1998..................................................... 268,821
1999..................................................... 122,187
2000..................................................... 98,109
2001..................................................... 71,902
----------
1,019,387
Amounts representing interest............................ 168,475
----------
$ 850,912
==========
</TABLE>
4. EMPLOYEE RETIREMENT PLAN
Effective January 1996, the Company began a 401(k) employee retirement plan
(the "Plan"). To be eligible to participate in the Plan an employee must have
reached the age of 21 and completed one year of service with the Company. This
plan allows participating employees to contribute up to 20 percent of their base
pay, subject to limits determined annually by the Internal Revenue Service. The
Company will match 25% of the first 6% of an employee's contribution. The
Company has recognized $17,291 of expense related to the Plan for the year ended
December 31, 1996.
5. RELATED PARTY TRANSACTIONS
The Company leases all seven of its facilities from entities owned by
certain Company stockholders. The rental expense to related parties included in
the statements of income was $184,200, $228,630 and $287,310 for the years ended
December 31, 1994, 1995 and 1996, respectively (see Note 7).
6. INCOME TAXES
Deferred tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in deferred tax assets or liabilities from
period to period.
F-80
<PAGE> 156
CVR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Tax versus financial reporting differences................ $158,175 $284,827
Deferred tax assets:
Allowance for doubtful accounts........................... 23,112 32,561
Other..................................................... 17,413 28,223
-------- --------
40,525 60,784
-------- --------
Net deferred tax liability.................................. $117,650 $224,043
======== ========
</TABLE>
Significant components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Income tax expense:
Federal............................................ $ 6,188 $20,497 $ 69,954
State.............................................. 979 3,423 8,742
Deferred........................................... 38,860 39,352 106,393
------- ------- --------
Total income tax expense............................. $46,027 $63,272 $185,089
======= ======= ========
</TABLE>
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rates.......................... $42,968 $61,391 $171,368
State taxes.......................................... 979 3,423 8,742
Other................................................ 2,080 (1,542) 4,979
------- ------- --------
$46,027 $63,272 $185,089
======= ======= ========
</TABLE>
7. SUBSEQUENT EVENT
On March 14, 1997, substantially all of the Company's net assets related to
six of the Company's seven stores were acquired by RentX Industries, Inc.
("RentX") in an asset purchase agreement (the "Agreement"). Pursuant to the
Agreement, the Company's operating leases relating to various land and
facilities were terminated with no penalty to the Company. RentX then entered
into new operating lease agreements effective March 14, 1997 with entities owned
by certain of the Company's stockholders.
F-81
<PAGE> 157
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Newmanco, Inc. (dba A-1 Rental Centers)
We have audited the accompanying balance sheets of Newmanco, Inc. (dba A-1
Rental Centers) (the "Company") as of September 30, 1995 and 1996, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at September 30,
1995 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended September 30, 1996, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
June 6, 1997
F-82
<PAGE> 158
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------- MARCH 31
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash..................................................... $ 16,972 $ 23,125 $ --
Accounts receivable, net of allowance for doubtful
accounts of $34,432 and $38,433 at September 30, 1995
and 1996, respectively and $34,432 at March 31, 1997... 235,656 215,956 192,249
Merchandise inventories.................................. 262,996 291,105 373,800
Rental equipment, net of accumulated depreciation of
$1,547,485 and $1,780,438 at September 30, 1995 and
1996, respectively and $1,960,382 at March 31, 1997.... 1,205,445 1,522,477 1,436,840
Property, plant and equipment, net of accumulated
depreciation of $340,000 and $375,489, at September 30,
1995 and 1996, respectively and $349,691 at
March 31, 1997......................................... 242,105 213,682 235,721
Due from stockholder..................................... 56,936 58,561 44,326
Other assets............................................. 49,510 55,771 81,367
---------- ---------- ----------
Total assets................................... $2,069,620 $2,380,677 $2,364,303
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................................... $ 140,202 $ 142,178 $ 276,473
Other payables........................................... 71,813 93,567 54,788
Capital lease obligation................................. 260,530 297,290 222,658
Notes payable............................................ 1,006,810 1,094,323 1,137,765
Deferred income taxes.................................... 168,248 213,196 213,196
---------- ---------- ----------
Total liabilities.............................. 1,647,603 1,840,554 1,904,880
Stockholders' equity:
Common stock, $1 par value, 100 shares authorized,
issued and outstanding.............................. 100 100 100
Additional paid-in capital............................. 3,746 3,746 3,746
Retained earnings...................................... 418,171 536,277 455,577
---------- ---------- ----------
Total stockholders' equity..................... 422,017 540,123 459,423
---------- ---------- ----------
Total liabilities and stockholders' equity..... $2,069,620 $2,380,677 $2,364,303
========== ========== ==========
</TABLE>
See accompanying notes.
F-83
<PAGE> 159
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 SIX MONTHS ENDED MARCH 31
------------------------------------ -------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue................. $1,804,455 $2,343,852 $2,697,766 $1,203,743 $1,107,338
Merchandise sales.............. 482,185 560,006 602,687 261,107 283,632
Other revenues................. 40,404 76,169 65,357 33,627 30,180
---------- ---------- ---------- ---------- ----------
Total revenues......... 2,327,044 2,980,027 3,365,810 1,498,477 1,421,150
Cost of revenues:
Rental equipment expense....... 706,620 784,615 913,265 373,131 401,599
Cost of merchandise sales...... 208,733 372,880 325,635 141,810 149,322
Direct operating expense....... 851,285 1,015,873 1,245,334 552,775 630,487
---------- ---------- ---------- ---------- ----------
Total cost of
revenue.............. 1,766,638 2,173,368 2,484,234 1,067,716 1,181,408
Store contribution............... 560,406 806,659 881,576 430,761 239,742
Selling, general and
administrative expense......... 369,717 456,125 511,235 234,295 250,051
Depreciation and amortization,
excluding rental equipment
depreciation................... 26,982 36,456 42,251 18,558 23,087
---------- ---------- ---------- ---------- ----------
Operating income (loss).......... 163,707 314,078 328,090 177,908 (33,396)
Interest expense................. 72,201 114,335 138,534 64,236 47,304
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes....................... 91,506 199,743 189,556 113,672 (80,700)
Income taxes..................... 26,727 72,866 71,450 41,490 --
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 64,779 $ 126,877 $ 118,106 $ 72,182 $ (80,700)
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-84
<PAGE> 160
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------- ADDITIONAL TOTAL
PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------ ----- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance on September 30, 1993............... 100 $100 $3,746 $226,515 $230,361
Net income.................................. -- -- -- 64,779 64,779
--- ---- ------ -------- --------
Balance on September 30, 1994............... 100 100 3,746 291,294 295,140
Net income.................................. -- -- -- 126,877 126,877
--- ---- ------ -------- --------
Balance on September 30, 1995............... 100 100 3,746 418,171 422,017
Net income.................................. -- -- -- 118,106 118,106
--- ---- ------ -------- --------
Balance on September 30, 1996............... 100 100 3,746 536,277 540,123
Net loss (unaudited)........................ -- -- -- (80,700) (80,700)
--- ---- ------ -------- --------
Balance on March 31, 1997 (unaudited)....... 100 $100 $3,746 $455,577 $459,423
=== ==== ====== ======== ========
</TABLE>
See accompanying notes.
F-85
<PAGE> 161
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30 MARCH 31
------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................ $ 64,779 $126,877 $118,106 $ 72,182 $ (80,700)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 154,470 218,010 282,104 110,976 154,146
Changes in operating assets and
liabilities:
Accounts receivable................. (12,777) (115,450) 19,700 (209) 23,707
Inventories......................... (32,612) (45,349) (28,109) (22,262) (82,695)
Other assets and due from
stockholder....................... (24,834) 8,892 (7,886) (6,239) (11,361)
Accounts payable and other
payables.......................... 46,088 11,376 23,730 52,323 95,515
Deferred income taxes............... 16,371 45,999 44,948 26,139 --
--------- -------- -------- --------- ---------
Net cash provided by operating
activities............................. 211,485 250,355 452,593 232,910 98,612
INVESTING ACTIVITIES
Purchases of property and equipment...... (359,526) (295,876) (406,458) (308,686) (68,548)
Proceeds from sales of property and
equipment.............................. -- 10,197 -- --
--------- -------- -------- --------- ---------
Net cash used in investing activities.... (359,526) (285,679) (406,458) (308,686) (68,548)
FINANCING ACTIVITIES
Proceeds from borrowings................. 193,890 376,040 444,012 225,492 80,580
Payment on borrowing..................... (35,524) (271,159) (356,501) (124,362) (59,137)
Payment on capital lease obligation...... -- (68,887) (127,493) (42,326) (74,632)
--------- -------- -------- --------- ---------
Net cash provided by (used in) financing
activities............................. 158,366 35,994 (39,982) 58,804 (53,189)
--------- -------- -------- --------- ---------
Net increase (decrease) in cash.......... 10,325 670 6,153 (16,972) (23,125)
Cash at beginning of period.............. 5,977 16,302 16,972 16,972 23,125
--------- -------- -------- --------- ---------
Cash at end of period.................... $ 16,302 $ 16,972 $ 23,125 $ -- $ --
========= ======== ======== ========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes of $7,500, $5,262 and $24,000 for the years
ended September 30, 1994, 1995 and 1996, respectively.
Interest paid for 1994, 1995 and 1996 approximated interest expense.
See accompanying notes.
F-86
<PAGE> 162
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(THE INFORMATION AS OF MARCH 31, 1997 AND FOR THE SIX-MONTH PERIODS ENDED
MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Newmanco, Inc. dba A-1 Rental Centers (the "Company"), is a corporation
formed in New Mexico. The Company is primarily involved in the short-term rental
of equipment, vehicles and special event items in the state of New Mexico. At
September 30, 1996, the Company operated five store locations in the state of
New Mexico.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are presented
on an unclassified basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
REVENUE RECOGNITION
Rental revenue is recorded under the operating method. Rental revenue in
the statements of income includes revenue earned on equipment rentals, fuel
sales, and rental equipment delivery fees. Revenues from the sale of merchandise
and equipment are recorded at the time of delivery or pickup by the customer.
CREDIT POLICY
A significant portion of the Company's business is on a credit basis. The
Company extends credit to its commercial customers based on evaluations of their
financial condition and generally no collateral is required. The Company
operates almost exclusively in the state of New Mexico. The Company maintains
reserves it believes adequate for potential credit losses.
RENTAL EQUIPMENT
Rental equipment purchased by the Company is recorded at cost. Rental
equipment is depreciated on a straight-line basis over the estimated useful
lives of the assets, which typically is five to ten years.
Ordinary maintenance and repair costs are charged to operations as
incurred. Proceeds from disposal and the related net book value of the equipment
are recognized in the period of disposal and reported as rental revenue and cost
of rental equipment sales in the statements of income, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment purchased by the Company is recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets.
F-87
<PAGE> 163
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives for furniture, fixtures and computer equipment
range from 15-30 years for leasehold improvements and 5-10 years for office
furniture and equipment.
Ordinary maintenance and repair costs are charged to operations as
incurred.
MERCHANDISE INVENTORIES
Merchandise inventories consist principally of parts, commodity type
supplies and small- to medium-sized equipment for sale. All merchandise
inventories are valued at the lower of cost (first-in, first-out) or market.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its operations on an ongoing basis. When indicators of
impairment are present, the Company analyzes the recoverability of those assets
by measuring estimated future undiscounted cash flows against the carrying value
of the assets.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was
$31,317, $40,673 and $43,457 for the years ended September 30, 1994, 1995 and
1996, respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be more likely than not of realization in future
periods.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at March 31, 1997 and the statements of
operations, stockholder's deficiency and cash flows for the six-month periods
ended March 31, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
F-88
<PAGE> 164
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1995 1996
-------- --------
<S> <C> <C>
Vehicles, machinery and equipment........................... $328,844 $153,185
Leasehold improvements...................................... 95,747 95,747
Furniture, fixtures and computer equipment.................. 157,514 340,239
-------- --------
Total....................................................... 582,105 589,171
Less: accumulated depreciation.............................. 340,000 375,489
-------- --------
$242,105 $213,682
======== ========
</TABLE>
3. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Notes payable to banks and financing companies, principal
and interest repayment under various terms at interest
rates ranging from 9%-11%, maturity dates ranging from
April 1995 to February 2000............................... $1,267,340 $1,391,613
Certain assets of the Company are pledged as collateral
On May 22, 1997 all of the outstanding debt of the Company
was paid. (See Note 6)
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Assets held under capital leases as of September 30 consist of:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Rental equipment............................................ $323,387 $487,642
Less accumulated amortization............................... (21,527) (77,251)
-------- --------
$301,860 $410,391
======== ========
</TABLE>
Amortization of assets held under capital leases is included in
depreciation expense.
Future minimum payments under capital leases and operating leases having an
initial or remaining term of more than one year consisted of the following at
September 30, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1997........................................................ $195,345 $147,600
1998........................................................ 102,136 147,600
1999........................................................ 24,350 146,600
-------- --------
Total minimum lease payments................................ $321,831 $441,800
========
Amounts representing interest............................... 24,541
--------
Present value of lease payments............................. $297,290
========
</TABLE>
All leases contain various renewal options and escalation clauses requiring
the Company to pay for taxes, insurance, and maintenance expenses. Rent expense
was $200,115 and $220,390 for the years ended September 30, 1995 and 1996,
respectively.
F-89
<PAGE> 165
NEWMANCO, INC.
(DBA A-1 RENTAL CENTERS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in deferred tax assets or liabilities from
period to period.
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation...................... $181,699 $225,247
Deferred tax assets:
Allowance for doubtful accounts........................... 13,451 12,051
-------- --------
Net deferred tax liability.................................. $168,248 $213,196
======== ========
</TABLE>
Significant components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Income tax expense:
Current........................................... $10,356 $26,867 $26,502
Deferred.......................................... 16,371 45,999 44,948
------- ------- -------
Total income tax expense.................. $26,727 $72,866 $71,450
======= ======= =======
</TABLE>
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense is:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rates......................... $31,112 $67,913 $64,449
State taxes (net of federal benefit)................ 2,943 6,424 6,096
Other............................................... (7,328) (1,471) 905
------- ------- -------
$26,727 $72,866 $71,450
======= ======= =======
</TABLE>
6. SUBSEQUENT EVENT
Effective May 22, 1997, all of the Company's outstanding common stock was
purchased by RentX Industries, Inc.
F-90
<PAGE> 166
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Titus Rental Service Companies, Inc.
We have audited the accompanying balance sheets of Titus Rental Service
Companies, Inc. (dba Suburban Rent-It Company and Able Party Rental) (the
"Company") as of March 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended March 31, 1997. These financial statements are the
responsibility of the management of Titus Rental Service Companies, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at March 31,
1996 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
July 30, 1997
Denver, Colorado
F-91
<PAGE> 167
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Cash........................................................ $ 199,368 $ 109,215
Accounts receivable, net of allowance for doubtful accounts
of $52,657 and $61,937 at March 31, 1996 and 1997,
respectively.............................................. 103,557 77,436
Prepaid expenses............................................ 21,189 23,989
Merchandise inventories..................................... 173,794 131,544
Rental equipment, net of accumulated depreciation of
$1,289,238 and $1,438,508, at March 1, 1996 and March 1,
1997, respectively........................................ 1,797,762 2,237,485
Furniture, fixtures and computer equipment, net of
accumulated depreciation of $869,328 and $941,143, at
March 1, 1996 and March 1, 1997, respectively............. 600,341 547,727
Related party receivable.................................... 10,387 115,475
Other assets................................................ 2,352 --
---------- ----------
Total assets...................................... $2,908,750 $3,242,871
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 171,574 $ 151,688
Payroll and other accrued expenses.......................... 119,935 132,245
Bank debt and other notes payable........................... 145,655 240,000
Deferred tax liability...................................... 180,274 220,122
---------- ----------
Total liabilities................................. 617,438 744,055
Stockholders' equity:
Common stock, $1 par value, 50,000 shares authorized,
1,000 shares issued and outstanding.................... 1,000 1,000
Additional paid-in capital................................ 651,060 651,060
Retained earnings......................................... 1,639,252 1,846,756
---------- ----------
Total stockholders' equity........................ 2,291,312 2,498,816
---------- ----------
Total liabilities and stockholders' equity........ $2,908,750 $3,242,871
========== ==========
</TABLE>
See accompanying notes.
F-92
<PAGE> 168
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental revenue......................................... $2,710,358 $2,763,957 $3,233,744
Merchandise sales...................................... 412,340 398,847 454,005
Sales of rental equipment.............................. 140,894 109,874 147,312
Labor, damage waivers, and other....................... 40,623 38,907 50,190
---------- ---------- ----------
Total revenues................................. 3,304,215 3,311,585 3,885,251
Cost of revenues:
Rental equipment depreciation.......................... 272,796 258,713 264,357
Cost of merchandise sales.............................. 326,346 298,855 312,344
Cost of rental equipment sales......................... 229,478 64,869 105,620
Direct operating expense............................... 1,865,205 1,884,452 2,084,713
---------- ---------- ----------
Total cost of revenues......................... 2,693,825 2,506,889 2,767,034
---------- ---------- ----------
Store contribution....................................... 610,390 804,696 1,118,217
Selling, general and administrative expense.............. 499,546 592,947 700,291
Depreciation and amortization, excluding rental equipment
depreciation........................................... 101,219 67,656 78,741
---------- ---------- ----------
Operating income......................................... 9,625 144,093 339,185
Interest expense......................................... 26,577 11,993 12,142
---------- ---------- ----------
Income (loss) before income taxes........................ (16,952) 132,100 327,043
Income tax expense (benefit)............................. (3,283) 40,455 119,539
---------- ---------- ----------
Net income (loss)........................................ $ (13,669) $ 91,645 $ 207,504
========== ========== ==========
</TABLE>
See accompanying notes.
F-93
<PAGE> 169
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL TOTAL
PAR PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------ ------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balance on March 31, 1994................. 1,000 $1,000 $651,060 $1,561,276 $2,213,336
Net income (loss)......................... -- -- -- (13,669) (13,669)
----- ------ -------- ---------- ----------
Balance on March 31, 1995................. 1,000 1,000 651,060 1,547,607 2,199,667
Net income................................ -- -- -- 91,645 91,645
----- ------ -------- ---------- ----------
Balance on March 31, 1996................. 1,000 1,000 651,060 1,639,252 2,291,312
Net income................................ -- -- -- 207,504 207,504
----- ------ -------- ---------- ----------
Balance on March 31, 1997................. 1,000 $1,000 $651,060 $1,846,756 $2,498,816
===== ====== ======== ========== ==========
</TABLE>
See accompanying notes.
F-94
<PAGE> 170
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ (13,669) $ 91,645 $ 207,504
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 374,015 326,369 343,098
Loss (gain) on sale rental equipment.................. 88,584 (45,005) (41,692)
Deferred taxes........................................ (18,385) 26,005 39,848
Changes in operating assets and liabilities:
Accounts receivable................................ 33,570 (22,455) 26,121
Prepaid expenses................................... -- -- (2,800)
Merchandise inventories............................ 103,632 7,923 42,250
Related party receivable and other assets.......... (4,131) 2,134 (102,736)
Accounts payable................................... 163,007 (189,856) (77,039)
Payroll and other accrued expenses................. (32,863) 80,689 12,310
--------- --------- ---------
Net cash provided by operating activities............... 693,760 277,449 446,864
INVESTING ACTIVITIES
Purchases of rental equipment........................... (621,749) (285,029) (752,547)
Net purchases of furniture and fixtures and equipment... (13,665) (53,073) (26,127)
Proceeds from sale of rental equipment.................. 140,894 109,874 147,312
--------- --------- ---------
Net cash used by (used in) investing activities......... (494,520) (228,228) (631,362)
FINANCING ACTIVITIES
Borrowings on debt...................................... 197,041 109,395 300,000
Payments on debt........................................ (236,332) (221,663) (205,655)
--------- --------- ---------
Net cash provided by (used in) financing activities..... (39,291) (112,268) 94,345
--------- --------- ---------
Net increase (decrease) in cash......................... 159,949 (63,047) (90,153)
Cash at beginning of year............................... 102,466 262,415 199,368
--------- --------- ---------
Cash at end of year..................................... $ 262,415 $ 199,368 $ 109,215
========= ========= =========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Company's accounts payable include $66,935, $98,055, and $57,153 of
fixed asset purchases as of March 31, 1995, 1996, and 1997, respectively.
Interest paid and income taxes paid approximated interest expense and current
income tax expense, respectively.
See accompanying notes.
F-95
<PAGE> 171
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Titus Rental Service Companies, Inc., (dba Suburban Rent It and Able Party
Rentals) is a Michigan corporation formed in June 1982. The Company is primarily
involved in the short-term rental of equipment, vehicles and special event items
and the sales and rental of party related items. At March 31, 1997, the Company
operated seven store locations in the state of Michigan.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are presented
on an unclassified basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Rental
revenue in the statements of operations includes revenue earned on equipment
rentals, fuel sales, and rental equipment delivery fees. Revenues from the sale
of parts, supplies, and equipment are recorded at the time of delivery or pickup
by the customer.
CREDIT POLICY
A portion of the Company's business is on a credit basis. The Company
extends credit to its commercial customers based on evaluations of their
financial condition and generally no collateral is required. The Company
operates almost exclusively in the state of Michigan. The Company maintains
reserves it believes adequate for potential credit losses.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment is depreciated on a
straight-line basis over the estimated useful lives of the assets, typically ten
years with an approximate salvage value of ten percent.
Ordinary maintenance and repair costs are charged to operations as
incurred. Proceeds from disposal and the related net book value of the equipment
are recognized in the period of disposal and reported as revenue from rental
equipment sales and cost of rental equipment sales in the statements of
operations, respectively.
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT
Furniture, fixtures and computer equipment is recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets.
F-96
<PAGE> 172
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The estimated useful lives for furniture, fixtures and computer equipment
range from five to ten years for office furniture and shop equipment to twenty
five years for leasehold improvements.
Ordinary maintenance and repair costs are charged to operations as
incurred.
MERCHANDISE INVENTORIES
Merchandise inventories consist principally of party supplies, parts,
tools, supplies and small- to medium-sized equipment for sale. All merchandise
inventories are valued at the lower of cost (first-in, first-out) or market.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its operations on an ongoing basis. When indicators of
impairment are present, the Company analyzes the recoverability of those assets
by measuring estimated future undiscounted cash flows against the carrying value
of the assets.
ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense was $3,820,
$10,910 and $6,510 for the years ended March 31, 1995, 1996 and 1997,
respectively.
2. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31
--------------------
1996 1997
-------- --------
<S> <C> <C>
Note payable to bank, principal and interest due quarterly
at an interest rate of prime (8.5% at March 31, 1997),
matures March 2001........................................ $ -- $240,000
Note payable to bank, paid during 1997...................... 145,655 --
-------- --------
$145,655 $240,000
======== ========
</TABLE>
Cash paid for interest was $26,577, $12,545 and $20,118 for the years ended
March 31, 1995, 1996 and 1997, respectively.
Maturities of debt are as follows at March 31, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1998.................................................... $ 60,000
1999.................................................... 60,000
2000.................................................... 60,000
2001.................................................... 60,000
--------
$240,000
========
</TABLE>
3. RELATED PARTY TRANSACTIONS
The Company leases all of its facilities from the Company's stockholders.
The rental expense to related parties included in the statements of income was
$205,800, $204,600 and $204,900 for the years ended March 31, 1995, 1996 and
1997, respectively.
F-97
<PAGE> 173
TITUS RENTAL SERVICE COMPANIES, INC.
(DBA SUBURBAN RENT-IT COMPANY AND ABLE PARTY RENTAL)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in deferred tax assets or liabilities from
period to period.
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MARCH 31
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $(204,727) $(248,497)
--------- ---------
(204,727) (248,497)
Deferred tax assets:
Allowance for doubtful accounts........................... 10,531 14,122
Other..................................................... 13,922 14,253
--------- ---------
24,453 28,375
--------- ---------
Net deferred tax liability.................................. $(180,274) $(220,122)
========= =========
</TABLE>
Significant components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Income tax expense:
Current........................................... $ 15,102 $14,450 $ 79,691
Deferred.......................................... (18,385) 26,005 39,848
-------- ------- --------
Total income tax expense............................ $ (3,283) $40,455 $119,539
======== ======= ========
</TABLE>
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense, (benefit) is:
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Tax provision at U.S. statutory rates............... $(5,764) $ 44,914 $111,195
Effects of graduated income tax rates............... 3,220 (16,035) (398)
State income taxes.................................. 1,694 1,639 5,371
Other............................................... (2,435) 9,938 3,371
------- -------- --------
$(3,283) $ 40,455 $119,539
======= ======== ========
</TABLE>
5. SUBSEQUENT EVENT
Effective June 26, 1997, all of the Company's outstanding common stock was
purchased by RentX Industries, Inc.
F-98
<PAGE> 174
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Mer-Cal Enterprises, Inc. dba Duncan Rent-Alls
We have audited the accompanying balance sheets of Mer-Cal Enterprises,
Inc. (dba Duncan Rent-Alls) (the "Company") as of December 31, 1995 and 1996,
and the related statements of operations, stockholders' deficiency, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the management of Mer-Cal
Enterprises, Inc. (dba Duncan Rent-Alls). Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mer-Cal Enterprises, Inc.
(dba Duncan Rent-Alls) at December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
July 11, 1997
F-99
<PAGE> 175
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------- JUNE 30
1995 1996 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash.................................................... $ 20,133 $ 24,889 $ 28,523
Accounts receivable, net of allowance for doubtful
accounts of $19,958 and $27,234 at December 31, 1995
and 1996, respectively and $31,305 at June 30, 1997... 59,150 55,105 69,925
Due from Duncan Rent-Alls of Ardmore.................... 1,046 3,707 2,096
Merchandise inventories................................. 31,953 30,790 30,790
Rental equipment, net of accumulated depreciation of
$134,542 and $264,899 at December 31, 1995 and 1996,
respectively and $348,559 at June 30, 1997............ 426,129 531,725 565,652
Property and equipment, net of accumulated depreciation
of $34,404 and $61,764 at December 31, 1995 and 1996,
respectively and $76,088 at June 30, 1997............. 74,969 106,633 92,309
--------- --------- ---------
Total assets.................................. $ 613,380 $ 752,849 $ 789,295
========= ========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Accounts payable........................................ $ 27,065 $ 22,942 $ 45,889
Accrued liabilities..................................... 10,385 20,177 13,878
Due to stockholder...................................... 7,700 7,700 7,700
Notes payable to stockholder............................ 67,789 67,789 67,789
Notes payable, other.................................... 593,460 677,317 668,393
--------- --------- ---------
Total liabilities............................. 706,399 795,925 803,649
Stockholders' deficiency:
Common stock, $1 par value; 10,000 shares authorized,
1,000 shares issued and outstanding................ 1,000 1,000 1,000
Accumulated deficit................................... (94,019) (44,076) (15,354)
--------- --------- ---------
Total stockholders' deficiency.......................... (93,019) (43,076) (14,354)
--------- --------- ---------
Total liabilities and stockholders' deficiency.......... $ 613,380 $ 752,849 $ 789,295
========= ========= =========
</TABLE>
See accompanying notes.
F-100
<PAGE> 176
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue........................ $469,035 $540,477 $659,759 $322,103 $332,302
Merchandise and rental equipment
sales.............................. 130,871 172,532 223,736 111,619 83,521
Labor and other....................... 31,743 17,654 37,766 13,615 11,606
-------- -------- -------- -------- --------
Total revenues................ 631,649 730,663 921,261 447,337 427,429
Cost of revenues:
Rental equipment expense.............. 123,612 125,643 124,564 89,023 28,432
Rental equipment depreciation......... 68,299 96,561 130,357 65,179 83,660
Cost of merchandise and rental
equipment sales.................... 146,829 180,845 209,124 98,763 78,611
Direct operating expense.............. 116,973 147,891 183,987 86,220 92,430
-------- -------- -------- -------- --------
Total cost of revenues........ 455,713 550,940 648,032 339,185 283,133
-------- -------- -------- -------- --------
Store contribution...................... 175,936 179,723 273,229 108,152 144,296
Selling, general and administrative
expense............................... 122,020 154,583 140,773 66,798 71,024
Depreciation, excluding rental equipment
depreciation.......................... 14,444 20,518 27,360 13,680 14,324
-------- -------- -------- -------- --------
Operating income........................ 39,472 4,622 105,096 27,674 58,948
Interest expense, stockholders.......... 6,664 6,613 6,582 3,291 3,291
Interest expense, other................. 26,292 30,874 45,471 24,178 26,935
-------- -------- -------- -------- --------
Net income (loss)....................... $ 6,516 $(32,865) $ 53,043 $ 205 $ 28,722
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-101
<PAGE> 177
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIENCY
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
Balance on January 1, 1994...................... 1,000 $1,000 $(59,005) $(58,005)
Distributions to stockholders................... -- -- (1,900) (1,900)
Net income...................................... -- -- 6,516 6,516
----- ------ -------- --------
Balance on December 31, 1994.................... 1,000 1,000 (54,389) (53,389)
Distributions to stockholders................... -- -- (6,765) (6,765)
Net loss........................................ -- -- (32,865) (32,865)
----- ------ -------- --------
Balance on December 31, 1995.................... 1,000 1,000 (94,019) (93,019)
Distributions to stockholders................... -- -- (3,100) (3,100)
Net income...................................... -- -- 53,043 53,043
----- ------ -------- --------
Balance on December 31, 1996.................... 1,000 1,000 (44,076) (43,076)
Net income (unaudited).......................... -- -- 28,722 28,722
----- ------ -------- --------
Balance at June 30, 1997 (unaudited)............ 1,000 $1,000 $(15,354) $(14,354)
===== ====== ======== ========
</TABLE>
See accompanying notes.
F-102
<PAGE> 178
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
--------------------------------- -------------------------
1994 1995 1996 1996 1997
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................. $ 6,516 $ (32,865) $ 53,043 $ 205 $ 28,722
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation..................... 82,743 117,079 157,717 78,859 97,984
Changes in operating assets and
liabilities:
Accounts receivable........... (20,628) (9,754) 4,045 (603) (14,820)
Due from Duncan Rent-Alls of
Ardmore..................... (1,005) (41) (2,661) (98) 1,611
Merchandise inventories....... (4,969) (15,131) 1,163 4,238 --
Accounts payable and accrued
liabilities................. (10,444) 20,352 5,669 13,041 16,648
Due from stockholder.......... 1,500 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by operating
activities....................... 53,713 79,640 218,976 95,642 130,145
INVESTING ACTIVITIES
Purchase of rental equipment....... (46,004) (313,968) (235,953) (84,668) (117,587)
Purchase of property and
equipment........................ (33,234) -- (59,024) (50,009) --
--------- --------- --------- --------- ---------
Net cash used in investing
activities....................... (79,238) (313,968) (294,977) (134,677) (117,587)
FINANCING ACTIVITIES
Proceeds from notes payable,
other............................ 335,634 553,436 492,041 63,583 50,035
Payments on notes payable, other... (318,181) (304,842) (408,184) (32,910) (58,959)
Proceeds from notes payable to
stockholder...................... 11,857 -- -- -- --
Payments on notes payable to
stockholder...................... -- (583) -- -- --
Distributions to stockholders...... (1,900) (6,765) (3,100) (3,100) --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities............. 27,410 241,246 80,757 27,573 (8,924)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash.... 1,885 6,918 4,756 (11,462) 3,634
Cash at beginning of period........ 11,330 13,215 20,133 20,133 24,889
--------- --------- --------- --------- ---------
Cash at end of period.............. $ 13,215 $ 20,133 $ 24,889 $ 8,671 $ 28,523
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-103
<PAGE> 179
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION SUBSEQUENT TO DECEMBER 31, 1996 IS UNAUDITED)
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Mer-Cal Enterprises, Inc. (dba Duncan Rent-Alls) (the "Company"), an
Oklahoma corporation, was formed on December 15, 1992. The Company is primarily
involved in the short-term rental of general purpose construction equipment, and
to a lesser extent, selling complementary parts and related merchandise. At
December 31, 1996, the Company operated one store located in Duncan, Oklahoma.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are presented
on an unclassified basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Equipment
rentals in the statements of operations include revenue earned on equipment
rentals, fuel sales, and rental equipment delivery fees. Revenue from the sale
of parts, supplies, and equipment is recorded at the time of delivery or pickup
by the customer. Seasonality impacts the Company's revenues which tend to be
highest during the second and third quarters of the year and may cause operating
income to vary from quarter to quarter.
ACCOUNTS RECEIVABLE
The majority of the Company's business is on a credit basis. The Company
extends credit to its commercial customers based on evaluations of their
financial condition and generally no collateral is required. The Company
operates almost exclusively in the Duncan, Oklahoma, area. The Company maintains
reserves it believes adequate for potential credit losses. The Company's
provision for doubtful accounts receivable was $9,731, $16,194 and $10,382 for
the years ended December 31, 1994, 1995 and 1996.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment is depreciated on a
straight-line basis over the estimated useful lives of the assets, which are
typically seven years, with no salvage value.
Ordinary maintenance and repair costs are charged to operations as
incurred. Proceeds from disposal and the related net book value of the equipment
are recognized in the period of disposal and reported as revenue from
merchandise and rental equipment sales and cost of merchandise and rental
equipment sales in the statements of operations, respectively.
F-104
<PAGE> 180
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment purchased by the Company is recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives for property and equipment range
from five to ten years with no salvage value.
Ordinary maintenance and repair costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gains
or losses are included in the statements of operations.
MERCHANDISE INVENTORIES
Merchandise inventories consist principally of parts, tools, supplies and
small- to medium-sized equipment for sale. All merchandise inventories are
valued at the lower of cost or market using the specific identification method.
INCOME TAXES
The Company has elected to be taxed under the Subchapter S provisions of
the Internal Revenue Code. Accordingly, the Company's income or loss is included
in the stockholders' individual income tax returns.
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company incurred $4,339,
$4,639 and $4,878 for the years ended December 31, 1994, 1995 and 1996.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at June 30, 1997 and the statements of
operations, stockholders' deficiency and cash flows for the three-month periods
ended June 30, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. The results of operations for such
interim periods are not necessarily indicative of results for the full year.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
-------- --------
<S> <C> <C>
Vehicles.................................................... $ 29,447 $ 84,159
Leasehold improvements...................................... 25,256 27,584
Furniture, fixtures and office equipment.................... 13,626 15,610
Land and building........................................... 41,044 41,044
-------- --------
Total............................................. 109,373 168,397
Less accumulated depreciation............................... 34,404 61,764
-------- --------
$ 74,969 $106,633
======== ========
</TABLE>
F-105
<PAGE> 181
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
-------- --------
<S> <C> <C>
Notes payable to stockholder:
Note payable to 51% stockholder of the Company, interest
due monthly at a rate of 9%, due on demand............. $ 29,239 $ 29,239
Note payable to 51% stockholder of the Company, interest
due monthly at a rate of 8.54%, due on demand.......... 38,550 38,550
-------- --------
$ 67,789 $ 67,789
======== ========
Notes payable, other:
Note payable to bank, principal and interest payable
monthly at bank's base float rate plus 1.25% (10.5% at
December 31, 1996), matures March 1997................. $ 14,507 $ 9,691
Note payable to bank, principal and interest payable
monthly at 8.5%, matures November 2001................. -- 14,843
Note payable to bank, principal and interest due monthly
at 9.45%, matures December 1997........................ 21,297 17,247
Note payable to financing company, principal and interest
payable monthly at 7.9%, matures January 2000.......... 44,988 32,153
Note payable to financing company, principal and interest
payable monthly at 6.5%, matures August 1998........... 5,338 3,376
Note payable to bank, principal and interest payable
monthly at bank's adjusted prime plus .5% (9.85% at
December 31, 1996), matures March 2000................. 52,785 43,071
Note payable to bank, principal and interest payable
monthly at 9.5%, matures May 2001...................... -- 35,174
Note payable to bank, principal and interest payable
monthly at 9.5%, matures November 1996................. 250,000 --
Note payable to bank, principal and interest payable
monthly at 9.5%, matures November 1997................. -- 300,000
Note payable to financing company, principal and interest
due monthly at 9.9%, matures October 1999.............. 29,856 22,221
Note payable to financing company, principal and interest
due monthly at 9.9%, matures October 1999.............. 31,605 23,643
Note payable to financing company, principal and interest
due monthly at 10.5%, matures April 2000............... -- 5,776
Note payable to financing company, principal and interest
due monthly at 10.5%, matures November 2000............ -- 5,361
Note payable to financing company, principal and interest
due monthly at 12.25%, matures August 2001............. -- 46,255
Note payable to financing company, principal and interest
due monthly at 10.9%, matures August 2000.............. 49,666 40,555
Note payable to financing company, principal and interest
due monthly at 10.9%, matures July 1999................ -- 12,345
</TABLE>
F-106
<PAGE> 182
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to financing company, principal and interest
due monthly at 10.25%, matures February 2002........... $ -- $ 36,658
Note payable to financing company, principal and interest
due monthly at 10.9%, matures May 1996................. 1,968 --
Note payable to financing company, principal and interest
due monthly at 10.24%, matures December 1998........... 13,968 9,389
Note payable to financing company, principal and interest
due monthly at 10.76%, matures November 1995........... 3,270 --
Note payable to financing company, principal and interest
due monthly at 12.48%, matures July 1998............... 9,930 19,559
Note payable to bank, principal and interest due monthly
at 8.5%, matures April 1999............................ 11,786 --
Note payable to financing company, principal and interest
due monthly at 10.5%, matures April 1998............... 2,851 --
Note payable to financing company, principal and interest
due monthly at 7.99%, matures December 1999............ 23,877 --
Note payable to financing company, principal and interest
due monthly at 9.18%, matures March 1998............... 20,556 --
Note payable to financing company, principal and interest
due monthly at 13.21%, matures June 1996............... 5,212 --
-------- --------
$593,460 $677,317
======== ========
</TABLE>
Substantially all of the Company's assets are pledged as collateral under
these note payable agreements.
Cash paid for interest approximates interest expense for the years ended
December 31, 1994, 1995 and 1996.
Maturities of debt, including debt due to stockholder, are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997...................................................... $466,503
1998...................................................... 111,179
1999...................................................... 78,308
2000...................................................... 40,075
2001...................................................... 43,015
Thereafter................................................ 6,026
--------
$745,106
========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company leases its primary facility from its stockholders on a
month-to-month basis. The rental expense to related parties included in the
statements of operations was $9,600, $12,000 and $18,000 for the years ended
December 31, 1994, 1995 and 1996, respectively.
The Company also periodically receives and advances funds to its
stockholders in addition to the notes payable described in Note 3 above. The
Company has also sold and rented equipment to an
F-107
<PAGE> 183
MER-CAL ENTERPRISES, INC.
(DBA DUNCAN RENT-ALLS)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
affiliated entity, Duncan Rent-Alls of Ardmore, which is owned by some of the
stockholders of the Company.
5. SUBSEQUENT EVENTS
On July 30, 1997, substantially all of the Company's net assets were
acquired by RentX Industries, Inc. ("RentX") in an asset purchase agreement (the
"Agreement").
On May 14, 1997, the Company received proceeds pursuant to a note payable
agreement with a bank of $50,035. The note payable matures on July 14, 1997 and
accrues interest at a rate of 9.36%.
F-108
<PAGE> 184
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Redi Rentals, Inc.
We have audited the accompanying balance sheets of Redi Rentals, Inc. (the
"Company") as of May 31, 1996 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for the years ended May 31,
1995, 1996 and 1997. These financial statements are the responsibility of Redi
Rentals, Inc. management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Redi Rentals, Inc. at
May 31, 1996 and 1997, and the results of its operations and its cash flows for
years ended May 31, 1995, 1996 and 1997, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
August 8, 1997
F-109
<PAGE> 185
REDI RENTALS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31
----------------------- AUGUST 31,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash....................................................... $ 105,406 $ 338,111 $ 729,947
Accounts receivable, net of allowance for doubtful accounts
of $11,570 and $14,324 at May 31, 1996 and 1997,
respectively and $14,324 at August 31, 1997.............. 334,202 394,894 375,643
Merchandise inventories.................................... 188,152 148,562 131,140
Rental equipment, net of accumulated depreciation of
$607,016 and $797,854 at May 31, 1996 and 1997,
respectively and $885,083 at August 31, 1997............. 1,030,999 918,538 820,010
Property and equipment, net of accumulated depreciation of
$142,629 and $190,791 at May 31, 1996 and 1997,
respectively and $209,810 at August 31, 1997............. 332,976 259,479 260,518
Cash surrender value of life insurance..................... 80,128 90,929 90,929
Prepaid expenses........................................... 30,409 12,913 16,413
Other assets............................................... 6,762 9,262 9,262
---------- ---------- ----------
Total assets..................................... $2,109,034 $2,172,688 $2,433,862
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable........................................... $ 55,792 $ 85,949 $ 64,934
Payroll and other accrued expenses......................... 100,213 107,504 227,555
Notes payable.............................................. 212,570 187,886 168,072
Notes payable to related parties........................... 129,577 92,508 88,904
Deferred tax liability..................................... 261,226 282,803 282,803
---------- ---------- ----------
Total liabilities................................ 759,378 756,650 832,268
Commitments and contingencies
Stockholders' equity:
Common Stock, 2,000 no par value shares authorized, 1,200
shares issued and outstanding......................... 11,999 11,999 11,999
Retained earnings........................................ 1,337,657 1,404,039 1,589,595
---------- ---------- ----------
Total stockholders' equity....................... 1,349,656 1,416,038 1,601,594
---------- ---------- ----------
Total liabilities and stockholders' equity....... $2,109,034 $2,172,688 $2,433,862
========== ========== ==========
</TABLE>
See accompanying notes.
F-110
<PAGE> 186
REDI RENTALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31 ENDED AUGUST 31,
------------------------------------ -----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenue..................... $2,983,841 $3,315,876 $3,541,651 $1,086,050 $1,096,395
Sale of merchandise and rental
equipment....................... 508,627 451,991 532,430 124,598 152,458
Other income....................... 10,729 16,237 15,978 1,629 3,149
---------- ---------- ---------- ---------- ----------
Total revenues............. 3,503,197 3,784,104 4,090,059 1,212,277 1,252,002
Cost of revenues:
Rental equipment expense........... 202,507 233,899 243,246 62,245 61,850
Rental equipment depreciation...... 269,815 283,158 348,021 69,252 87,229
Cost of merchandise and rental
equipment sales................. 363,728 331,462 417,937 91,330 119,680
Direct operating expense........... 1,850,649 2,075,342 2,186,175 543,765 543,181
---------- ---------- ---------- ---------- ----------
Total cost of revenues..... 2,686,699 2,923,861 3,195,379 766,592 811,940
---------- ---------- ---------- ---------- ----------
Store contribution................... 816,498 860,243 894,680 445,685 440,062
Selling, general and administrative
expense......................... 534,228 655,107 691,326 121,217 117,822
Depreciation, excluding rental
equipment depreciation.......... 79,660 72,754 75,995 17,748 19,019
---------- ---------- ---------- ---------- ----------
Operating income..................... 202,610 132,382 127,359 306,720 303,221
Interest expense, related parties.... -- 8,142 10,544 1,130 3,146
Interest expense, other.............. 21,684 16,740 10,678 2,322 3,185
---------- ---------- ---------- ---------- ----------
Income before income tax............. 180,926 107,500 106,137 303,268 296,890
Provision for income taxes........... 80,916 38,280 39,755 113,726 111,334
---------- ---------- ---------- ---------- ----------
Net income........................... $ 100,010 $ 69,220 $ 66,382 $ 189,542 $ 185,556
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-111
<PAGE> 187
REDI RENTALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at May 31, 1994......................... 1,200 $11,999 $1,168,427 $1,180,426
Net Income...................................... -- -- 100,010 100,010
----- ------- ---------- ----------
Balance at May 31, 1995......................... 1,200 11,999 1,268,437 1,280,436
Net Income...................................... -- -- 69,220 69,220
----- ------- ---------- ----------
Balance at May 31, 1996......................... 1,200 11,999 1,337,657 1,349,656
Net Income...................................... -- -- 66,382 66,382
----- ------- ---------- ----------
Balance at May 31, 1997......................... 1,200 11,999 1,404,039 1,416,038
Net Income (unaudited).......................... -- -- 185,556 185,556
----- ------- ---------- ----------
Balance at August 31, 1997 (unaudited).......... 1,200 $11,999 $1,589,595 $1,601,594
===== ======= ========== ==========
</TABLE>
See accompanying notes.
F-112
<PAGE> 188
REDI RENTALS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MAY 31 ENDED AUGUST 31
----------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................... $ 100,010 $ 69,220 $ 66,382 $189,542 $185,556
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... 349,475 355,912 424,016 87,000 106,248
Loss on sale/disposal of rental
equipment................... 60,631 -- 15,071 -- --
Deferred taxes................. 60,838 23,063 21,577 -- --
Changes in operating assets and
liabilities:
Accounts receivable......... (104,502) 18,926 (60,692) 16,051 19,251
Prepaid expenses............ (2,720) (25,189) 17,496 14,496 (3,500)
Cash surrender value of life
insurance................. (8,759) (11,532) (10,801) (2) --
Other assets................ (1,750) (3,050) (2,500) (637) --
Merchandise inventories..... (43,693) (19,403) 39,590 (19,051) 17,422
Accounts payable............ (95,771) (2,820) 30,157 (33,292) (21,015)
Payroll and other accrued
expenses.................. (6,124) 31,064 7,291 97,411 120,051
--------- --------- --------- -------- --------
Net cash provided by operating
activities..................... 307,635 436,191 547,587 351,518 424,013
INVESTING ACTIVITIES
Purchases of rental equipment.... (326,342) (524,515) (250,631) (31,538) (7,720)
Purchases of property and
equipment...................... (218,228) (55,884) (2,498) (2,505) (1,039)
--------- --------- --------- -------- --------
Net cash used in investing
activities..................... (544,570) (580,399) (253,129) (34,043) (8,759)
FINANCING ACTIVITIES
Borrowings on bank debt and notes
payable........................ 180,246 275,797 274,374 -- --
Payments on bank debt and notes
payable........................ (87,332) (224,991) (336,127) (28,722) (23,418)
--------- --------- --------- -------- --------
Net cash provided by (used in)
financing activities........... 92,914 50,806 (61,753) (28,722) (23,418)
--------- --------- --------- -------- --------
Net (decrease) increase in
cash........................... (144,021) (93,402) 232,705 288,753 391,836
Cash at beginning of period...... 342,829 198,808 105,406 105,406 338,111
--------- --------- --------- -------- --------
Cash at end of period............ $ 198,808 $ 105,406 $ 338,111 $394,159 $729,947
========= ========= ========= ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.................... $ 21,684 $ 24,882 $ 21,222 $ 3,452 $ 6,331
Income taxes paid................ 18,000 18,000 12,000 -- --
</TABLE>
See accompanying notes.
F-113
<PAGE> 189
REDI RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1997
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
Redi Rentals, Inc. (the "Company"), a C corporation, was formed in 1974.
The Company is primarily involved in the short-term rental of general purpose
construction equipment, and to a lesser extent, the short-term rental of special
event equipment and the sale of complementary parts, merchandise, and new and
used equipment to commercial and residential construction, industrial and
homeowner customers. The Company operates one equipment rental facility located
in Tennessee.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are presented
on an unclassified basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Equipment rental revenue is recorded under the operating method. Rental
income in the statements of operations includes revenue earned on equipment
rentals. The sale of parts, supplies, and equipment are recorded at the time of
delivery or pick-up by the customer.
CREDIT POLICY
The Company extends credit to its commercial customers based on evaluations
of their financial condition and generally no collateral is required. Invoices
are generated when a piece of rental equipment is returned by the customer or in
any event after 30 days. The Company maintains reserves it believes adequate for
potential credit losses.
RENTAL EQUIPMENT
Rental equipment purchased by the Company is recorded at cost. Rental
equipment is depreciated on a straight-line basis over estimated lives of three
to seven years to a salvage value of zero.
Ordinary maintenance and repair costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales and cost
of rental equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment purchased by the Company is recorded at cost.
Depreciation is computed on a straight-line basis over the estimated useful
lives of three to ten years to a salvage value of zero.
The estimated useful lives for property and equipment range from 3 to 10
years for vehicles, delivery and yard equipment, fixtures and leasehold
improvements.
F-114
<PAGE> 190
REDI RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Ordinary maintenance and repair costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gains
or losses are included in results of operations.
MERCHANDISE INVENTORIES
The Company maintains an inventory of small, purchased equipment and
costumes available for sale or rental to its customers. All inventories are
valued at the lower of cost or market (first-in, first-out).
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Standards No. 109, Accounting for Income
Taxes. Under the liability method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in the years in which the differences are
expected to reverse. Recognition of deferred tax assets is limited to amounts
considered by management to be more likely than not of realization in future
periods.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of ("Statement No. 121"), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. Statement No. 121
also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted Statement No. 121 for the year ended May 31,
1996. There were no impairment losses recorded as a result of the adoption of
Statement No. 121.
CONCENTRATIONS OF CREDIT RISK
The Company's primary financial instrument that is potentially subject to
significant concentrations of credit risk is trade accounts receivable. The
concentration of credit risk is subject to the economic conditions and
construction activity in its geographic area of eastern Tennessee.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet at August 31, 1997 and the statements of
operations, stockholders' equity and cash flows for the three-month periods
ended August 31, 1996 and 1997 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consist
solely of normal recurring adjustments. Due to seasonal variations in the
Company's business, the results of operations for such interim periods are not
necessarily indicative of results for the full year.
F-115
<PAGE> 191
REDI RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. NOTES PAYABLE
Notes payable consist of the following at May 31:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Note payable, secured by specific rental equipment, interest
payable at 8.25%, due May 1999............................ $ 40,067 $ 27,767
Note payable, secured by specific rental equipment, interest
payable at 8.25%, due December 1999....................... -- 44,273
Note payable, secured by specific rental equipment, interest
payable at 6.9%, due May 1998............................. 16,832 8,327
Note payable, secured by specific rental equipment, interest
payable at 6.9%, due May 1997............................. 5,213 --
Note payable, secured by specific rental equipment, interest
payable at 6.9%, due June 1998............................ 18,233 9,807
Note payable, secured by specific rental equipment, interest
payable at 6.9%, due September 1997....................... 6,810 --
Note payable, secured by specific rental equipment, interest
payable at 6.9%, due September 1997....................... 6,886 1,656
Note payable, secured by specific rental equipment, interest
payable at 7.9%, due April 1997........................... 6,532 --
Note payable, secured by specific rental equipment, interest
payable at 7.9%, due April 1997........................... 6,532 --
Note payable, secured by specific rental equipment, interest
payable at 7.9%, due April 1997........................... 5,834 --
Note payable, secured by specific rental equipment, interest
payable at 7.9%, due November 1999........................ 28,286 20,780
Note payable, secured by specific rental equipment, interest
payable at 7.9%, due March 2000........................... 31,763 24,191
Note payable, secured by specific rental equipment, interest
payable at 4.9%, due June 1999............................ 21,200 14,475
Note payable, secured by specific rental equipment, interest
payable at 5.9%, due April 2000........................... -- 17,126
Note payable, taken on an insurance policy, interest payable
at 6.0%................................................... 18,382 19,484
-------- --------
$212,570 $187,886
======== ========
</TABLE>
Maturities of notes payable are as follows at May 31, 1997:
<TABLE>
<S> <C>
1998.................................................... $ 96,457
1999.................................................... 62,146
2000.................................................... 29,283
--------
$187,886
========
</TABLE>
3. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) retirement plan (the
Plan) which is subject to the provisions of ERISA. The plan was implemented in
June 1995. The Company recognized expense of $6,020 and $8,937 for the years
ended May 31, 1996 and 1997 respectively.
F-116
<PAGE> 192
REDI RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
The Company is party to legal proceedings and potential claims arising in
the ordinary course of its business. In the opinion of management, the Company
has adequate legal defense, reserves or insurance coverage with respect to these
matters so that the ultimate resolution will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
5. INCOME TAXES
Deferred tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in deferred tax assets or liabilities from
period to period.
Deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
MAY 31
----------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $(127,545) $(149,675)
Accounts receivable....................................... (138,309) (163,687)
--------- ---------
(265,854) (313,362)
Deferred tax assets:
Allowance for doubtful accounts........................... 4,628 5,730
Accounts payable.......................................... -- 24,829
--------- ---------
4,628 30,559
--------- ---------
Net deferred tax liability.................................. $(261,226) $(282,803)
========= =========
</TABLE>
Significant components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income tax expense:
Current............................................ $20,078 $15,217 $18,178
Deferred........................................... 60,838 23,063 21,577
------- ------- -------
Total income tax expense............................. $80,916 $38,280 $39,755
======= ======= =======
</TABLE>
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory tax rates to income tax expense, (benefit) is:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Tax provision at U.S. statutory rates.............. $58,252 $ 33,551 $ 32,881
Effects of graduated income tax rates.............. (8,184) (11,750) (11,750)
State income taxes................................. 13,924 7,869 7,951
Other.............................................. 16,924 8,610 10,673
------- -------- --------
$80,916 $ 38,280 $ 39,755
======= ======== ========
</TABLE>
F-117
<PAGE> 193
REDI RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED PARTY TRANSACTIONS
DEBT OBLIGATIONS
The majority stockholder of the Company loaned $148,348 to the Company in
August 1995. The proceeds of the loan were used to relieve the balance owed on
the Company's letter of credit with a bank. Debt obligations owed to related
parties consist of the following at May 31:
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Note payable, unsecured, interest payable at 7.75%,
due on demand............................................. $129,577 $92,508
</TABLE>
The Company incurred and paid interest on related party notes of $0, $8,142
and $10,544 for the years ended May 31, 1995, 1996 and 1997, respectively.
LEASE COMMITMENTS
The Company leases its facility from the majority stockholder of the
Company. The lease expires in 2013. The rental expense to related parties
included in the statements of operations was $223,531, $229,036 and $235,795 for
the years ended May 31, 1995, 1996 and 1997, respectively.
Future yearly lease commitments are derived based on the greater of 7% of
the prior year's gross sales in the lease year, $146,400 adjusted by the change
in the consumer price index since June 1992, or prior years' basis rent. For
fiscal year 1998, the Company has rental commitments totaling approximately
$234,000. The rental commitments for fiscal years 1999 through 2013 cannot yet
be determined.
7. ADVERTISING COSTS
The Company expenses advertising costs as they are incurred. The
advertising expense included in the statements of income was $68,433, $89,331
and $77,913 for the years ended May 31, 1995, 1996 and 1997, respectively.
8. SUBSEQUENT EVENT
On July 15, 1997, the stockholders of the Company entered into a letter of
intent to sell all of the Company's outstanding stock to RentX Industries, Inc.
F-118
<PAGE> 194
INSIDE BACK COVER:
An architectural rendering of a prototype Rent X store and map of stores in
United States.
<PAGE> 195
RentX Logo
<PAGE> 196
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts shown
are estimates, except for the Commission Registration Fee and NASD Filing Fee.
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 13,069
NASD Filing Fee............................................. 4,333
Nasdaq National Market Listing Fees......................... 24,500
Accounting Fees and Expenses................................ 1,150,000
Legal Fees and Expenses (other than Blue Sky)............... 175,000
Blue Sky Fees and Expenses.................................. 5,000
Printing and Engraving Expenses............................. 300,000
Transfer Agent Fees and Expenses............................ 5,000
Directors and Officers Insurance Premium for Offering....... 100,000
Miscellaneous Expenses...................................... 23,098
----------
Total............................................. $1,800,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions, gives a director or
officer who successfully defends an action the right to be so indemnified; and
permits a corporation to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other rights to which those indemnified
may be entitled under any by-law, agreement, vote of stockholders or otherwise.
As permitted by Section 145 of the Delaware Corporation Law, Article 8 of
the Certificate of Incorporation and Article VI of the Bylaws of the Company
provide for the indemnification by the Company of its directors, officers,
employees and agents against liabilities and expenses incurred in connection
with actions, suits or proceeds brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents.
Article 7 of the Company's Certificate of Incorporation, which is
incorporated by reference in this Registration Statement, provides that to the
fullest extent permitted by the Delaware Corporation Law as the same exists or
may hereafter be amended, a director of the Company shall not be liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Registrant for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
II-1
<PAGE> 197
The Company has entered into, or intends to enter into, agreements to
indemnify its directors and executive officers in addition to the
indemnification provided for in the Certificate of Incorporation and Bylaws.
These agreements, among other things, will indemnify the Company's directors and
executive officers for certain expenses (including attorneys' fees), and all
losses, claims, liabilities, judgments, fines and settlement amounts incurred by
such person arising out of or in connection with such person's service as a
director or officer of the Company to the fullest extent permitted by applicable
law.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and subject
to the limitations of the policies, against certain expenses in connection with
the defense of, and certain liabilities which might be imposed as a result of,
actions, suits or proceedings to which they are parties by reason of being or
having been such directors or officers.
Reference is also made to Section 8 of the Underwriting Agreement contained
in Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities, and Section 7 of the Registration Rights Agreement
contained in Exhibit 10.5 hereto, indemnifying certain of the Registrant's
stockholders, including controlling stockholders, and the officers and
directors, against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table and text specifies securities sold by the Registrant
since inception which were not registered under the Securities Act of 1933, the
date of each sale, the title and amount of securities sold, and the nature and
aggregate amount of consideration received by the issuer in connection with each
sale.
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF NUMBER OF SHARES AS
DATE SECURITIES CONSIDERATION SHARES CONVERTED PURCHASER
---- ---------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
March 7, 1996 Class A $ 500 1,000(1) 1,000 BACE Investments, LLC
Common
May 15, 1996 Series B $ 200,000 200 1,810,538 BACE Investments, LLC
Preferred
May 15, 1996 Series A $2,510,000 2,510 502,000 Mesirow Capital Partners VI
Preferred
May 15, 1996 Series A $2,510,000 2,510 502,000 The Edgewater Private Equity Fund II,
Preferred L.P.
May 29, 1996 Series A $1,277,000 1,277 255,400 Trustees of Grinnell College
Preferred
May 29, 1996 Series A $ 200,000 200 40,000 Larry W. Davidson and Maureen C.
Preferred Davidson
May 29, 1996 Series A $ 300,000 300 60,000 George A. Evans and Marilyn J. Evans
Preferred
May 29, 1996 Series A $ 60,000 60 12,000 Gary J. Kulesza
Preferred
May 29, 1996 Series A $ 50,000 50 10,000 Charles D. Greenidge
Preferred
August 2, 1996 Series A $ 340,000 340 68,000 Trustees of Grinnell College
Preferred
August 2, 1996 Series A $1,000,000 1,000 200,000 Inroads Capital Partners, L.P.
Preferred
November 1, 1996 Series A $ 675,000 675 135,000 Trustees of Grinnell College
Preferred
</TABLE>
II-2
<PAGE> 198
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF NUMBER OF SHARES AS
DATE SECURITIES CONSIDERATION SHARES CONVERTED PURCHASER
---- ---------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
November 1, 1996 Series A $ 465,000 465 93,000 Inroads Capital Partners, L.P.
Preferred
December 20, 1996 Series A $ 206,000 206 41,200 Inroads Capital Partners, L.P.
Preferred
January 6, 1997 Series A $ 271,000 271 54,200 Trustees of Grinnell College
Preferred
January 31, 1997 Series A $ 43,000 43 8,600 The Edgewater Private Equity Fund II,
Preferred L.P.
January 31, 1997 Series A $ 43,000 43 8,600 Mesirow Capital Partners VI
Preferred
February 14, 1997 Series A $ 451,000 451 90,200 Mesirow Capital Partners VI
Preferred
February 14, 1997 Series A $ 451,000 451 90,200 The Edgewater Private Equity Fund II,
Preferred L.P.
February 14, 1997 Series A $ 358,000 358 71,600 Trustees of Grinnell College
Preferred
February 14, 1997 Series A $ 332,000 332 66,400 Inroads Capital Partners, L.P.
Preferred
February 14, 1997 Series A $ 250,000 250 50,000 Arnold A. Bernstein
Preferred
March 14, 1997 Series A $ 200,000 200 40,000 Lawrence R. Redwine
Preferred
March 14, 1997 Series A $ 439,000 439 87,800 Trustees of Grinnell College
Preferred
March 14, 1997 Series A $ 355,000 355 71,000 The Edgewater Private Equity Fund II,
Preferred L.P.
March 14, 1997 Series A $ 355,000 355 71,000 Mesirow Capital Partners VI
Preferred
March 14, 1997 Series A $ 315,000 315 63,000 Inroads Capital Partners, L.P.
Preferred
March 14, 1997 Series A $ 170,000 170 34,000 John H. Hays
Preferred
April 21, 1997 Series A $ 208,000 208 41,600 Inroads Capital Partners, L.P.
Preferred
April 21, 1997 Series A $ 301,000 301 60,200 Mesirow Capital Partners VI
Preferred
April 21, 1997 Series A $ 301,000 301 60,200 The Edgewater Private Equity Fund II,
Preferred L.P
April 21, 1997 Series A $ 300,000 300 60,000 Trustees of Grinnell College
Preferred
May 19, 1997 Series A $ 40,000 40 8,000 Gary J. Kulesza
Preferred
May 19, 1997 Series A $ 200,000 200 40,000 Norman C. Kiser
Preferred
May 19, 1997 Series A $ 100,000 100 20,000 Richard H. Baldwin
Preferred
May 19, 1997 Series A $ 200,000 200 40,000 Jeffrey A. Eide
Preferred
May 19, 1997 Series A $ 125,000 125 25,000 Thomas D. Nugent
Preferred
</TABLE>
II-3
<PAGE> 199
<TABLE>
<CAPTION>
NUMBER OF
TITLE OF NUMBER OF SHARES AS
DATE SECURITIES CONSIDERATION SHARES CONVERTED PURCHASER
---- ---------- ------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
May 19, 1997 Series A $ 100,000 100 20,000 Charles E. Baker
Preferred
May 22, 1997 Series A $ 142,000 142 28,400 Mesirow Capital Partners
Preferred
May 22, 1997 Series A $ 142,000 142 28,400 The Edgewater Private Equity Fund II,
Preferred L.P.
May 22, 1997 Series A $ 142,000 142 28,400 Trustees of Grinnell College
Preferred
May 22, 1997 Series A $ 99,000 99 19,800 Inroads Capital Partners, L.P.
Preferred
June 9, 1997 Series A $ 200,000 200 40,000 Hershel A. Manning
Preferred
June 26, 1997 Series A $ 263,000 263 52,600 Mesirow Capital Partners VI
Preferred
June 26, 1997 Series A $ 263,000 263 52,600 The Edgewater Private Equity Fund II,
Preferred L.P.
June 26, 1997 Series A $ 263,000 263 52,600 Trustees of Grinnell College
Preferred
June 26, 1997 Series A $ 180,000 180 36,000 Inroads Capital Partners, L.P.
Preferred
June 26, 1997 Series C $ 813,000 813 127,771 Mesirow Capital Partners VI
Preferred
June 26, 1997 Series C $ 813,000 813 127,771 The Edgewater Private Equity Fund II,
Preferred L.P.
June 26, 1997 Series C $ 813,000 813 127,771 Trustees of Grinnell College
Preferred
June 26, 1997 Series C $ 561,000 561 88,167 Inroads Capital Partners, L.P.
Preferred
---------
5,722,018
=========
</TABLE>
- ---------------
(1) Adjusted for subsequent stock splits.
The following table specifies stock options with respect to Class B Common
Stock granted by the Registrant to employees as part of the consideration for
their agreement to become employees of the Registrant, the date of each grant,
the number of shares of Class B Common Stock subject to each grant and the name
of each optionee.
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER
DATE SHARES SHARE OPTIONEE
---- --------- --------- --------
<S> <C> <C> <C>
November 11, 1996................................ 38,462 $0.15 Arnold A. Bernstein
November 11, 1996................................ 64,984 $8.00 Arnold A. Bernstein
April 1, 1996.................................... 19,231 $0.10 Gary J. Kulesza
April 1, 1996.................................... 32,532 $8.00 Gary J. Kulesza
May 19, 1997..................................... 40,000 $7.00 Thomas D. Nugent
January 31, 1997................................. 4,808 $1.00 Charles E. Baker
April 14, 1997................................... 2,500 $1.00 Stephen T. Carlson
August 4, 1997................................... 1,450 $8.00 James Conley
September 2, 1997................................ 1,500 $8.00 Darcy Erickson
</TABLE>
II-4
<PAGE> 200
Each sale of securities described above was made in reliance on the
exemptions from registration contained in Section 4(2) of the Securities Act of
1933 for transactions not involving any public offering, except that
transactions involving the Stock Option Plans, were carried out in reliance upon
Rule 701 of the Securities Act of 1933. The recipients in each case represented
their intention to acquire the securities for investment only and not with a
view to the distribution thereof.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement++
3.1 -- Amended and Restated Certificate of Incorporation of the
Company+
3.2 -- Amended and Restated Bylaws of the Company+
5.1 -- Opinion of Sherman & Howard L.L.C. as to the validity of
the securities being registered hereby++
10.1 -- Credit Agreement dated as of May 15, 1996 among RentX
Industries, Inc., Harris Trust and Savings Bank and the
Lenders Party Thereto, as amended by a First Amendment
thereto dated October 28, 1996, a Second Amendment
thereto dated April 16, 1997 and a Third Amendment
thereto dated August 25, 1997+
10.2 -- Consulting Agreement effective as of May 1, 1997, between
BACE Industries, LLC and RentX Industries, Inc., as
amended by First Amendment to Consulting Agreement dated
August 1, 1997+
10.3 -- Investment Agreement dated as of May 15, 1996, among
RentX Industries, Inc., Mesirow Capital Partners VI, The
Edgewater Private Equity Fund II, L.P., and BACE
Investments, LLC, as amended by Amendment No. 1 effective
as of August 2, 1996, by Amendment No. 2 effective as of
December 19, 1996, Amendment No. 3, effective as of March
11, 1997, Amendment No. 4 effective as of May 19, 1997,
Amendment No. 5 effective as of June 26, 1997, and
Amendment No. 6 effective as of September 19, 1997+
10.4 -- Stockholders Agreement dated as of May 15, 1996, among
RentX Industries, Inc., Mesirow Capital Partners VI, The
Edgewater Private Equity Fund II, L.P., BACE Investments,
LLC, Richard M. Tyler and Craig J. Zoellner, as amended
by Amendment No. 1 thereto dated as of May 15, 1996, by
Amendment No. 2 thereto effective as of June 9, 1997, by
Amendment No. 3 thereto effective as of June 26, 1997,
and by Amendment No. 4 thereto effective as of September
19, 1997+
10.5 -- Registration Rights Agreement dated as of May 15, 1996,
among RentX Industries, Inc., Mesirow Capital Partners
VI, The Edgewater Private Equity Fund II, L.P., and BACE
Investments, LLC, as amended by Amendment No. 1 thereto
dated June 26, 1997+
10.6 -- Asset Purchase Agreement dated as of May 15, 1996 between
RentX Industries, Inc., and Zodiac Rentals, Inc., Zodiac
Rentals III, Inc., George A. Evans, Marilyn J. Evans,
Maureen C. Davidson and Larry W. Davidson+
10.7 -- Stock Purchase Agreement dated as of May 29, 1996 between
RentX Industries, Inc., and Milton L. Neumann and Alice
E. Neumann, and Milt and Alice Neumann, Cheryl L.
Kettrick and Steven E. Neumann+
10.8 -- Asset Purchase Agreement dated as of August 2, 1996
between RentX Industries, Inc., and Rifle Rentals, Inc.,
Rental Country U.S.A., Inc., G.R.M. Company, Inc., Rocky
Mountain Rentals, Inc., Glen R. Miller and Elizabeth
Miller+
10.9 -- Asset Purchase Agreement dated as of November 1, 1996
between RentX Industries, Inc., and U-Rent, Inc.,
Lawrence R. Redwine and John P. Redwine+
10.10 -- Asset Purchase Agreement dated as of December 17, 1996
between RentX Industries, Inc., and U-Do-It Rental
Centers, Inc., Charles E. Campbell, CAAR Partnership,
Scott W. Arnone and Lori K. Arnone+
</TABLE>
II-5
<PAGE> 201
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.11 -- Asset Purchase Agreement dated as of January 31, 1997
between RentX Industries, Inc., and Rifle Rentals, Inc.,
Rental Country U.S.A., Inc., G.R.M. Company, Inc., Rocky
Mountain Rentals, Inc., Glen R. Miller and Elizabeth
Miller, as amended+
10.12 -- Asset Purchase Agreement dated as of February 14, 1997
between RentX Industries, Inc., and Hays Rental & Sales
of El Dorado, Inc., Hays Rental & Sales of Hot Springs,
Inc., Magnolia, Inc., Camden, Inc., and Arkadelphia,
Inc., Hays Leasing, Inc. and John H. Hays+
10.13 -- Asset Purchase Agreement dated as of March 14, 1997
between RentX Industries, Inc., and CVR, Inc., Norman C.
Kiser, Richard H. Baldwin, Daniel C. Showalter and Tracy
C. Smith+
10.14 -- Purchase Agreement dated as of April 14, 1997 between
RentX Industries, Inc., and Irwin R. Scott, Carol J.
Scott and Jeffrey Eide+
10.15 -- Purchase Agreement dated as of May 19, 1997 between RentX
Industries, Inc., and Hershel A. Manning and Carolyn W.
Manning+
10.16 -- Purchase Agreement dated as of June 26, 1997 between
RentX Industries, Inc. and William Titus, Jeffrey W.
Titus and Christopher Titus+
10.17 -- Purchase Agreement between RentX Industries, Inc. and A-Z
Rents It of Fort Collins, Inc., Ronald K. Wray and Janet
L. Wray+
10.18 -- Purchase Agreement between RentX Industries, Inc., A-1
Rent All, Inc. Charitable Remainder Unitrust, A-1 Rent
All, Inc., A. Reed Franklin, Patricia Franklin, The
Franklin Children Trust No. One and The Cynthia Frazier
Trust No. One+
10.19 -- Purchase Agreement between RentX Industries, Inc., A-1
Rent All of Marshall, Inc., Patricia Franklin, A. Reed
Franklin and Richard Jackson+
10.20 -- Purchase Agreement between RentX Industries, Inc.,
Mer-Cal Enterprises, Inc., d/b/a Duncan Rents All, Inc.,
Dean Callas and W. R. Merrill+
10.21 -- Nonqualified Stock Option Plan -- January, 1997+
10.22 -- Nonqualified Stock Option Plan -- May, 1997+
10.23 -- Nonqualified Stock Option Plan -- June, 1997+
10.24 -- Stock Option Plan for Employees+
10.25 -- Stock Option Plan for Non-Employee Directors+
10.26 -- Restated Nonqualified Stock Option Agreement [Management]
effective as of November 11, 1996 between RentX
Industries, Inc., and Arnold A. Bernstein+
10.27 -- Restated Nonqualified Stock Option Agreement
[Management-Vested] effective as of November 11, 1996
between RentX Industries, Inc., and Arnold A. Bernstein+
10.28 -- Restated Nonqualified Stock Option Agreement [Management]
effective as of April 1, 1996 between RentX Industries,
Inc., and Gary J. Kulesza+
10.29 -- Restated Nonqualified Stock Option Agreement
[Management-Vested] effective as of April 1, 1996 between
RentX Industries, Inc., and Gary J. Kulesza+
10.30 -- Employment Agreement dated April 3, 1997 between RentX
Industries, Inc., and Stephen T. Carlson+
10.31 -- Employment Agreement dated November 13, 1996 between
RentX Industries, Inc., and Arnold A Bernstein, as
amended February 17, 1997+
10.32 -- Employment Agreement dated April 1, 1996 between RentX
Industries, Inc., and Gary J. Kulesza, as amended
February 25, 1997+
10.33 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 9215 Federal, Westminster, Colorado+
10.34 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 1230 N. Park, Castle Rock, Colorado+
</TABLE>
II-6
<PAGE> 202
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.35 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 15350 E. Evans, Denver, Colorado+
10.36 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 5860 E. Evans, Denver, Colorado+
10.37 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 2131 S. Jasmine, Denver, Colorado+
10.38 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 2250 S. Fraser, Aurora, Colorado+
10.39 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 600 Fraser Street, Aurora, Colorado+
10.40 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 10685 S. Parker Road, Aurora, Colorado+
10.41 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 5862 E. Evans, Denver, Colorado+
10.42 -- Lease -- Plaza 6000 Partners, a California limited
partnership (as landlord) and RentX Industries, Inc., a
Delaware corporation (as tenant), as amended by First,
Second and Third Amendments+
10.43 -- Form of Indemnification Agreement to be entered into
between RentX Industries, Inc. and its Executive Officers
and Directors+
10.44 -- Nonqualified Stock Option Agreement [Management]
effective as of May 19, 1997, between RentX Industries,
Inc. and Thomas D. Nugent++
10.45 -- Employment Agreement dated April 7, 1997 between RentX
Industries, Inc. and Thomas D. Nugent++
11.1 -- Statement re: computation of per share earnings+
21.1 -- Subsidiaries+
23.1 -- Consent of Ernst & Young LLP++
23.2 -- Consent of Pester & Company Certified Public Accountants,
P.C.++
23.3 -- Consent of LeMaster & Daniels PLLC++
23.4 -- Consent of Williams & Parsons, PA++
23.5 -- Consent of Sherman & Howard L.L.C. (included in Exhibit
5.1)++
23.6 -- Consent of American Rental Association++
23.7 -- Consent of Manfredi & Associates++
24.1 -- Powers of Attorney (included in Signature Page)+
27.1 -- Financial Data Schedule+
</TABLE>
- ---------------
+ Previously filed.
++ Filed herewith.
(b) Financial Statement Schedules
Other schedules are not included because the required information is not
present or is included in the consolidated financial statements or notes
thereto.
II-7
<PAGE> 203
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or Rule
497(h) under the Securities Act shall be deemed to be a part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-8
<PAGE> 204
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on November 3, 1997.
RENTX INDUSTRIES, INC.
By: /s/ ARNOLD A. BERNSTEIN
----------------------------------
Arnold A. Bernstein
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARNOLD A. BERNSTEIN President, Chief Executive November 3, 1997
- ----------------------------------------------------- Officer, and Director
Arnold A. Bernstein
/s/ THOMAS D. NUGENT Chief Financial Officer November 3, 1997
- -----------------------------------------------------
Thomas D. Nugent
Stephen T. Carlson Vice President-Controller
(Principal Accounting
Officer)
Richard M. Tyler Director
Craig J. Zoellner Director
Thomas E. Galuhn Director
James A. Gordon Director
William P. Sutter, Jr. Director
Margaret G. Fisher Director
By: /s/ ARNOLD A. BERNSTEIN November 3, 1997
-------------------------------------------------
Arnold A. Bernstein,
Attorney-in-fact
</TABLE>
II-9
<PAGE> 205
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
1.1 -- Form of Underwriting Agreement++
3.1 -- Amended and Restated Certificate of Incorporation of the
Company+
3.2 -- Amended and Restated Bylaws of the Company+
5.1 -- Opinion of Sherman & Howard L.L.C. as to the validity of
the securities being registered hereby++
10.1 -- Credit Agreement dated as of May 15, 1996 among RentX
Industries, Inc., Harris Trust and Savings Bank and the
Lenders Party Thereto, as amended by a First Amendment
thereto dated October 28, 1996, a Second Amendment
thereto dated April 16, 1997 and a Third Amendment
thereto dated August 25, 1997+
10.2 -- Consulting Agreement effective as of May 1, 1997, between
BACE Industries, LLC and RentX Industries, Inc., as
amended by First Amendment to Consulting Agreement dated
August 1, 1997+
10.3 -- Investment Agreement dated as of May 15, 1996, among
RentX Industries, Inc., Mesirow Capital Partners VI, The
Edgewater Private Equity Fund II, L.P., and BACE
Investments, LLC, as amended by Amendment No. 1 effective
as of August 2, 1996, by Amendment No. 2 effective as of
December 19, 1996, Amendment No. 3, effective as of March
11, 1997, Amendment No. 4 effective as of May 19, 1997,
Amendment No. 5 effective as of June 26, 1997, and
Amendment No. 6 effective as of September 19, 1997+
10.4 -- Stockholders Agreement dated as of May 15, 1996, among
RentX Industries, Inc., Mesirow Capital Partners VI, The
Edgewater Private Equity Fund II, L.P., BACE Investments,
LLC, Richard M. Tyler and Craig J. Zoellner, as amended
by Amendment No. 1 thereto dated as of May 15, 1996, by
Amendment No. 2 thereto effective as of June 9, 1997, by
Amendment No. 3 thereto effective as of June 26, 1997,
and by Amendment No. 4 thereto effective as of September
19, 1997+
10.5 -- Registration Rights Agreement dated as of May 15, 1996,
among RentX Industries, Inc., Mesirow Capital Partners
VI, The Edgewater Private Equity Fund II, L.P., and BACE
Investments, LLC, as amended by Amendment No. 1 thereto
dated June 26, 1997+
10.6 -- Asset Purchase Agreement dated as of May 15, 1996 between
RentX Industries, Inc., and Zodiac Rentals, Inc., Zodiac
Rentals III, Inc., George A. Evans, Marilyn J. Evans,
Maureen C. Davidson and Larry W. Davidson+
10.7 -- Stock Purchase Agreement dated as of May 29, 1996 between
RentX Industries, Inc., and Milton L. Neumann and Alice
E. Neumann, and Milt and Alice Neumann, Cheryl L.
Kettrick and Steven E. Neumann+
10.8 -- Asset Purchase Agreement dated as of August 2, 1996
between RentX Industries, Inc., and Rifle Rentals, Inc.,
Rental Country U.S.A., Inc., G.R.M. Company, Inc., Rocky
Mountain Rentals, Inc., Glen R. Miller and Elizabeth
Miller+
10.9 -- Asset Purchase Agreement dated as of November 1, 1996
between RentX Industries, Inc., and U-Rent, Inc.,
Lawrence R. Redwine and John P. Redwine+
10.10 -- Asset Purchase Agreement dated as of December 17, 1996
between RentX Industries, Inc., and U-Do-It Rental
Centers, Inc., Charles E. Campbell, CAAR Partnership,
Scott W. Arnone and Lori K. Arnone+
10.11 -- Asset Purchase Agreement dated as of January 31, 1997
between RentX Industries, Inc., and Rifle Rentals, Inc.,
Rental Country U.S.A., Inc., G.R.M. Company, Inc., Rocky
Mountain Rentals, Inc., Glen R. Miller and Elizabeth
Miller, as amended+
10.12 -- Asset Purchase Agreement dated as of February 14, 1997
between RentX Industries, Inc., and Hays Rental & Sales
of El Dorado, Inc., Hays Rental & Sales of Hot Springs,
Inc., Magnolia, Inc., Camden, Inc., and Arkadelphia,
Inc., Hays Leasing, Inc. and John H. Hays+
</TABLE>
<PAGE> 206
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.13 -- Asset Purchase Agreement dated as of March 14, 1997
between RentX Industries, Inc., and CVR, Inc., Norman C.
Kiser, Richard H. Baldwin, Daniel C. Showalter and Tracy
C. Smith+
10.14 -- Purchase Agreement dated as of April 14, 1997 between
RentX Industries, Inc., and Irwin R. Scott, Carol J.
Scott and Jeffrey Eide+
10.15 -- Purchase Agreement dated as of May 19, 1997 between RentX
Industries, Inc., and Hershel A. Manning and Carolyn W.
Manning+
10.16 -- Purchase Agreement dated as of June 26, 1997 between
RentX Industries, Inc. and William Titus, Jeffrey W.
Titus and Christopher Titus+
10.17 -- Purchase Agreement between RentX Industries, Inc. and A-Z
Rents It of Fort Collins, Inc., Ronald K. Wray and Janet
L. Wray+
10.18 -- Purchase Agreement between RentX Industries, Inc., A-1
Rent All, Inc. Charitable Remainder Unitrust, A-1 Rent
All, Inc., A. Reed Franklin, Patricia Franklin, The
Franklin Children Trust No. One and The Cynthia Frazier
Trust No. One+
10.19 -- Purchase Agreement between RentX Industries, Inc., A-1
Rent All of Marshall, Inc., Patricia Franklin, A. Reed
Franklin and Richard Jackson+
10.20 -- Purchase Agreement between RentX Industries, Inc.,
Mer-Cal Enterprises, Inc., d/b/a Duncan Rents All, Inc.,
Dean Callas and W. R. Merrill+
10.21 -- Nonqualified Stock Option Plan -- January, 1997+
10.22 -- Nonqualified Stock Option Plan -- May, 1997+
10.23 -- Nonqualified Stock Option Plan -- June, 1997+
10.24 -- Stock Option Plan for Employees+
10.25 -- Stock Option Plan for Non-Employee Directors+
10.26 -- Restated Nonqualified Stock Option Agreement [Management]
effective as of November 11, 1996 between RentX
Industries, Inc., and Arnold A. Bernstein+
10.27 -- Restated Nonqualified Stock Option Agreement
[Management-Vested] effective as of November 11, 1996
between RentX Industries, Inc., and Arnold A. Bernstein+
10.28 -- Restated Nonqualified Stock Option Agreement [Management]
effective as of April 1, 1996 between RentX Industries,
Inc., and Gary J. Kulesza+
10.29 -- Restated Nonqualified Stock Option Agreement
[Management-Vested] effective as of April 1, 1996 between
RentX Industries, Inc., and Gary J. Kulesza+
10.30 -- Employment Agreement dated April 3, 1997 between RentX
Industries, Inc., and Stephen T. Carlson+
10.31 -- Employment Agreement dated November 13, 1996 between
RentX Industries, Inc., and Arnold A Bernstein, as
amended February 17, 1997+
10.32 -- Employment Agreement dated April 1, 1996 between RentX
Industries, Inc., and Gary J. Kulesza, as amended
February 25, 1997+
10.33 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 9215 Federal, Westminster, Colorado+
10.34 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 1230 N. Park, Castle Rock, Colorado+
10.35 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 15350 E. Evans, Denver, Colorado+
10.36 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 5860 E. Evans, Denver, Colorado+
</TABLE>
<PAGE> 207
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.37 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 2131 S. Jasmine, Denver, Colorado+
10.38 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 2250 S. Fraser, Aurora, Colorado+
10.39 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 600 Fraser Street, Aurora, Colorado+
10.40 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 10685 S. Parker Road, Aurora, Colorado+
10.41 -- Lease Agreement between RentX Industries, Inc. and George
Evans and Larry Davidson, dated May 15, 1997, for the
property at 5862 E. Evans, Denver, Colorado+
10.42 -- Lease -- Plaza 6000 Partners, a California limited
partnership (as landlord) and RentX Industries, Inc., a
Delaware corporation (as tenant), as amended by First,
Second and Third Amendments+
10.43 -- Form of Indemnification Agreement to be entered into
between RentX Industries, Inc. and its Executive Officers
and Directors+
10.44 -- Nonqualified Stock Option Agreement [Management]
effective as of May 19, 1997, between RentX Industries,
Inc. and Thomas D. Nugent++
10.45 -- Employment Agreement dated April 7, 1997 between RentX
Industries, Inc. and Thomas D. Nugent++
11.1 -- Statement re: computation of per share earnings+
21.1 -- Subsidiaries+
23.1 -- Consent of Ernst & Young LLP++
23.2 -- Consent of Pester & Company Certified Public Accountants,
P.C.++
23.3 -- Consent of LeMaster & Daniels PLLC++
23.4 -- Consent of Williams & Parsons, PA++
23.5 -- Consent of Sherman & Howard L.L.C. (included in Exhibit
5.1)++
23.6 -- Consent of American Rental Association++
23.7 -- Consent of Manfredi & Associates++
24.1 -- Powers of Attorney (included in Signature Page)+
27.1 -- Financial Data Schedule+
</TABLE>
- ---------------
+ Previously filed.
++ Filed herewith.
<PAGE> 1
EXHIBIT 1.1
3,750,000 SHARES1
RENTX INDUSTRIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 1997
BANCAMERICA ROBERTSON, STEPHENS & COMPANY
BT ALEX. BROWN INCORPORATED
As Representatives of the several Underwriters
c/o BancAmerica Robertson, Stephens & Company
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
RentX Industries, Inc., a Delaware corporation (the
"Company"), addresses you as the Representatives of each of the persons, firms
and corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreements with the several
Underwriters as follows:
1. Description of Shares. The Company proposes to issue
and sell 3,750,000 shares of its authorized and unissued Common Stock, par
value $.01 per share (the "Firm Shares"), to the several Underwriters. The
Company also proposes to grant to the Underwriters an option to purchase up to
562,500 additional shares of the Company's Common Stock, par value $.01 per
share (the "Option Shares"), as provided in Section 7 hereof. As used in this
Agreement, the term "Shares" shall include the Firm Shares and the Option
Shares. All shares of Common Stock, par value $.01 per share, of the Company
to be outstanding after giving effect to the sales contemplated hereby,
including the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the
Company. The Company represents and warrants to and agrees with each
Underwriter that:
(a) A registration statement on Form S-1 (File
No. 333-36341) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act and has
been filed with the Commission; such amendments to such registration statement,
such amended prospectuses subject to completion and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared
and filed with the Commission; and
__________________________________
1 Plus an option to purchase up to 562,500 additional shares from the Company
to cover over-allotments.
<PAGE> 2
the Company will file such additional amendments to such registration
statement, such amended prospectuses subject to completion and such abbreviated
registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
If the registration statement relating to the Shares
has been declared effective under the Act by the Commission, the Company will
prepare and promptly file with the Commission the information omitted from the
registration statement pursuant to Rule 430A(a) or, if BancAmerica Robertson,
Stephens & Company, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or
(7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to the registration statement (including a final form of prospectus).
If the registration statement relating to the Shares has not been declared
effective under the Act by the Commission, the Company will prepare and
promptly file an amendment to the registration statement, including a final
form of prospectus, or, if BancAmerica Robertson, Stephens & Company, on behalf
of the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the information required to be included in any term
sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations. The term "Registration Statement" as used in this Agreement shall
mean such registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434
of the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any abbreviated registration statement pursuant to
Rule 462(b) of the Rules and Regulations relating thereto after the effective
date of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of such abbreviated registration
statement) such registration statement as so amended, together with any such
abbreviated registration statement. The term "Prospectus" as used in this
Agreement shall mean the prospectus relating to the Shares as included in such
Registration Statement at the time it becomes effective (including, if the
Company omitted information from the Registration Statement pursuant to Rule
430A(a) of the Rules and Regulations, the information deemed to be a part of
the Registration Statement at the time it became effective pursuant to Rule
430A(b) of the Rules and Regulations); provided, however, that if in reliance
on Rule 434 of the Rules and Regulations and with the consent of BancAmerica
Robertson, Stephens & Company, on behalf of the several Underwriters, the
Company shall have provided to the Underwriters a term sheet pursuant to Rule
434(b) or (c), as applicable, prior to the time that a confirmation is sent or
given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall
mean the "prospectus subject to completion" (as defined in Rule 434(g) of the
Rules and Regulations) last provided to the Underwriters by the Company and
circulated by the Underwriters to all prospective purchasers of the Shares
(including the information deemed to be a part of the Registration Statement at
the time it became effective pursuant to Rule 434(d) of the Rules and
Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the Underwriters for such use.
If in reliance on Rule 434 of the Rules and Regulations and with the consent of
BancAmerica Robertson, Stephens & Company, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement.
(b) The Commission has not issued any order
preventing or suspending the use of any Preliminary Prospectus or instituted
proceedings for that purpose, and each such Preliminary Prospectus has
2.
<PAGE> 3
conformed in all material respects to the requirements of the Act and the Rules
and Regulations and, as of its date, has not included any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up
to and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the Registration
Statement, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (iii) the Prospectus, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties contained in
this subparagraph (b) shall apply to information contained in or omitted from
the Registration Statement or Prospectus, or any amendment or supplement
thereto, in reliance upon, and in conformity with, written information relating
to any Underwriter furnished to the Company by such Underwriter specifically
for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has
been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation with full
power and authority (corporate and other) to own, lease and operate its
properties and conduct its business as described in the Prospectus; the Company
owns all of the outstanding capital stock of its subsidiaries free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
except for the security interest granted to secure the Company's bank line of
credit described in the Registration Statement; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from
state, federal and other regulatory authorities which are material to the
conduct of its business, all of which are valid and in full force and effect;
neither the Company nor any of its subsidiaries is in violation of its
respective charter or bylaws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound; and neither the Company nor any of its
subsidiaries is in material violation of any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or
any of its subsidiaries or over their respective properties of which it has
knowledge. The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than those subsidiaries listed
in Exhibit 21 to the Registration Statement.
(d) The Company has full legal right, power and
authority to enter into this Agreement and perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the performance
of this Agreement and the consummation of the transactions herein contemplated
will not result in a material breach
3.
<PAGE> 4
or violation of any of the terms and provisions of, or constitute a default
under, (i) any bond, debenture, note or other evidence of indebtedness, or
under any lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which it or any of its subsidiaries or their
respective properties may be bound, (ii) the charter or bylaws of the Company
or any of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of
its subsidiaries or over their respective properties. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company or any of its subsidiaries of the transactions herein
contemplated, except such as may be required under the Act or under state or
other securities or Blue Sky laws, all of which requirements have been
satisfied in all material respects.
(e) There is not any pending or, to the best of
the Company's knowledge, threatened action, suit, claim or proceeding against
the Company, any of its subsidiaries or any of their respective officers or any
of their respective properties, assets or rights before any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its subsidiaries of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the
Act or the Rules and Regulations which have not been accurately described in
all material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of
the Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state the substance
of the instruments defining the capitalization of the Company); the Firm Shares
and the Option Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable,
and will be sold free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; and no preemptive right, co-sale
right, registration right, right of first refusal or other similar right of
shareholders exists with respect to any of the Firm Shares or Option Shares or
the issuance and sale thereof other than those that have been expressly waived
prior to the date hereof and those that will automatically expire upon and will
not apply to the consummation of the transactions contemplated on the Closing
Date. No further approval or authorization of any shareholder, the Board of
Directors of the Company or others is required for the issuance and sale or
transfer of the Shares except as may be required under the Act or under state
or other securities or Blue Sky laws. All issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and were not issued in
violation of or subject to any preemptive right, or other rights to subscribe
for or purchase shares and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in the Prospectus and the financial statements of the
Company, and the related notes thereto, included in the Prospectus, neither the
Company nor any subsidiary has outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
4.
<PAGE> 5
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights.
(g) Ernst & Young LLP, Pester & Company, P.C.,
LeMaster & Daniels PLLC and Williams & Parsons, PA, each of which firms has
expressed their opinion with respect to certain of the financial statements,
together with the related schedules and notes, as of the respective dates of
such financial statements, filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited financial statements of the Company, together with the related
schedules and notes, and the unaudited financial information, forming part of
the Registration Statement and Prospectus, and the audited financial statements
of Zodiac Rentals, A to Z Rentals and Sales, Inc., E-Z Way Rentals, Redwine
Enterprise, Inc. dba U-Rent, Inc., U-Do-It Rental Centers, Inc. and Affiliate,
Hays Rental and Sales and Affiliates, CVR, Inc., Newmanco, Inc. dba A-1 Rental
Centers, Titus Rental Services Companies, Inc. dba Suburban, Mer-Cal
Enterprises, Inc. dba Duncan Rental-Alls and Redi Rentals, Inc. fairly present
the financial position and the results of operations of the Company or such
other entity at the respective dates and for the respective periods to which
they apply; and all audited financial statements, together with the related
schedules and notes, and the unaudited financial information, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary financial and operating data included in the Registration
Statement present fairly the information shown therein and have been compiled
on a basis consistent with the audited financial statements presented therein.
The pro forma financial information included under the caption "Summary
Financial Information and Operating Data", "Selected Financial Information and
Operating Data", "Summary Unaudited Pro Forma Financial Information" and
"Unaudited Pro Forma Financial Information" and elsewhere in the Prospectus
present fairly the information contained therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly presented on the bases described
therein, and the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of
which information is given in the Registration Statement and Prospectus, there
has not been (i) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (ii) any transaction that is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (iii) any
obligation, direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or its
subsidiaries, except obligations incurred in the ordinary course of business,
(iv) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries that is material to the Company and its subsidiaries
considered as one enterprise, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or any of its subsidiaries which has been sustained or
will have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
(i) Except as set forth in the Registration
Statement and Prospectus, (i) each of the Company and its subsidiaries has good
and marketable title to all properties and assets described in the Registration
Statement and Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as
5.
<PAGE> 6
one enterprise, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Registration Statement and Prospectus
are valid agreements, enforceable by the Company and its subsidiaries (as
applicable), except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) each of the Company and its subsidiaries has
valid and enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles. Except as set forth in the Registration
Statement and Prospectus, the Company owns or leases all such properties as are
necessary to its operations as now conducted or as proposed to be conducted.
(j) The Company and its subsidiaries have timely
filed all necessary federal, state and foreign income and franchise tax returns
and have paid all taxes shown thereon as due, and there is no tax deficiency
that has been or, to the best of the Company's knowledge, might be asserted
against the Company or any of its subsidiaries that might have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise; and all tax liabilities are adequately provided for on the
books of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain
insurance with insurers of recognized financial responsibility of the types and
in the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against, all of which insurance is in full force and effect; neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for; and neither the Company nor any such subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(l) To the best of the Company's knowledge, no
labor disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent; and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its principal suppliers or
subcontractors that might be expected to result in a material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) Each of the Company and its subsidiaries owns
or possesses adequate rights to use all patents, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names and copyrights
which are necessary to conduct its businesses as described in the Registration
Statement and Prospectus; the expiration of any patents, patent rights, trade
secrets, trademarks, service marks, trade names or copyrights would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; the Company has not received any notice of, and
has no knowledge of, any infringement of or conflict with asserted rights of
the Company by others with respect to any patent, patent rights, inventions,
trade secrets, know-how, trademarks, service marks, trade names or copyrights;
and the Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a material
adverse effect on the condition
6.
<PAGE> 7
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise.
(n) The Common Stock has been approved for
quotation on The Nasdaq National Market, subject to official notice of
issuance.
(o) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" or a company "controlled" by an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not
distribute prior to the later of (i) the Closing Date, or any date on which
Option Shares are to be purchased, as the case may be, and (ii) completion of
the distribution of the Shares, any offering material in connection with the
offering and sale of the Shares other than any Preliminary Prospectuses, the
Prospectus, the Registration Statement and other materials, if any, permitted
by the Act.
(q) Neither the Company nor any of its
subsidiaries has at any time during the last five (5) years (i) made any
unlawful contribution to any candidate for foreign office or failed to disclose
fully any contribution in violation of law, or (ii) made any payment to any
federal or state governmental officer or official, or other person charged with
similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof.
(r) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company and
each beneficial owner of Common Stock has agreed in writing that such person
will not, for a period of 180 days from the date that the Registration
Statement is declared effective by the Commission (the "Lock-up Period"), offer
to sell, contract to sell, or otherwise sell (including, without limitation,
any short sale), dispose of, loan, pledge (except to secure borrowings of the
Company) or grant any rights with respect to (collectively, a "Disposition")
any shares of Common Stock, any options or warrants to purchase any shares of
Common Stock or any securities convertible into or exchangeable for shares of
Common Stock (collectively, "Securities") now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by
this restriction, (ii) as a distribution to partners or shareholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) in a pledge to any bank or other
financial institution to secure a bona fide extension of credit provided that
the creditor agrees in writing to be bound by the terms of this restriction; or
(iv) with the prior written consent of BancAmerica Robertson, Stephens &
Company. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a
complete and accurate list of all securityholders of the Company and the number
and type of securities held by each securityholder. The Company has provided
to counsel for the Underwriters true, accurate and complete copies of all of
the agreements pursuant to which its officers, directors and shareholders have
agreed to such restrictions (the "Lock-up Agreements"). The Company hereby
represents and warrants that it will not release any of its officers, directors
or other shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancAmerica Robertson,
Stephens & Company.
7.
<PAGE> 8
(t) Except as set forth in the Registration
Statement and Prospectus, (i) the Company is in compliance with all rules, laws
and regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601,
et seq.), or otherwise designated as a contaminated site under applicable state
or local law.
(u) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(v) There are no outstanding loans, advances
(except normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for the benefit of
any of the officers or directors of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(w) The Company has complied with all provisions
of Section 517.075, Florida Statutes relating to doing business with the
Government of Cuba or with any person or affiliate located in Cuba.
3. Purchase, Sale and Delivery of Shares. On the basis
of the representations, warranties and agreements herein contained, but subject
to the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
receipt of a wire transfer reference number issued by the Federal Reserve
System evidencing payment of the purchase price therefor by the several
Underwriters by wire transfer of immediately available funds to an account
specified in writing by the Company with regard to the Shares being purchased
from the Company, at the offices of Sherman & Howard L.L.C., 3000 First
Interstate Tower North, 633 Seventeenth Street, Denver, Colorado 80202 (or at
such other place as may be agreed upon among the Representatives and the
Company), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business
day following the first day that Shares are traded, (b) if this Agreement is
executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th)
full business day following the day that this Agreement is executed and
delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available
to the Representatives copies of the Prospectus within the time provided in
Section 4(d) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later than two (2) full business days
following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you
8.
<PAGE> 9
may reasonably request for checking at least one (1) full business day prior to
the Closing Date and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
the Closing Date. If the Representatives so elect, delivery of the Firm Shares
may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public
offering price of $_____ per share. After the initial public offering, the
several Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), on the
inside front cover concerning stabilization and over-allotment by the
Underwriters, and under the second and sixth paragraphs under the caption
"Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement,
and you, on behalf of the respective Underwriters, represent and warrant to the
Company that the statements made therein do not include any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees
with the several Underwriters that:
(a) The Company will use its best efforts to
cause the Registration Statement and any amendment thereof, if not effective at
the time and date that this Agreement is executed and delivered by the parties
hereto, to become effective as promptly as possible; the Company will use its
best efforts to cause any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations as may be required subsequent to the date
the Registration Statement is declared effective to become effective as
promptly as possible; the Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any abbreviated
registration statement has become effective or any supplement to the Prospectus
has been filed; if the Company omitted information from the Registration
Statement at the time it was originally declared effective in reliance upon
Rule 430A(a) of the Rules and Regulations, the Company will provide evidence
satisfactory to you that the Prospectus contains such information and has been
filed, within the time period prescribed, with the Commission pursuant to
subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to such Registration Statement as originally
declared effective which is declared effective by the Commission; if the
Company files a term sheet pursuant to Rule 434 of the Rules and Regulations,
the Company will provide evidence satisfactory to you that the Prospectus and
term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of
the Rules and Regulations, have been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules
and Regulations; if for any reason the filing of the final form of Prospectus
is required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable
9.
<PAGE> 10
in connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if,
at any time when a prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a result of which the
Prospectus or any other prospectus relating to the Shares as then in effect
would include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine (9) months or more after
the effective date of the Registration Statement in connection with the sale of
the Shares, it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
(b) The Company will advise you, promptly after
it shall receive notice or obtain knowledge, of the issuance of any stop order
by the Commission suspending the effectiveness of the Registration Statement or
of the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use its best efforts to
qualify the Shares for offering and sale under the securities laws of such
jurisdictions as you may designate and to continue such qualifications in
effect for so long as may be required for purposes of the distribution of the
Shares, except that the Company shall not be required in connection therewith
or as a condition thereof to qualify as a foreign corporation or to execute a
general consent to service of process in any jurisdiction in which it is not
otherwise required to be so qualified or to so execute a general consent to
service of process. In each jurisdiction in which the Shares shall have been
qualified as above provided, the Company will make and file such statements and
reports in each year as are or may be required by the laws of such
jurisdiction.
(d) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, in no event later than the first (1st) full business
day following the first day that Shares are traded, copies of the Registration
Statement (two of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements
to such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request. Notwithstanding the foregoing, if BancAmerica
Robertson, Stephens & Company, on behalf of the several Underwriters, shall
agree to the utilization of Rule 434 of the Rules and Regulations, the Company
shall provide to you copies of a Preliminary Prospectus updated in all respects
through the date specified by you in such quantities as you may from time to
time reasonably request.
(e) The Company will make generally available to
its securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration
Statement, an earnings statement (which will be in reasonable detail but need
not be audited) complying with the provisions of Section 11(a) of the Act and
covering a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the
date hereof, the Company will furnish to its shareholders as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder,
10.
<PAGE> 11
upon request (i) concurrently with furnishing such reports to its shareholders,
statements of operations of the Company for each of the first three (3)
quarters in the form furnished to the Company's shareholders, (ii) concurrently
with furnishing to its shareholders, a balance sheet of the Company as of the
end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of
all reports (financial or other) mailed to shareholders, (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the National Association
of Securities Dealers, Inc. ("NASD"), (v) every material press release and
every material news item or article in respect of the Company or its affairs
which was generally released to shareholders or prepared by the Company or any
of its subsidiaries, and (vi) any additional information of a public nature
concerning the Company or its subsidiaries, or its business which you may
reasonably request. During such five (5) year period, if the Company shall
have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from
the sale of the Shares being sold by it in the manner set forth under the
caption "Use of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent
and, if necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for its Common
Stock.
(i) If the transactions contemplated hereby are
not consummated by reason of any failure, refusal or inability on the part of
the Company to perform any agreement on its part to be performed hereunder or
to fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i),
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred
by the Underwriters in investigating or preparing to market or marketing the
Shares.
(j) If at any time during the one hundred eighty
(180) day period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(k) During the Lock-up Period, the Company will
not, without the prior written consent of BancAmerica Robertson Stephens &
Company, effect the Disposition of, directly or indirectly, any Securities
other than the sale of the Firm Shares and the Option Shares hereunder and the
Company's issuance of options or Common Stock under the Company's presently
authorized stock options plans (the "Option Plans") or outstanding options
described in the Prospectus.
(l) During a period of one hundred eighty (180)
days from the effective date of the Registration Statement, the Company will
not file a registration statement registering shares under the Option Plans or
other employee benefit plan.
5. Expenses.
11.
<PAGE> 12
(a) The Company agrees with each Underwriter
that:
(i) The Company will pay and bear all
costs and expenses in connection with the preparation, printing and filing of
the Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey
and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power
of Attorney, and any instruments related to any of the foregoing; the issuance
and delivery of the Shares hereunder to the several Underwriters, including
transfer taxes, if any, the cost of all certificates representing the Shares
and transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's
independent certified public accountants; the cost of furnishing to the several
Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectus and the Prospectus, and any amendments or
supplements to any of the foregoing; NASD filing fees and the cost of
qualifying the Shares under the laws of such jurisdictions as you may designate
(including filing fees and fees and disbursements of Underwriters' Counsel in
connection with such Blue Sky qualifications); and all other expenses directly
incurred by the Company in connection with the performance of their obligations
hereunder.
(ii) In addition to its other obligations
under Section 8(a) hereof, the Company agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(a) hereof, it will reimburse the Underwriters
on a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriters for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Underwriters shall promptly
return such payment to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) listed from time to time in The Wall
Street Journal which represents the base rate on corporate loans posted by a
substantial majority of the nation's thirty (30) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under
Section 8(b) hereof, the Underwriters severally and not jointly agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(b) hereof, they will
reimburse the Company on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(c) It is agreed that any controversy arising out
of the operation of the interim reimbursement arrangements set forth in
Sections 5(a)(ii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. In the event the
12.
<PAGE> 13
party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii) and 5(b) hereof and will not resolve the ultimate propriety or
enforceability of the obligation to indemnify for expenses which is created by
the provisions of Sections 8(a) and 8(b) hereof or the obligation to contribute
to expenses which is created by the provisions of Section 8(d) hereof.
6. Conditions of Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein shall be subject to the accuracy, as of the date hereof and the
Closing Date and any later date on which Option Shares are to be purchased, as
the case may be, of the representations and warranties of the Company herein,
to the performance by the Company of their respective obligations hereunder and
to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 2:00 P.M., San Francisco time, on the date following
the date of this Agreement, or such later date as shall be consented to in
writing by you; and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to
Underwriters' Counsel, and such counsel shall have been furnished with such
papers and information as they may reasonably have requested to enable them to
pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of
this Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered
as one enterprise from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that
makes it, in your sole judgment, impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date
and on any later date on which Option Shares are to be purchased, as the case
may be, the following opinion of counsel for the Company, dated the Closing
Date or such later date on which Option Shares are to be purchased addressed to
the Underwriters and with reproduced copies or signed counterparts thereof for
each of the Underwriters, to the effect that:
(i) The Company and each Significant
Subsidiary (as that term is defined in Regulation S-X of the Act) has
been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation;
(ii) The Company and each Significant
Subsidiary has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus;
(iii) The Company and each Significant
Subsidiary is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse
effect on the
13.
<PAGE> 14
condition (financial or otherwise), earnings, operations or business
of the Company and its subsidiaries considered as one enterprise. To
such counsel's knowledge, the Company does not own or control,
directly or indirectly, any corporation, association or other entity
other than Newmanco, Inc. and Titus Rental Services Company, Inc.;
(iv) The authorized, issued and
outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" as of the dates stated
therein, the issued and outstanding shares of capital stock of the
Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right;
(v) To such counsel's knowledge, all
issued and outstanding shares of capital stock of each Significant
Subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, except for the security interest granted in the
outstanding shares of capital stock of each significant subsidiary to
secure the Company's bank line of credit as described in the
Registration Statement;
(vi) The Firm Shares or the Option
Shares, as the case may be, to be issued by the Company pursuant to
the terms of this Agreement have been duly authorized and, upon
issuance and delivery against payment therefor in accordance with the
terms hereof, will be duly and validly issued and fully paid and
nonassessable, and to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right.
(vii) The Company has the corporate power
and authority to enter into this Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold by it
hereunder;
(viii) This Agreement has been duly
authorized by all necessary corporate action on the part of the
Company and has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid
and binding agreement of the Company, enforceable in accordance with
its terms, except insofar as indemnification provisions may be limited
by applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(ix) The Registration Statement has
become effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
has been issued and to such counsel's knowledge, no proceedings for
that purpose have been instituted or are pending or threatened under
the Act;
(x) The Registration Statement and the
Prospectus, and each amendment or supplement thereto (other than the
financial statements (including supporting schedules) and financial
data derived therefrom as to which such counsel need express no
opinion), as of the effective date of the Registration Statement,
complied as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations;
14.
<PAGE> 15
(xi) The information in the Prospectus
under the caption "Description of Capital Stock," to the extent that
it constitutes matters of law or legal conclusions, has been reviewed
by such counsel and is a fair summary of such matters and conclusions;
and the forms of certificates evidencing the Common Stock comply with
Delaware law;
(xii) The description in the Registration
Statement and the Prospectus of the charter and bylaws of the Company
and of statutes are accurate and fairly present the information
required to be presented by the Act and the applicable Rules and
Regulations;
(xiii) To such counsel's knowledge, there
are no agreements, contracts, leases or documents to which the Company
is a party of a character required to be described or referred to in
the Registration Statement or Prospectus or to be filed as an exhibit
to the Registration Statement which are not described or referred to
therein or filed as required;
(xiv) The performance of this Agreement
and the consummation of the transactions herein contemplated (other
than performance of the Company's indemnification obligations
hereunder, concerning which no opinion need be expressed) will not (a)
result in any violation of the Company's charter or bylaws or (b) to
such counsel's knowledge, result in a material breach or violation of
any of the terms and provisions of, or constitute a default under, any
material bond, debenture, note or other evidence of indebtedness, or
any lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument known to
such counsel to which the Company is a party or by which its
properties are bound, or any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order, writ
or decree of any court, government or governmental agency or body
having jurisdiction over the Company or any of its Significant
Subsidiaries, or over any of their properties or operations;
(xv) No consent, approval, authorization
or order of or qualification with any court, government or
governmental agency or body having jurisdiction over the Company or
any of its subsidiaries, or over any of their properties or operations
is necessary in connection with the consummation by the Company of the
transactions herein contemplated, except such as have been obtained
under the Act or such as may be required under state or other
securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters;
(xvi) Such counsel is not aware of any
legal or governmental proceedings pending or threatened against the
Company or any of its Significant Subsidiaries of a character required
to be disclosed in the Registration Statement or the Prospectus by the
Act or the Rules and Regulations, other than those described therein;
(xvii) To such counsel's knowledge, neither
the Company nor any of its Significant Subsidiaries is presently (a)
in material violation of its respective charter or bylaws, or (b) in
material breach of any applicable statute, rule or regulation known to
such counsel or, to such counsel's knowledge, any order, writ or
decree of any court or governmental agency or body having jurisdiction
over the Company or any of its Significant Subsidiaries, or over any
of their properties or operations; and
(xviii) To such counsel's knowledge, except
as set forth in the Registration Statement and Prospectus, no holders
of Common Stock or other securities of the Company have been granted
registration rights by the Company with respect to securities of the
Company and, except as set forth in the Registration Statement and
Prospectus, all holders of securities of the Company having such
rights known to such counsel to registration of such shares of Common
Stock or other securities, because of the filing of the Registration
Statement by the Company have, with respect to the offering
contemplated
15.
<PAGE> 16
thereby, waived such rights or such rights have expired by reason of
lapse of time following notification of the Company's intent to file
the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights.
In addition, such counsel shall state that such
counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters' Counsel and
the independent certified public accountants of the Company, at which such
conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and although they have not verified the
accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
which leads them to believe that, at the time the Registration Statement became
effective and at all times subsequent thereto up to the Closing Date and on any
later date as to which Option Shares are to be purchased, the Registration
Statement and any amendment or supplement thereto (other than the financial
statements including supporting schedules and other financial and statistical
information derived therefrom, as to which such counsel need express no
comment) contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as
to questions of law not involving the laws of the United States or the State of
Colorado and the Delaware General Corporation Law upon opinions of local
counsel, and as to questions of fact upon representations or certificates of
officers of the Company, and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date
and on any later date on which Option Shares are to be purchased, as the case
may be, an opinion of Brobeck, Phleger & Harrison LLP, in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(f) You shall have received on the Closing Date
and on any later date on which Option Shares are to be purchased, as the case
may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth
in the Original Letter are accurate as of the Closing Date or such later date
on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering
16.
<PAGE> 17
of the Shares as contemplated by the Prospectus. The Original Letter from
Ernst & Young LLP shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of
January 31, 1997, and related consolidated statements of operations,
stockholders' equity, and cash flows for the period from May 15, 1996
(commencement of operations) through January 31, 1997, (iii) state that Ernst &
Young LLP has performed the procedures set out in Statement on Auditing
Standards No. 71 ("SAS 71") for a review of interim financial information and
providing the report of Ernst & Young LLP on the interim financial information
included in the Prospectus, (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any material
modifications need to be made to any of the interim financial statements in
order for them to be in compliance with generally accepted accounting
principles consistently applied across the periods presented, and (v) address
other matters agreed upon by Ernst & Young LLP and you. You will also be
provided with letters from Pester & Company, P.C., LeMaster & Daniels PLLC and
Williams & Parsons, PA, dated the Closing Date and on any later date on which
Option Shares are to be purchased, as to such matters and in such form
satisfactory to you. In addition, you shall have received from Ernst & Young
LLP a letter addressed to the Company and made available to you for the use of
the Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements
as of January 31, 1997, did not disclose any weaknesses in internal controls
that they considered to be material weaknesses.
(g) You shall have received on the Closing Date
and on any later date on which Option Shares are to be purchased, as the case
may be, a certificate of the Company, dated the Closing Date or such later date
on which Option Shares are to be purchased, as the case may be, signed by the
Chief Executive Officer and Chief Financial Officer of the Company, to the
effect that, and you shall be satisfied that:
(i) The representations and warranties
of the Company in this Agreement are true and correct, as if made on
and as of the Closing Date or any later date on which Option Shares
are to be purchased, as the case may be, and the Company has complied
with all the agreements and satisfied all the conditions on its part
to be performed or satisfied at or prior to the Closing Date or any
later date on which Option Shares are to be purchased, as the case may
be;
(ii) No stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(iii) When the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained all
material information required to be included therein by the Act and
the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates
as of which information is given in the Registration Statement and
Prospectus, there has not been (a) any material adverse change in the
17.
<PAGE> 18
condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as
one enterprise, (b) any transaction that is material to the Company
and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (c) any obligation,
direct or contingent, that is material to the Company and its
subsidiaries considered as one enterprise, incurred by the Company or
its subsidiaries, except obligations incurred in the ordinary course
of business, (d) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries that is
material to the Company and its subsidiaries considered as one
enterprise, (e) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company or any of its
subsidiaries, or (f) any loss or damage (whether or not insured) to
the property of the Company or any of its subsidiaries which has been
sustained or will have been sustained which has a material adverse
effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(h) The Company shall have obtained and delivered
to you an agreement from each officer and director of the Company, and each
beneficial owner of Common Stock in writing prior to the date hereof that such
person will not, during the Lock-up Period, effect the Disposition of any
Securities now owned or hereafter acquired directly by such person or with
respect to which such person has or hereafter acquires the power of
disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or shareholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, (iii) in a pledge to any bank or other financial institution to
receive a bona fide extension of credit provided that the creditor agrees in
writing to be bound by the terms of this restriction, or (iv) with the prior
written consent of BancAmerica Robertson, Stephens & Company. Furthermore,
such person will have also agreed and consented to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of the
Securities held by such person except in compliance with this restriction.
(i) The Company shall have furnished to you such
further certificates and documents as you shall reasonably request (including
certificates of officers of the Company as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder).
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with such
number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations,
warranties and agreements herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants to the several
Underwriters, for the purpose of covering over- allotments in connection with
the distribution and sale of the Firm Shares only, a nontransferable option to
purchase up to an aggregate of 562,500 Option Shares at the purchase price per
share for the Firm Shares set forth in Section 3 hereof. Such option may be
exercised by the Representatives on behalf of the several Underwriters on one
(1) or more occasions in whole or in part during the period of thirty (30) days
after the date on which the Firm Shares are initially offered to the public, by
giving written notice to the Company. The number of Option Shares to be
purchased by each Underwriter upon the exercise of such option shall be the
same proportion of the total number of Option Shares to be purchased by the
several Underwriters pursuant to the exercise of such option as the number of
Firm Shares purchased by such Underwriter (set forth in Schedule A hereto)
bears to the total number of Firm Shares purchased by the several Underwriters
(set forth in Schedule A hereto), adjusted by the Representatives in such
manner as to avoid fractional shares.
18.
<PAGE> 19
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of or at such other place as may be agreed upon
among the Representatives and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company at least two
(2) full business days prior to the Closing Date, or (ii) on a date which shall
not be later than the third (3rd) full business day following the date the
Company receives written notice of the exercise of such option, if such notice
is received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for
checking at least one (1) full business day prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least two (2) full business days prior to such date of
payment and delivery. If the Representatives so elect, delivery of the Option
Shares may be made by credit through full fast transfer to the accounts at The
Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated
to) make payment of the purchase price on behalf of any Underwriter or
Underwriters whose check or checks shall not have been received by you prior to
the date of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any
such Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in
Section 7(a) hereof, the obligations of the several Underwriters to purchase
such Option Shares will be subject (as of the date hereof and as of the date of
payment and delivery for such Option Shares) to the accuracy of and compliance
with the representations, warranties and agreements of the Company herein, to
the accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of
the representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject (including,
without limitation, in its capacity as an Underwriter or as a "qualified
independent underwriter" within the meaning of Schedule E of the Bylaws of the
NASD), under the Act, the Exchange Act or otherwise arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
the Company herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact
19.
<PAGE> 20
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
agrees to reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by
such Underwriter, directly or through you, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the
time required by the Act and the Rules and Regulations, unless such failure is
the result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly,
agrees to indemnify and hold harmless the Company against any losses, claims,
damages or liabilities, joint or several, to which the Company may become
subject under the Act or otherwise, arising out of or based upon (i) any breach
of any representation, warranty, agreement or covenant of such Underwriter
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company for any legal or other expenses
reasonably incurred by the Company in connection with investigating or
defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 8(b) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
any indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with
20.
<PAGE> 21
counsel reasonably satisfactory to such indemnified party; provided, however,
that if the defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of the indemnifying party's election so to assume the defense
of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under Section 8(a)
or 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all liability
on all claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 8 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 8 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such
proportion so that the Underwriters severally and not jointly are responsible
pro rata for the portion represented by the percentage that the underwriting
discount bears to the initial public offering price, and the Company is
responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the amount
by which the underwriting discount applicable to the Shares purchased by such
Underwriter exceeds the amount of damages which such Underwriter has otherwise
been required to pay and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 8(e) shall
extend upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls any Underwriter or the Company within the
meaning of the Act or the Exchange Act and each officer of the Company who
signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented
by counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 8, and are fully informed
regarding said provisions. They further acknowledge that the provisions of
this Section 8 fairly allocate the risks in light of the ability of the parties
to investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Act and the Exchange Act.
9. Representations, Warranties, Covenants and Agreements
to Survive Delivery. All representations, warranties, covenants and agreements
of the Company and the Underwriters herein or in certificates delivered
pursuant hereto, and the indemnity and contribution agreements contained in
Section 8 hereof shall remain
21.
<PAGE> 22
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any person controlling any Underwriter
within the meaning of the Act or the Exchange Act, or by or on behalf of the
Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of
such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this
Section 10, (i) the Company shall have the right to postpone the time of
delivery for a period of not more than seven (7) full business days, in order
to effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or
shall not elect to seek another underwriter or underwriters for such Firm
Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, the Company shall not be liable to
any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than
for some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
22.
<PAGE> 23
(a) This Agreement shall become effective at the
earlier of (i) 6:30 A.M., San Francisco time, on the first full business day
following the effective date of the Registration Statement, or (ii) the time of
the initial public offering of any of the Shares by the Underwriters after the
Registration Statement becomes effective. The time of the initial public
offering shall mean the time of the release by you, for publication, of the
first newspaper advertisement relating to the Shares, or the time at which the
Shares are first generally offered by the Underwriters to the public by letter,
telephone, telegram or telecopy, whichever shall first occur. By giving notice
as set forth in Section 12 before the time this Agreement becomes effective,
you, as Representatives of the several Underwriters, or the Company, may
prevent this Agreement from becoming effective without liability of any party
to any other party, except as provided in Sections 4(j), 5 and 8 hereof.
(b) You, as Representatives of the several
Underwriters, shall have the right to terminate this Agreement by giving notice
as hereinafter specified at any time on or prior to the Closing Date or on or
prior to any later date on which Option Shares are to be purchased, as the case
may be, (i) if the Company shall have failed, refused or been unable to perform
any agreement on its part to be performed, or because any other condition of
the Underwriters' obligations hereunder required to be fulfilled is not
fulfilled, including, without limitation, any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes
it inadvisable or impracticable to proceed with the offering, sale and delivery
of the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration
by the United States of a national emergency which, in the reasonable opinion
of the Representatives, makes it impracticable or inadvisable to proceed with
the public offering of the Shares as contemplated by the Prospectus. In the
event of termination pursuant to subparagraph (i) above, the Company shall
remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8
hereof. Any termination pursuant to any of subparagraphs (ii) through (v)
above shall be without liability of any party to any other party except as
provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone, telecopy or telegram, in each case
confirmed by letter. If the Company shall elect to prevent this Agreement from
becoming effective, the Company shall promptly notify you by telephone,
telecopy or telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder,
except as herein otherwise specifically provided, shall be in writing and if
sent to you shall be mailed, delivered, telegraphed (and confirmed by letter)
or telecopied (and confirmed by letter) to you c/o BancAmerica Robertson,
Stephens & Company, 555 California Street, Suite 2600, San Francisco,
California 94104, telecopier number (415) 781-0278, Attention: General
Counsel; if sent to the Company, such notice shall be mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter)
to 6000 East Evans Avenue, Suite 2-300, Denver, Colorado 80222, telecopier
number (303) 782-5370, Attention: Arnold A. Bernstein, Chief Executive
Officer.
13. Parties. This Agreement shall inure to the benefit
of and be binding upon the several Underwriters and the Company and their
respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than
23.
<PAGE> 24
the parties hereto and their respective executors, administrators, successors
and assigns, and the controlling persons within the meaning of the Act or the
Exchange Act, officers and directors referred to in Section 8 hereof, any legal
or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or entity. No purchaser of any of the Shares
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase.
In all dealings with the Company under this Agreement, you
shall act on behalf of each of the several Underwriters, and the Company shall
be entitled to act and rely upon any statement, request, notice or agreement
made or given by you jointly or by BancAmerica Robertson, Stephens & Company on
behalf of you.
14. Applicable Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in
several counterparts, each of which will constitute an original.
24.
<PAGE> 25
If the foregoing correctly sets forth the understanding among
the Company and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company and the several Underwriters.
Very truly yours,
RENTX INDUSTRIES, INC.
By:
-----------------------------------
Arnold A. Bernstein
Chief Executive Officer
Accepted as of the date first above written:
BANCAMERICA ROBERTSON, STEPHENS & COMPANY
BT ALEX. BROWN INCORPORATED
On their behalf and on behalf of each of the several
Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON, STEPHENS & COMPANY
By
-------------------------------------------
Authorized Signatory
25.
<PAGE> 26
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ ------------
<S> <C>
BancAmerica Robertson, Stephens & Company . . . . . . . . . . . . . . . . . . . . . . . . .
BT Alex. Brown Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[SHERMAN & HOWARD L.L.C. LETTERHEAD]
November 3, 1997
Board of Directors
RentX Industries, Inc.
6000 East Evans, Suite 2-300
Denver, Colorado 80222
Re: Validity of Common Stock
Ladies and Gentlemen:
We have acted as special counsel to RentX Industries, Inc., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form S-1 (Registration No. 333-36341) relating to 3,750,000 shares of the
Company's Common Stock, $.01 par value per share ("Common Stock"), plus up to an
additional 562,500 shares of Common Stock to cover over-allotments. We have
examined the Company's Certificate of Incorporation, Bylaws and minutes of the
proceedings of the Board of Directors of the Company authorizing the issuance of
the Common Stock.
Based upon the foregoing examination, it is our opinion that the shares of
Common Stock being offered pursuant to the Registration Statement have been duly
authorized and, when issued and sold as contemplated in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement referred to above and to the reference to our firm under the heading
"Legal Matters" in the Registration Statement. In giving this consent, we do not
thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the Rules of the
Securities and Exchange Commission thereunder.
Yours truly,
/s/ SHERMAN & HOWARD L.L.C.
<PAGE> 1
EXHIBIT 10.44
NONQUALIFIED STOCK OPTION AGREEMENT [MANAGEMENT]
This NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement") is made effective as
of the 19th day of May, 1997, between RENTX INDUSTRIES, INC., a Delaware
corporation (the "Company"), and Thomas D. Nugent (the "Optionee"). In
consideration of the mutual promises set forth in this Agreement, we agree as
follows:
1. OPTION GRANT. Pursuant to the letter agreement dated April 7, 1997 between
the Company and the Optionee (the "Letter Agreement") and subject to the terms
and conditions of this Agreement (including, without limitation, those relating
to vesting set forth in Section 3 and those relating to "community property"
and related matters set forth in Section 16), the Company grants to the
Optionee the right and option (the "Option") to purchase up to an aggregate of
40,000 shares of its nonvoting Class B Common Stock (the "Optioned Shares")
pursuant to the Plan. This Option grant is made as a matter of separate
agreement and not in lieu of regular salary. The date on which this Option was
granted was May 19, 1997 (the "Grant Date").
2. STOCK OPTION PRICE. The purchase price of the Optioned Shares is $7.00 per
share (the "Stock Option Price").
3. VESTING; TIME OF EXERCISE. The Optionee shall not have any right to
exercise the Option and acquire any of the Optioned Shares until April 21,
1998, at which time the Optionee's right to acquire 20% of the Optioned Shares
shall vest. Thereafter, on April 21 of each of 1999, 2000, 2001 and 2002, the
Optionee's right to acquire an additional 20% of the Optioned Shares shall
vest. Notwithstanding anything to the contrary contained in this Section 3,
but subject to Section 14, the Optionee's right to acquire 100% of the Optioned
Shares shall vest upon the earliest to occur of [a] immediately prior to the
closing of the sale by the Company of all or substantially all of its assets
(other than to any entity of which the majority of the voting power of the
ownership interests therein is held, immediately prior to or immediately after
such sale, by the persons who immediately prior to such transaction hold a
majority of the voting power of the ownership interests in the Company) (a
"Non-Affiliate Asset Sale"), [b] immediately prior to the closing of the sale
of the Company substantially in its entirety by merger or consolidation (other
than with an entity of which the majority of the voting power of the ownership
interests therein is held, immediately prior to or immediately after such
transaction, by the persons who immediately prior to such transaction hold a
majority of the voting power of the ownership interests in the Company) (a
"Non-Affiliate Merger"), or [c] immediately prior to the closing of the sale by
the stockholders of the Company of all of the outstanding capital stock (other
than to any entity of which the majority of the voting power of the ownership
interests therein is held, immediately prior to or immediately after such sale,
by the persons who immediately prior to such transaction hold a majority of the
voting power of the ownership interests in the Company) (a "Non-Affiliate Stock
Sale") (each of [a], [b] and [c] being referred to herein as a "Vesting
Event"), but only if the Optionee is an employee of the Company or any
Subsidiary at the moment prior to the occurrence of the Vesting Event. Subject
to the vesting requirements set forth above and to the provisions of Sections
13, 14 and 16, the Option may be exercised at any time or times prior to 5:00
p.m., Colorado time, on April 21, 2007.
<PAGE> 2
4. MANNER OF EXERCISE. The Option is exercisable by written notice to the
Company, signed by the Optionee. Such notice must set forth: [a] the election
to exercise the Option and accept the Company's offer, [b] the number of
Optioned Shares to which such exercise relates, and [c] a date at least three,
but no more than five, days after the giving of such notice on which payment of
the Stock Option Price will be made. Such notice must either be actually
delivered to the Company or sent by certified mail to the Company at 6000 East
Evans, Suite 2-300, Denver, Colorado 80222, Attn: President (or at such other
address as the Company may direct). Upon exercise of the Option by giving
written notice to the Company, the Optionee will be personally liable to
acquire the Optioned Shares as stated in such notice.
5. CLOSING ON SHARE ISSUANCE. On the date specified in the written notice of
exercise (the "Closing Date"), the Optionee will deliver to the Company [a] the
Stock Option Price for all Optioned Shares being acquired pursuant to the
Option, [b] the Optionee's signed investment letter in the form of the attached
Exhibit A (or in such form as the Board of Directors of the Company (the
"Board") may from time to time subsequently determine), [c] the Optionee's
signed Class B Common Stock Voting Trust Agreement in the form of the attached
Exhibit B (or in such form as the Board may from time to time subsequently
determine) and [d], upon issuance by the Company, the stock certificate
representing the Optioned Shares, duly endorsed for transfer to the trustee
under the Class B Common Stock Voting Trust Agreement (in return for which the
Optionee shall receive a Voting Trust Certificate representing the Optioned
Shares). All of the provisions of this Agreement, including, without
limitation, Sections 7 through 18, will apply to each Voting Trust Certificate
issued under the Class B Common Stock Voting Trust Agreement in respect of any
Shares (as defined below). Payment will be made in cash, either by personal
check which clears in the ordinary course, by bank cashier's check or by
certified check (in all cases, in immediately available funds). Any other
method of payment may be made only if acceptable to the Board, in its
discretion. Notwithstanding the above, the Company shall not be obligated to
deliver any Optioned Shares unless and until, in the opinion of the Company's
counsel, there has been compliance with all applicable federal and state laws
and regulations and only when all other legal matters in connection with the
issuance and delivery of such Optioned Shares have been approved by the
Company's counsel. The Company shall use its best efforts to effect any such
compliance, and the Optionee shall take any such action reasonably requested by
the Company; provided, however, that in no event shall the Company be required
to file a registration statement under the Securities Act of 1933 or any state
securities law to satisfy its obligation to use its best efforts to effect such
compliance. The Optionee shall have the rights of a shareholder of the Company
only as to shares actually acquired by and issued to the Optionee under this
Agreement.
6. NONASSIGNABLE OPTION. Neither the Option nor any other rights acquired by
the Optionee under this Agreement are assignable or transferable by the
Optionee. Any sale, assignment, transfer, pledge or other disposition of any
Option contrary to the provisions of this Agreement, and any levy of any
attachment or similar process upon any Option, will be null and void. Upon the
occurrence of such an event, the Board may, in its discretion, terminate the
Option. The Option may be exercised only during the Employee's lifetime,
except as otherwise specifically provided in Section 13.
-2-
<PAGE> 3
7. SHARE TRANSFER RESTRICTION. Except for Permitted Transfers (as defined in
Section 8) and unless a Release Event (as defined below) has occurred, none of
the Optioned Shares, any shares of capital stock of the Company issued in
respect of the Optioned Shares upon any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares, change in
corporate structure or otherwise, nor any right, title or interest therein,
whether represented by the Voting Trust Certificate or otherwise (the Optioned
Shares, all such other shares, and all right, title and interest therein being
referred to collectively as the "Shares"), may be sold, assigned, transferred,
pledged, or otherwise disposed of or encumbered, voluntarily or involuntarily,
by act of the Optionee or the Optionee's Permitted Transferee or by operation
of law, including, without limitation, by bequest or the laws of descent and
distribution (any of such events being referred to as a "Transfer"), without
the Company's prior written consent and upon such terms and conditions as the
Company may determine. Any attempted transfer of any Shares contrary to the
preceding sentence will be null and void. Nevertheless, the restriction on
transfer of the Shares set forth in this Section 7 will terminate and be of no
further force and effect upon the occurrence of any of the following events
(each of which is referred to as a "Release Event"): [a] the closing of any
Qualified Public Offering (as defined below), [b] the closing of a Non-
Affiliate Asset Sale, or [c] the closing of the sale of the Company
substantially in its entirety by a Non-Affiliate Merger or by a Non-Affiliate
Stock Sale (or by any combination of the foregoing).
For purposes of this Agreement: [a] "Qualified Public Offering" means
the sale in an underwritten public offering or a series of public offerings,
registered under the Securities Act of 1933, as amended (the "Securities Act"),
of Common Stock, which results in public ownership of not less than 25% of the
Fully Diluted Common Stock of the Company, which shares of Common Stock are
listed upon the New York Stock Exchange, the American Stock Exchange or are
approved for quotation on the NASDAQ National Market and which offerings shall
have resulted in the receipt by the Company of aggregate cash proceeds (after
deduction of underwriting discounts and the costs associated with the
offerings) of at least $8 million and with the average price in such offering
or offerings reflecting a valuation of the Fully Diluted Common Stock
(excluding shares being issued in the offering or offerings) aggregating at
least $30 million; [b] "Common Stock" means the Class A Common Stock and the
Class B Common Stock of the Company; [c] "Common Stock Equivalents" means
(without duplication with any other Common Stock or Common Stock Equivalents)
rights, warrants, options (including, without limitation, employee stock
options), convertible securities or indebtedness, exchangeable securities or
indebtedness, or other rights, exercisable for or convertible or exchangeable
into, directly or indirectly, Common Stock and securities convertible or
exchangeable into Common Stock, whether at the time of issuance or upon the
passage of time or the occurrence of some future event, including (without
limitation) the Series A Preferred Stock and the Series B Preferred Stock of
the Company; and [d] "Fully Diluted Common Stock" means, at any time, the then
outstanding Common Stock of the Company plus (without duplication) all shares
of Common Stock issuable, whether at such time or upon the passage of time or
the occurrence of future events, upon the exercise, conversion or exchange of
all then outstanding Common Stock Equivalents.
8. PERMITTED TRANSFEREES. Any Optionee may transfer the Shares held by the
Optionee to the Optionee's spouse or children, to any other shareholder of the
Company, or to any
-3-
<PAGE> 4
employee of the Company or a Subsidiary of the Company, by gift, by bequest, by
the laws of descent and distribution, or by operation of law in the case where
the Optionee and the Optionee's Permitted Transferee (as defined below) hold
Shares as joint tenants with right of survivorship; provided, however, that in
all of the foregoing cases (each of which is referred to as a "Permitted
Transfer") the Optionee must first give notice to the Company of such Transfer
and the transferee (the "Permitted Transferee") first must agree in writing to
be a party to and bound by the terms and conditions of this Agreement
(including by execution of the signature page to this Agreement) and an
original of such writing must be delivered to the Company. Each Permitted
Transferee acknowledges and agrees that, upon acceptance of Shares from the
Optionee, the following provisions will apply: [a] the transfer restrictions
and other obligations applicable to the Optionee under this Agreement, as well
as the agreements and obligations of the Optionee under the Class B Common
Stock Voting Trust Agreement referred to in Section 5[c] will apply to and be
assumed by such Permitted Transferee with respect to the Shares owned by the
Permitted Transferee, and [b] if, as a result of the operation of Section 9,
the Optionee is (or would be) required by this Agreement to sell any Shares
held by such Optionee the Permitted Transferee agrees to sell the Shares in the
same manner and under the same terms as are applicable to the Optionee.
9. REPURCHASE RIGHT. If the Optionee's employment with the Company or any
Subsidiary is terminated for any or no reason (whether by voluntary or
involuntary act of the Optionee, the Company or any Subsidiary, including
retirement, firing, death or disability) before or after a Release Event, the
Company will have the right, but not the obligation, to purchase from the
Optionee and each Permitted Transferee all or any part of the Shares and all or
any part of the Optionee's right to acquire Optioned Shares, which immediately
prior to such termination, are vested (the Optionee's right to acquire Optioned
Shares which has so vested is referred to as the "Vested Options"), and the
Optionee and each Permitted Transferee must sell to the Company, if the Company
exercises such option, all of the Shares the Company desires to purchase and
all of the Vested Options the Company desires to purchase. The purchase price
will be determined under Section 10, and the closing will occur as provided in
Section 11.
10. PURCHASE PRICE. [a] The purchase price per share payable by the Company
for the Shares will be fixed as of the effective date of termination of the
Optionee's employment with the Company or any Subsidiary (the "Termination
Date") at an amount equal to the fair market value thereof (the "Per Share
Purchase Price") determined as set forth in Section 11[b]. The purchase price
per Vested Option payable by the Company for the Vested Options will be the Per
Share Purchase Price minus the Stock Option Price for the Optioned Share
underlying such Vested Option.
[b] If, at the time the Company's repurchase right
under Section 10 becomes operative, the Shares are registered under the
Securities Act of 1934, as amended (meaning the Shares are "publicly traded"),
then the Per Share Purchase Price payable by the Company for the Shares will be
fixed as of the Termination Date at a per Share price equal to the arithmetic
mean of the market prices of the class of stock of which the Shares are a part
(the "Stock") for the 20 trading days preceding the Termination Date. For this
purpose, the market price of the Stock on each such day shall be [i] the
closing price of the Stock on the principal national securities exchange on
which it is then traded, or [ii] if the Stock is not then
-4-
<PAGE> 5
traded on a national securities exchange, the closing price of the Stock
reported by the National Association of Securities Dealers, Inc. National
Market System or Automated Quotation System or its successors ("NASDAQ"), or
[iii] if the closing price of the Stock is not then reported by NASDAQ, the
mean of the bid and asked prices of the Stock reported by NASDAQ, or [iv], if
bid and asked prices for the Stock are not then reported by NASDAQ, the mean of
the bid and asked prices of the Stock reported by the National Quotation
Bureau, Inc. or its successor. If, at the time the Company's repurchase right
under Section 10 becomes operative, the Shares are not registered under the
Securities Exchange Act of 1934, as amended, then the Per Share Purchase Price
payable by the Company for the Shares will be fixed as of the Termination Date
and determined in good faith by the Board of Directors using any reasonable
valuation method, with the Board's objective being to set the price at the
price at which a Share would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell and both having
reasonable knowledge of relevant facts including rights and restrictions on the
Shares or the class of stock of which they are a part.
11. CLOSING OF REPURCHASE. The closing of any purchase of Shares and/or
Vested Options by the Company under this Agreement will occur at a meeting of
the Company and the Optionee and/or the Permitted Assigns, as appropriate, on a
date selected by the Company and noticed to the Optionee and/or the Permitted
Assigns, as appropriate, which will be not later than the 120th day following
the Termination Date at 10:00 a.m. Colorado time at the Company's office in
Denver, Colorado (unless otherwise agreed by the Company and the Optionee
and/or the Permitted Transferees, as appropriate). At the meeting, the Company
will make payment for the Shares and/or Vested Options and the Optionee and/or
the Permitted Transferees, as appropriate, will deliver certificates
representing the Shares, duly endorsed for transfer. If the Shares so
purchased by the Company are then subject to the Class B Common Stock Voting
Trust Agreement, the Trustee thereunder is authorized and directed to deliver
to the Company stock certificates representing such Shares, against receipt of
payment therefor, and to deliver such payment to the Optionee upon delivery by
the Optionee to the Company of the Voting Trust Certificate representing such
Shares. Payment for the Shares and/or Vested Options will be made in cash or
by the Company's check or checks which clear in the ordinary course. All
notices under this Section to the Optionee or the Permitted Transferees, as
appropriate, will be in writing and will be deemed to have been duly given when
delivered in person (by express courier or otherwise), by telecopier or three
days after being deposited in the United States mail, certified mail, return
receipt requested, first class postage prepaid, to the Optionee or the
Permitted Transferees, as appropriate, at _____________________________________
_______________________________________________________________________________,
or to such other address as the Optionee or the Permitted Transferees, as
appropriate, will have specified by notice in writing to the Company.
12. STOCK LEGEND. Except to the extent that the Board determines to add or
revise the restrictive legend, all stock and voting trust certificates
evidencing Shares will be legended as follows by the Company:
The shares represented by this certificate are subject to, and are
transferrable only on compliance with, a Nonqualified Stock Option
Agreement dated as of May 19, 1997 between RentX Industries, Inc. and
the shareholder named on the
-5-
<PAGE> 6
face of this certificate, a copy of which is on file with, and may be
obtained from, RentX Industries, Inc.
13. EMPLOYMENT TERMINATION. If the Optionee's employment with the Company or
any Subsidiary is terminated for any or no reason (whether by voluntary or
involuntary act of the Optionee, the Company or any Subsidiary, including
retirement, firing, death or disability), the Option (including, without
limitation, any Vested Options) will terminate and be of no further force or
effect; provided, however, that any Vested Options shall remain exercisable for
60 days from such termination of employment; and, provided, further, that in
the event any Vested Options are exercised within such 60-day period, the
Optionee and the Optionee's heirs, legal representatives and any other person
entitled to exercise the Vested Options in the Optionee's stead shall, if and
to the extent the Company exercises its rights under Section 9, immediately
sell Shares and Vested Options to the Company in accordance with Section 9.
14. ACCELERATION OF EXPIRATION OF OPTION PERIOD. Notwithstanding anything to
the contrary contained in this Agreement, in the event [a] that the Company
proposes to engage in a Non-Affiliate Asset Sale, [b] that it is proposed that
the Company be sold substantially in its entirety by a Non-Affiliate Merger or
by a Non-Affiliate Stock Sale (or any combination of the events described in
this [b]), or [c] that any transaction is proposed that would result in a
change in the majority ownership of the Company (whether as a result of the
sale of outstanding stock or the issuance of new stock, other than in a public
offering registered under the Securities Act) (each of [a], [b] and [c] being
referred to herein as an "Acceleration Event"), the Company may, at its option,
notify the Optionee of such proposed Acceleration Event and require the
Optionee to elect, within 5 days after such notice, to either exercise the
Option (which exercise, if such Option is not then vested pursuant to Section
3, shall be made contingent upon the occurrence of a Vesting Event which is
also an Acceleration Event) or allow it to expire upon the closing of the
Acceleration Event. If the Optionee does not elect to exercise any portion of
the Option within that 5-day period, the unexercised portion of the Option
shall automatically expire upon such closing. If the Optionee elects to
exercise the Option within that 5-day period, in whole or in part, the Optionee
shall deliver to the Company all funds and documents required by such notice or
this Agreement to exercise such Option and the Company shall hold such funds
and documents and the certificate representing the shares issuable upon such
exercise until such closing and shall then deposit and collect the payment and
forward the certificate (or such other securities or property as the Optionee
may have become entitled to as a result of owning such shares on the closing)
to the Optionee (or, in the case of an Acceleration Event which involves the
acquisition or conversion of the outstanding capital stock of the Company, to
the acquiror of such stock). If the Acceleration Event is not consummated for
any reason, then [a] such exercise shall be of no force or effect, [b] no
acceleration of the vesting of the Optionee's right to acquire the Option
Shares shall be deemed to have occurred, [c] the unexercised portion of the
Option shall not expire and [d] the Company shall return to the Optionee such
funds and documents delivered to it by the Optionee in connection with such
exercise and shall cancel the related certificate. The notice originally given
to the Optionee of a proposed Acceleration Event shall describe the proposal
generally. No subsequent change in the proposal shall require a new notice or
extend or revive the 5-day exercise period.
-6-
<PAGE> 7
15. SHAREHOLDER/EMPLOYEE RIGHTS. The Optionee will have the rights of a
shareholder with respect to any Shares subject to the Option only after such
Shares are issued to such person following exercise of the Option. Nothing in
this Agreement confers on the Optionee any right to continue in the employ of
the Company or any Subsidiary or interferes in any way with the right of the
Company or any Subsidiary at any time to terminate or modify the terms or
conditions of the Optionee's employment.
16. COMMUNITY PROPERTY MATTERS. If the Optionee, on or after the Grant Date,
resides in a state or other jurisdiction the laws of which determine the
interests of spouses in property on a "community property" or similar basis,
the grant of the Option and the Optionee's rights hereunder shall not be
effective unless and until the Optionee's spouse executes and delivers a
counterpart to the signature page hereto to the Company. The Optionee's spouse
shall be bound by the terms and conditions of this Agreement, including,
without limitation, those set forth in Sections 5 through 17.
17. TAX MATTERS.
[a] Tax Status. The Option granted under this Agreement is for nonqualified
stock options (that is, options that do not qualify as incentive stock
options under the Internal Revenue Code of 1986, as amended (the
"Code"). The Optionee is urged to consult with his or her own tax
advisors with respect to the federal and state income taxation of the
grant, exercise and disposition of stock pursuant to the Option.
[b] Section 83(b) Election. Whenever property is transferred to a taxpayer
in connection with performance of services, and such property is subject
to a substantial risk of forfeiture (as that term is defined under
Section 83 of the Code and applicable Treasury Regulations), the
taxpayer may elect under Section 83(b) of the Code to include in gross
income (as compensation) the excess, if any, of the fair market value of
such property over the purchase price. If this Section 83(b) election
is made, no compensation income is subsequently recognized when the risk
of forfeiture lapses. If the Optionee makes a Section 83(b) election
he or she shall give timely notice to the Company of the statement
required by the Treasury Regulations under Section 83 of the Code.
[c] Withholding. Whenever compensation income is recognized by the Optionee
with respect to the Option, the Company may require (as a condition of
Option exercise) the Optionee to make a withholding tax payment to the
Company. The amount of such payment shall equal the amount of federal
and state income tax that the Company or any Subsidiary is required to
withhold with respect to the issuance of such stock. To the extent the
required withholding tax payment is not timely made by the Optionee, the
Company or any Subsidiary may either withhold such payment from the
Optionee's cash compensation or make such other arrangements as the
Board determines.
[d] Interpretation. This Agreement, as well as all questions arising
thereunder, shall be interpreted and answered in the manner consistent
with the Code and applicable Treasury Regulations relating to
nonqualified stock options.
-7-
<PAGE> 8
18. GENERAL PROVISIONS.
[a] Capital Changes. The number of shares and purchase price of the
Optioned Shares subject to the Option shall not change in the event of
any change to the shares of Stock or to any other class or series of
capital stock of the Company or any rights related thereto, whether by
reason of recapitalization, change in conversion rates, stock dividend,
stock split, combination of shares, exchange of shares, change in
corporate structure or otherwise, except that appropriate adjustments
shall be made by the Board in the number of shares and purchase price of
the Optioned Shares subject to the Option [i] prior to the first
Qualified Public Offering for any stock dividend, stock split or similar
transaction, as determined by the Board, declared or made with respect
to all shares of capital stock of the Company prior to, but in
connection with, such Qualified Public Offering, as determined by the
Board, and [ii] after the first Qualified Public Offering for any stock
dividend, stock split or similar transaction, as determined by the
Board. If any of the foregoing adjustments shall result in a fractional
share, the fraction shall be disregarded, and the Company shall have no
obligation to make any cash or other payment with respect to such a
fractional share.
[b] Leave of Absence. For purposes of this Agreement, employment of the
Optionee shall be treated as continuing intact while such person is on
sick leave, military leave or other bona fide leave of absence if the
period of such leave does not exceed ninety days. If such person's
leave exceeds ninety days, employment shall be treated as terminated for
purposes of this Agreement on the ninety-first day of such leave unless
such person's right of continued employment is guaranteed either by
statute or contract.
[c] Delivery. Delivery of any notice or document shall occur upon actual
delivery to the recipient (including receipt of telecopy or facsimile
transmission), and shall be deemed delivered the third day following
mailing by U.S. certified mail, postage prepaid, return receipt
requested, addressed to the recipient's then current mailing address.
Any corporate officer or other authorized agent may receipt for any
notice or document on behalf of the Company.
[d] Remedies. Each of the parties to this Agreement will be entitled to
enforce its rights under this Agreement specifically, to recover damages
by reason of any breach of the provisions of this Agreement and to
exercise all other rights existing in its favor. The parties hereto
agree and acknowledge that money damages would not be an adequate remedy
for any breach of the provisions of this Agreement by the Optionee or
any Permitted Transferee, and the Company may in its sole discretion
apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief in order to enforce or
prevent any such breach of this Agreement, including, without
limitation, a breach of any provisions of the transfer restriction
contained in Section 7
[e] Actions of Board. Any determination by the Board as to any question
with respect to this Agreement will be final and binding on the
Optionee. All actions taken and all interpretations and determinations
made by the Board in good faith shall be final and
-8-
<PAGE> 9
binding upon the Optionee, the Company and all other interested persons.
In addition to any other rights of indemnification, each Board member
shall be indemnified by the Company against reasonable expenses
(including attorneys' fees) actually and necessarily incurred in
connection with the defense of any action, suit or proceeding (or in
connection with any appeal) to which such person may be a party by
reason of an action taken, or any failure to act, in connection with
this Agreement and the Stock Option granted under it. This
indemnification shall further extend to all amounts paid by any Board
member either in a settlement approved by independent legal counsel
selected by the Board or pursuant to a judgment in any such action, suit
or proceeding, provided that the Board member acted in good faith and in
a manner he or she reasonably believed to be in the best interests of
the Company. Any action taken by the Board under this Agreement may be
made without notice or meeting of the Board in a writing signed by all
members of the Board.
[f] Subsidiary. Any reference to a Subsidiary means any corporation in
which the Company owns at least 80% of the total voting power and value
of its stock.
[g] Amendment. This Agreement may be amended only by a written instrument
signed by both parties.
[h] Binding Effect. This Agreement is binding upon, and inures to the
benefit of, the parties and their respective heirs, legal
representatives and permitted successors and assigns.
[i] Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to its subject matter, and it supersedes all
prior written and oral agreements, including, without limitation, the
Letter Agreement.
[j] No Waiver. No waiver of any default under this Agreement will be
considered valid unless in writing, and no such waiver will be deemed a
waiver of any subsequent default of the same or similar nature.
[k] Indemnification. Each party hereby indemnifies and agrees to hold
harmless the other from any liability, cost or expense arising from or
related to any act or failure to act of such party which is in violation
of this Agreement.
[l] Counsel. Each party has had the opportunity to obtain separate counsel
of choice. The Company expressly disclaims that it is giving any tax
advice to the Optionee with respect to the grant or exercise of the
Option or to any disposition of the Optioned Shares or any Shares. The
Optionee acknowledges and accepts this disclaimer.
[m] Originals. This Agreement is signed in two original documents, one to
be delivered to each party.
[n] Governing Law. This Agreement will be construed and enforced in
accordance with the laws of the State of Colorado.
-9-
<PAGE> 10
[o] 30-Day Requirement. This Agreement will automatically terminate if the
Optionee fails to deliver an original of this Agreement to the Company
within thirty days after it has been delivered to the Optionee (unless
the Board otherwise determines).
-10-
<PAGE> 11
The Company and the Optionee have signed this Agreement effective as of the
date first above written, notwithstanding the actual date of signing.
RENTX INDUSTRIES, INC.
June 6, 1997 By: /s/ Arnold A. Bernstein
- ----------------------- -----------------------------------------
Date Title: President -- CEO
---------------------------------------
OPTIONEE:
June 6, 1997 /s/ Thomas D. Nugent
- ----------------------- ---------------------------------------------
Date Thomas D. Nugent
- ----------------------- ---------------------------------------------
Date Signature of Optionee's spouse (if Section
16 is applicable)
- ----------------------- ---------------------------------------------
Date Signature of Permitted Transferee (pursuant
to Section 8)
-11-
<PAGE> 12
EXHIBITS NOT PROVIDED
PLEASE SEE EXHIBIT 10.26 FOR IDENTICAL EXHIBITS A AND B
TO NONQUALIFIED STOCK OPTION AGREEMENT [MANAGEMENT]
OF THOMAS D. NUGENT
<PAGE> 13
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT (this "Agreement") is
entered into effective as of May 19, 1997 between RentX Industries,
Inc., a Delaware corporation (the "Employer"), and Thomas D. Nugent
(the "Employee").
Recitals
The Employee is the Executive Vice President-Chief Financial
Officer of the Employer. The execution and delivery of this Agreement is a
condition precedent to the Company executing and delivering a Stock Option
Agreement dated approximately the date of execution hereof (the "Option
Agreement") and granting the Employee stock options thereunder.
Agreement
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, and other good and valuable consideration,
the receipt and sufficiency of which hereby are acknowledged, the parties agree
as follows:
I. DEFINITIONS
In addition to the terms defined elsewhere in this Agreement,
the following terms will have the meanings set forth below:
1.1. "Affiliate" means, with respect to any Person, (i) any
Person in which such Person directly or indirectly holds an equity or profits
interest, (ii) any Person controlling, controlled by or under common control
with such Person, (iii) any director, executive officer, partner or trustee of
such Person, (iv) any member of the immediate family of such Person, (v) any
trust in which a substantial portion of the beneficial interest is held by one
or a combination of the foregoing Persons or (vi) any Person to whom such Person
provides or has provided financial assistance. As used in this definition,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities or voting interests, by contract or
otherwise.
1.2. "Business" means (i) the businesses conducted or planned
to be conducted by the Employer at any time during the Employee's employment by
the Employer and (ii) any business reasonably related or incident to, or
constituting a reasonable extension of, such businesses, whether or not the
Employer has been engaged therein prior to, or is engaged therein as of, the
date on which the Employee's employment by the Employer terminates so long as on
such date the Employer has plans to thereafter conduct such business.
1.3. "Person" means any natural person, corporation,
trust, partnership, limited liability company, joint venture,
unincorporated organization, government or governmental agency, or
other entity.
<PAGE> 14
II. NONCOMPETITION; CONFIDENTIALITY
2.1. Noncompetition.
(i) The Employee acknowledges that the Employer's business
is intended to be nationwide, and agrees that any activity by the Employee
anywhere in the United States within the scope of the Business would unfairly
damage the Employer and the Business. Therefore, the Employee covenants and
agrees that during the term of the Employee's employment hereunder and for a
period ending two years after the Employee's employment with the Employer
terminates, neither the Employee nor any of the Employee's Affiliates will
engage, anywhere in the United States, directly or indirectly, as an owner of a
voting, equity or profits interest (or any option or right to acquire a voting,
equity or profits interest), director, officer, employee, consultant, principal,
agent, lender or guarantor of indebtedness or otherwise, in any activity
relating to any business that is competitive with the Business or that is
similar in any material respect to the Business.
(ii) (A) Notwithstanding the provisions of Section 2.1(i),
this Agreement will not be deemed to prohibit the Employee or the Employee's
Affiliates from "beneficially owning" (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) equity securities of another
Person engaged in an activity that, if engaged in by the Employee or the
Employee's Affiliates, would be prohibited by Section 2.1(i), so long as the
equity securities so owned by the Employee and the Employee's Affiliates
(including any such equity securities owned by any "associate" of the Employee
and the Employee's Affiliates within the meaning of Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) are of a class of equity security
registered under the Securities Exchange Act of 1934, as amended, and do not
represent, in the aggregate, more than 2% of the voting power of all outstanding
equity securities of, or more than 2% of the profits interest in, the issuer
thereof so long as neither the Employee nor the Employee's Affiliates has any
other involvement with such other Person.
(B) Notwithstanding the provisions of Section 2.1(i),
this Agreement will not be deemed to prohibit any child of the Employee from
being employed by any business that is competitive with the Business or that is
similar in any material respect to the Business. Any child so employed shall not
be subject to Section 2.3.
(iii) The Employee and the Employer intend that the covenant
contained in Section 3.1(i) be deemed to be a series of separate covenants made
by the Employee, one for each state of the United States and each identical to
the terms of the covenant contained in Section 2.1(i).
2.2. No Competitive Hiring. The Employee covenants and agrees
that during the term of the Employee's employment hereunder and for a period of
two years after the date the Employee's employment with the Employer terminates,
the Employee will not, and will cause each of the Employee's Affiliates not to,
directly or indirectly solicit for employment any employee, officer or agent of
the Employer (except any employee whose employment by the Employer has
terminated) without the Employer's prior written consent.
2.3. Corporate Opportunities. The Employee covenants and
agrees that during the term of the Employee's employment by the Employer and for
a period of one year after the date the
2
<PAGE> 15
Employee's employment with the Employer terminates, the Employee will, and will
cause the Employee's Affiliates to, promptly refer to the Employer any
information or inquiry received by the Employee or any of the Employee's
Affiliates concerning any potential business opportunity involving the Business.
2.4. Confidential Information. The Employee acknowledges that
information, observations and data obtained by the Employee and the Employee's
Affiliates concerning the Business or the business or affairs of the Employer
constitute confidential information, are trade secrets, are the property of the
Employer and are essential and confidential components of the Employer's
business. The Employee will not, and will cause the Employee's Affiliates not
to, directly or indirectly disclose to any Person or use any of such
information, observations or data, except to the extent that (i) any such
information, observations or data becomes generally known to and available for
use by the public other than as a result of disclosure by any Person owing a
duty of confidentiality to the Employer or (ii) the Employee or the Employee's
Affiliates are required to do so by applicable law, regulation or order of a
governmental agency or court of competent jurisdiction. Immediately upon
termination of the Employee's employment with the Employer, the Employee will
deliver to the Employer all memoranda, notes, plans, records, reports, and other
documents and information and all copies thereof in any tangible form relating
to the Business or the business and affairs of the Employer which the Employee
may then possess or have under the Employee's control and will destroy all of
such information in intangible form which is in the Employee's possession or
under the Employee's control.
2.5. Inventions. For purposes of this Section 2.5, "Invention"
means any invention, improvement, discovery or idea (whether patentable or not,
and including those which may be subject to copyright protection) relating to
the Business which are generated, conceived or reduced to practice by the
Employee alone or in conjunction with others, during or after normal business
hours, whether before or during the term of this Agreement, and all associated
rights to patents, copyrights and applications therefor. The Employee agrees
promptly to disclose to the Employer in writing all Inventions. All Inventions
will be the exclusive property of the Employer and hereby are assigned to the
Employer. The Employee will, at the Employer's reasonable expense, provide the
Employer with all assistance it requires to protect, perfect and use its rights
to and its interest in Inventions anywhere in the world and to vest in the
Employer such rights and interest.
2.6. Return of Documents, Etc. All documents and tangible
items provided to the Employee by the Employer or created by the Employee in
connection with the Employee's employment, together with all copies, recordings,
abstracts, notes or reproductions of any kind made from or about such documents
and tangible items or the information they contain, are the property of the
Employer and promptly will be returned to the Employer immediately upon
termination of the Employee's employment.
III. MISCELLANEOUS
3.1. Specific Performance. The Employer and the Employee
acknowledge and agree that any breach of the Employee's covenants set forth in
Section II hereof will result in irreparable damage to the Employer for which
there will be no adequate remedy at law. Therefore, the Employer and the
Employee agree that the Employer may in its sole discretion seek temporary
3
<PAGE> 16
and permanent court orders enjoining any breach of such covenants, without
prejudice to any other right or remedy to which the Employer may be entitled at
law, in equity or under this Agreement.
3.2. Arbitration. Except as set forth in Section 3.1, any
disputes arising under or in connection with this Agreement, including, without
limitation, those involving claims for specific performance or other equitable
relief, will be submitted to binding arbitration under the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA Rules")
under the authority of federal and state arbitration statutes, and shall not be
the subject of litigation in any forum. EXCEPT AS SET FORTH IN SECTION 3.1, EACH
PARTY, BY SIGNING THIS AGREEMENT, VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY
WAIVES ANY RIGHTS SUCH PARTY MAY OTHERWISE HAVE TO SEEK REMEDIES IN COURT OR
OTHER FORUMS, INCLUDING THE RIGHT TO JURY TRIAL. The arbitration will be
conducted only in Denver, Colorado, before a single arbitrator from the staff of
the Judicial Arbiter Group, Inc. ("JAG") selected by the parties to such
arbitration (or, if JAG is no longer in existence, before a single arbitrator
selected by the parties in accordance with the AAA Rules) or, if they are unable
to agree on an arbitrator, before a panel of three arbitrators selected from the
staff of JAG (or, if JAG is no longer in existence, before a panel of three
arbitrators selected in accordance with the AAA Rules), one selected by the
Employee, one selected by the Employer and the third selected by the other two
arbitrators. The arbitrators shall have full authority to order specific
performance and award damages and other relief available under this Agreement or
applicable law, but shall have no authority to add to, detract from, change or
amend the terms of this Agreement (except as otherwise contemplated by Section
3.5) or existing law. All arbitration proceedings, including settlements and
awards, shall be confidential. The decision of the arbitrators will be final and
binding, and judgment on the award by the arbitrators may be entered in any
court of competent jurisdiction. THIS SUBMISSION AND AGREEMENT TO ARBITRATE WILL
BE SPECIFICALLY ENFORCEABLE.
3.3. Attorneys' Fees and Costs. The prevailing party or
parties in any arbitration or in any other action to enforce this Agreement will
be entitled to all reasonable costs and expenses, including attorneys' fees and
fees and expenses of the arbitrators, incurred in connection therewith.
3.4. Binding Contract. The mutual reliance by the Employer and
the Employee upon the existence of this Agreement as a condition precedent to
their obligations to consummate the transaction contemplated by the Option
Agreements will constitute sufficient consideration for the validity and
enforceability of each of its provisions.
3.5. Severability. The Employer and the Employee agree that
the terms of this Agreement, and in particular the restrictions on the Employee
set forth in Section II, are reasonable and fair in light of the transactions
contemplated hereby and by the Option Agreements. Whenever possible each
provision of this Agreement will be interpreted so as to be fully effective and
valid under applicable law. If any provision of this Agreement is determined to
be invalid, illegal or unenforceable in any respect as written, such provision
will be automatically modified only to the minimum extent necessary to make it
enforceable and the provision as so modified will be enforced, without
invalidating any other provision of this Agreement (it being the intent of the
parties that, if Section 2.1(i) is not enforceable as written, Section 2.1(i)
shall be enforceable with respect to each state of the United States in which
the Employer owns rental equipment stores as of the date on which the Employee's
employment by the Employer terminates). If any provision contained in this
4
<PAGE> 17
Agreement is determined to be void or unenforceable against the Employee in
whole or in part, it will not be deemed to affect or impair the validity of any
other provision of this Agreement or the validity thereof with respect to any
other party. This Agreement constitutes a fully negotiated agreement between the
parties, each with the aid and assistance of legal counsel. The language used in
this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent and will be construed and interpreted as though
drafted by all the parties to this Agreement.
3.6. Extension of Periods. The periods of time set forth in
Section II of this Agreement will be extended by any period of time during which
the Employee or any of the Employee's Affiliates is in breach of any term of
this Agreement.
3.7. Waiver. Any failure by the Employer to insist upon strict
compliance with any term, covenant or condition hereof will not be deemed to be
a waiver of such term, covenant or condition, nor will the relinquishment of any
right or power hereunder by the Employer at any one or more times be deemed a
waiver or relinquishment of such right or power by the Employer at any other
time or times.
3.8. Assignment. This Agreement will inure to the benefit of
and be enforceable by the parties and their successors and assigns, but will not
be assignable or delegable in whole or in part by the Employee.
3.9. Headings. The headings contained in this Agreement are
inserted for convenience only and do not constitute a part of this Agreement.
3.10. Counterparts. This Agreement may be executed in any
number of counterparts, each of which will be deemed to be an original but all
of which together shall constitute but one agreement.
3.11. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by the parties, written or
oral, which may relate to the subject matter hereof.
3.12. CHOICE OF LAW. THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE INTERNAL LAW OF THE
STATE OF COLORADO WITHOUT REFERENCE TO ANY CONFLICT OF LAW PRINCIPLES.
3.13. Notices. All notices hereunder shall be in writing. Any
notice hereunder shall be deemed duly given if it is sent by registered or
certified mail, return receipt requested, postage prepaid, or by courier,
telecopy or facsimile, and addressed to the intended recipient as follows: (i)
if to the Employee: __________________________________________, Telecopy (___)
___-____; or (ii) if to the Employer: RentX Industries, Inc., 1522 Blake Street,
Denver, Colorado 80202, Attn: Craig J. Zoellner, Telecopy: (303) 620-9016.
Notices will be deemed given three days after mailing if sent by certified mail,
when delivered if sent by courier, and upon receipt of confirmation by person or
machine if sent by telecopy or facsimile transmission. Either party may change
the address to
5
<PAGE> 18
which notices hereunder are to be delivered by giving the other party notice in
the manner herein set forth.
IN WITNESS WHEREOF, the parties have hereunto set their hands
effective as of the date first above written, notwithstanding the actual date of
signing.
RENTX INDUSTRIES, INC.
Dated: May 19, 1997 By: /s/ Arnold A. Bernstein
-------------------------------------
Name: Arnold Bernstein
Title: Pres.-CEO.
Dated: May 19, 1997 /s/ Thomas D. Nugent
------------------------------------
Thomas D. Nugent
6
<PAGE> 1
EXHIBIT 10.45
April 7, 1997
Thomas D. Nugent
4036 Wellington Lane
Grapevine, TX 76051
Dear Tom:
We are pleased to offer you the position of Executive Vice President and Chief
Financial Officer of RentX Industries.
The terms of your employment are as follows:
Base Salary: $130,000 annually ($5,000 per pay period).
Bonus: 40% of base salary, assuming the annual budgeting goals of
RentX are satisfied and your performance is fully
effective (with $35,000 of that amount guaranteed and paid
at $1,346.15 per pay period).
Car Allowance: $350 per month
Options: Stock options to purchase 36,000 shares of common stock in
RentX pursuant to RentX's "Non-qualified employee stock
option plan". The exercise price on these options will
vest 20% at the end of each year for five years, beginning
one year from your start date, but will become 100% vested
upon the completion of a sale of the company. The vesting
options require your employment with the company on each
anniversary date.
You will be able to purchase preferred A stock in RentX,
on the same basis as the original investors.
Relocation: Up to $30,000 to be used as you see fit for all relocation
costs (i.e., including real estate commissions, interim
living, transportation, house hunting trips, closing
costs, etc.)
THIS DOES NOT REPRESENT AN EMPLOYMENT CONTRACT, EITHER EXPRESS OR IMPLIED. IT
IS EXPRESSLY UNDERSTOOD THAT YOUR CONTINUED EMPLOYMENT IS AT WILL.
<PAGE> 2
Thomas D. Nugent
April 7, 1997
Page 2
Tom, we are excited to have you join the RentX team, and I look forward to
working with you. Please sign below to indicate your agreement that this
accurately represents the entire understanding between yourself and RentX
Industries, Inc.
RentX Industries, Inc.
By: /s/ Arnie Bernstein
------------------------------------
Arnie Bernstein, President-CEO
Acknowledged and Agreed:
/s/ Thomas D. Nugent, 4-10-97
- -----------------------------
Thomas D. Nugent
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" and to the
use of our reports as follows, in Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-36341) and related Prospectus of RentX Industries, Inc. dated
November 3, 1997:
o Report dated August 29, 1997, with respect to the financial statements of
RentX Industries, Inc. as of January 31, 1997 and for the period from May 15,
1996 (commencement of operations) through January 31, 1997
o Report dated July 2, 1997, with respect to the combined financial statements
of Rental Country U.S.A., Inc., Rifle Rentals, Inc., G.R.M. Company, Inc.,
and Rocky Mountain Rentals, Inc. (dba E-Z Way Rentals) for the years ended
December 31, 1994 and 1995 and for the seven month period ended July 31, 1996
o Report dated July 18, 1997, with respect to the financial statements of
Redwine Enterprises, Inc., fka U-Rent, Inc., for the period from January 1,
1996 through October 31, 1996
o Report dated July 11, 1997, with respect to the combined financial
statements of Hays Rental and Sales of El Dorado, Inc., Hays Rental and Sales
of Camden, Inc., Hays Rental and Sales of Magnolia, Inc., Hays Rental and
Sales of Hot Springs, Inc., Hays Rental and Sales of Arkadelphia, Inc. and
Hays Leasing Company, Inc. (dba Hays Rental and Sales) as of October 31,
1996 and 1995 and for each of the three years in the period ended
October 31, 1996
o Report dated May 28, 1997, with respect to the financial statements of CVR,
Inc. (formerly Central Virginia Rental Company) as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996
o Report dated June 6, 1997, with respect to the financial statements of
Newmanco, Inc. (dba A-1 Rental Centers) as of September 30, 1995 and 1996 and
for each of the three years in the period ended September 30, 1996
o Report dated July 30, 1997, with respect to the financial statements of
Titus Rental Service Companies, Inc. (dba Suburban Rent-It Company and Able
Party Rental) as of March 31, 1996 and 1997 and for each of the three years
in the period ended March 31, 1997
o Report dated July 11, 1997, with respect to the financial statements of
Mer-Cal Enterprises, Inc. (dba Duncan Rent-Alls) as of December 31, 1995 and
1996 and for each of the three years in the period ended December 31, 1996
o Report dated August 8, 1997, with respect to the financial statements of
Redi Rentals, Inc. as of May 31, 1996 and 1997 and for the years ended
May 31, 1995, 1996 and 1997.
Ernst & Young LLP
Denver, Colorado
November 3, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated May 9, 1997 (except
for Note 6, as to which the date was May 15, 1997), regarding Zodiac Rentals,
and to the reference to our Firm under the heading "Experts," in the
Registration Statement on Form S-1 for a stock offering by RentX Industries,
Inc. and in any subsequent registration statement relating to the same offering
filed pursuant to Rule 462(b) under the Securities Act of 1933.
Pester & Company
PESTER & COMPANY
CERTIFIED PUBLIC ACCOUNTANTS, P.C.
Denver, Colorado
November 3, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated May 19,1997, regarding A to Z
Rentals and Sales, Inc., and to the reference to our Firm under the heading
"Experts" in the Registration Statement on Form S-1 for a stock offering by
RentX Industries, Inc., and in any subsequent registration statement relating
to the same offering filed pursuant to Rule 462(b) under the Securities Act of
1933.
/s/ LEMASTER & DANIELS PLLC
Spokane, Washington
November 3, 1997
<PAGE> 1
EXHIBIT 23.4
[WILLIAMS & PARSONS, PA LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated June 26, 1997,
regarding U-Do-It Rental Centers, Inc. and Affiliate and to the reference to
our Firm under the heading "Experts" in the Registration Statement on form S-1
for a stock offering by RentX Industries, Inc. and in any subsequent
registration statement relating to the same offering filed pursuant to Rule
462(b) under the Securities Act of 1933.
/s/ WILLIAMS & PARSONS PA
Williams & Parsons PA
Certified Public Accountants
Sandpoint, ID
November 3, 1997
<PAGE> 1
EXHIBIT 23.6
[RENTX LETTERHEAD]
October 31, 1997
Sent Via Facsimile 309-764-1533
Mr. Joseph Lynch
American Rental Association
1900 19th St.
Moline, Illinois 61265-4198
Dear Mr. Lynch:
The American Rental Association hereby consents to the references to
the information published by us and to our name, all of which appear under the
captions "Industry Overview, pages 38 and 39" in the Registration Statement on
Form S-1, as amended (File No. 333-36341), filed by RentX Industries, Inc. with
the Securities and Exchange Commission. (See attached)
Please sign below and return via facsimile (303-782-5370) today to Mr. Arnie
Bernstein.
Sincerely,
/s/ Arnie Bernstein
Arnie Bernstein
President and CEO
By: /s/ Joseph M. Lynch
------------------------------------
Name: Joseph M. Lynch
----------------------------------
(Print or Type Name)
Title: Deputy Executive Vice President
---------------------------------
AB:jm
Attachment
<PAGE> 1
EXHIBIT 23.7
[RENTX LETTERHEAD]
October 31, 1997
Sent Via Facsimile 847-949-9910
Mr. Frank Manfredi
Manfredi & Associates
Dear Mr. Manfredi:
Manfredi & Associates hereby consents to the references to the information
published by us and to our name, all of which appear under the captions
"Industry Overview, page 38" in the Registration Statement on Form S-1, as
amended (File No. 333-36341), filed by RentX Industries, Inc. with the
Securities and Exchange Commission. (See attached)
Please sign below and return via facsimile (303-782-5370) today to Mr. Arnie
Bernstein.
Sincerely,
/s/ Arnie Bernstein
Arnie Bernstein
President and CEO
By: /s/ Frank Manfredi
-----------------------------------
Name: Frank Manfredi
---------------------------------
(Print or Type Name)
Title: President
--------------------------------
AB:jm
Attachment
