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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION STATEMENT NO. 333-40707
PROSPECTUS
4,000,000 Shares
[LOGO OF RENTAL SERVICE CORPORATION]
COMMON STOCK
----------------
OF THE 4,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 3,200,000
SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS AND 800,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. SEE
"UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY
ARE BEING SOLD BY THE COMPANY. THE COMMON STOCK IS TRADED ON THE NEW
YORK STOCK EXCHANGE UNDER THE SYMBOL "RSV." ON DECEMBER 16, 1997, THE
LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE WAS $24 13/16 PER SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NORHAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
PRICE $24 A SHARE
----------------
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
----------- -------------- -----------
<S> <C> <C> <C>
Per Share............................... $24.00 $1.14 $22.86
Total(3)................................ $96,000,000 $4,560,000 $91,440,000
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,000,000.
(3) The Company and certain Selling Stockholders have granted the U.S.
Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 600,000 additional Shares at the
price to public less underwriting discounts and commissions for the
purpose of covering overallotments, if any. If the U.S. Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions, proceeds to Company and proceeds to Selling
Stockholders will be $110,400,000, $5,244,000, $101,517,237 and
$3,638,763, respectively. The Company will not receive any proceeds
from the sale of Shares by the Selling Stockholders. See "Principal and
Selling Stockholders" and "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about December 22, 1997 at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER WILLIAM BLAIR & COMPANY
December 16, 1997
<PAGE>
[MAP SHOWING RENTAL LOCATIONS AND LOCATIONS TO BE ACQUIRED.]
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY ANY SELLING
STOCKHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
---------------
FOR INVESTORS OUTSIDE THE UNITED STATES: NO ACTION HAS BEEN OR WILL BE TAKEN
IN ANY JURISDICTION BY THE COMPANY OR ANY UNDERWRITER THAT WOULD PERMIT A
PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS IN ANY JURISDICTION WHERE ACTION FOR THAT PURPOSE IS REQUIRED,
OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE POSSESSION THIS PROSPECTUS
COMES ARE REQUIRED BY THE COMPANY AND THE UNDERWRITERS TO INFORM THEMSELVES
ABOUT AND TO OBSERVE ANY RESTRICTIONS AS TO THE OFFERING OF THE COMMON STOCK
AND THE DISTRIBUTION OF THIS PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Available Information..................................................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 14
Use of Proceeds........................................................... 20
Price Range of Common Stock and Dividend Policy........................... 21
Capitalization............................................................ 22
Unaudited Pro Forma Consolidated Financial Data........................... 23
Selected Consolidated Financial and Operating Data........................ 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business................................................................... 48
Management................................................................. 56
Principal and Selling Stockholders......................................... 64
Certain Relationships and Related Transactions............................. 66
Description of Capital Stock............................................... 67
Shares Eligible for Future Sale............................................ 68
Underwriters............................................................... 70
Certain United States Tax Considerations for Non-United States Holders..... 73
Legal Matters.............................................................. 76
Experts.................................................................... 76
Index to Financial Statements.............................................. F-1
</TABLE>
The Company operates through its subsidiaries and, unless the context
otherwise requires, references in this Prospectus to the "Company" or "RSC"
include Rental Service Corporation, a Delaware corporation, and its direct and
indirect subsidiaries. Industry figures were obtained from the Rental
Equipment Register (the "RER"), an industry trade magazine, the Dodge Report,
published by the F.W. Dodge Company, an independent market research firm (the
"Dodge Report"), and other industry sources that the Company has not
independently verified.
---------------
The Company's principal executive offices are located at 14505 N. Hayden
Road, Suite 322, Scottsdale, Arizona 85260, and its telephone number is (602)
905-3300.
---------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF COMMON STOCK IN THE OPEN
MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
AVAILABLE 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 securities 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 securities 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. The Company is also subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information 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 Company's
Common Stock is listed on the New York Stock Exchange. Consequently, reports
and other information concerning the Company may also be inspected at the
offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005. Electronic filings made through the Electronic Data Gathering Analysis
and Retrieval System are publicly available through the Commission's Website
(http://www.sec.gov). In addition, the Company consummated its initial public
offering on September 23, 1996 and sold 3,000,000 shares of its Common Stock
in a public offering consummated on June 4, 1997, and the related Registration
Statements of the Company on Form S-1, are available from the sources cited
above.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus. Certain information contained in this summary and
elsewhere in this Prospectus, including information with respect to the
Company's plans and strategy for its business, especially RSC's growth
strategy, plans to raise additional capital and prospective acquisitions, are
forward-looking statements. Prospective investors should carefully consider the
factors set forth herein under the caption "Risk Factors" for a discussion of
important factors that could cause actual results to differ materially from
results referred to in the forward-looking statements. Unless otherwise
indicated, all information set forth in this Prospectus assumes no exercise of
the U.S. Underwriters' overallotment option. Capitalized terms used but not
defined in this Prospectus Summary have the meanings ascribed to them elsewhere
in this Prospectus.
THE COMPANY
The Company is a leading consolidator in the rapidly-growing equipment rental
industry, serving the needs of a wide variety of industrial, manufacturing,
construction, government and homeowner markets. As of December 12, 1997, RSC
operated the largest rental network in the United States with 166 rental
locations. RSC rents a broad selection of equipment ranging from small items
such as pumps, generators, welders and electric hand tools, to larger equipment
such as backhoes, forklifts, air compressors, scissor lifts, aerial manlifts
and skid-steer loaders. The Company also sells maintenance, repair and
operations ("MRO") supplies, small tools, contractor supplies, parts and used
rental equipment, and acts as a distributor for new equipment on behalf of
certain national equipment manufacturers. Depending upon market needs, RSC also
offers its customers 24 hours-a-day, seven days-a-week support services,
including on-site maintenance and repair. The Company has a diverse customer
base and rented equipment to over 20,000 customers in 1996, with the top ten
customers representing less than 8% of total revenues. The Company's customers
include industrial companies (such as manufacturers, petrochemical facilities,
large chemical processing companies, paper mills, entertainment companies and
public utilities), construction companies (such as contractors), governmental
entities and homeowners.
RSC's strategy is to expand its presence in existing markets and capitalize
on opportunities to enter new geographic markets through a combination of
acquisitions and start-up locations. From its formation in July 1992 through
its initial public offering in September 1996, the Company acquired 16
businesses consisting of 65 locations and opened 30 start-up locations. Since
its initial public offering in September 1996, the Company has completed 28
acquisitions consisting of 73 locations, has entered into letters of intent to
acquire an additional five companies consisting of 20 locations and has opened
17 start-up locations. See "--Recent Developments." The Company also focuses on
increasing revenues across its locations through investments in fleet
expansion, the implementation of sophisticated information systems designed to
improve asset utilization and targeted marketing efforts. By pursuing such
growth strategies, the Company has increased total revenues from $41.8 million
in the year ended December 31, 1994 to $128.4 million in the year ended
December 31, 1996. Operating income has increased from $3.9 million to $13.8
million during the same period. During the first nine months of 1997, the
Company generated revenues of $172.3 million with operating income of $25.0
million, increases of 85.1% and 165.6%, respectively, over the same period in
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
The Company believes the rental equipment industry offers substantial
consolidation opportunities for large, well capitalized equipment rental
companies such as RSC. The equipment rental industry is highly fragmented and
primarily consists of a large number of relatively small, independent
businesses typically serving discrete local markets within 30 to 50 miles of
the store location, and a small number of multi-location regional
5
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or national operators. Relative to smaller companies with only one or two
rental locations, the Company believes RSC benefits from several competitive
advantages, including sophisticated management information systems, volume
purchasing discounts, professional management, a diverse customer base, a
modern and well-maintained rental fleet, the ability to transfer equipment
among rental locations to satisfy customer demand and national brand identity.
Management believes the equipment rental industry benefits from the trend among
businesses to outsource non-core operations in order to reduce capital
investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. As a result of consolidation and industry
growth, 1996 rental revenues of the top 100 rental equipment companies
increased over 1995 rental revenues by approximately 24%, to $3.1 billion,
according to estimates by the RER. In spite of this growth, these top 100
companies represented only a small percentage of the estimated $20 billion in
industry rental revenues in 1996.
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by taking
advantage of its strong market position and pursuing a business strategy that
includes the following key elements:
Small- to Medium-Sized Market Focus. The Company focuses on operating rental
locations in underserved small- to medium-sized rental markets where the
Company can capitalize on its competitive advantages relative to the small,
local equipment rental businesses and equipment dealers who have traditionally
served such markets. In addition, the Company believes small- to medium-sized
markets provide an extensive selection of acquisition candidates and attractive
start-up locations. The Company believes future acquisitions and start-up
locations will provide opportunities to achieve greater geographic and customer
diversification. Through its geographic diversification, the Company believes
it can more effectively manage economic fluctuations than single-location
businesses by transferring equipment to regions with higher demand. See
"Business--Locations" and "--Growth Strategy."
Cluster Strategy. Under its cluster strategy, RSC establishes a comprehensive
pool of rental equipment at a central, readily-accessible "hub" location, and
surrounds the hub with smaller "satellite" locations 30 to 150 miles away,
which draw on this equipment pool to serve local customers' needs. The hub
locations provide full-service rental fleet maintenance and repair operations
for the satellite locations. The Company believes this strategy increases fleet
utilization and allows RSC to bring the benefits of a large, high-quality and
diversified rental equipment fleet to markets with populations as small as
25,000 where a full-scale rental facility might not otherwise be justified. See
"Business--Fleet Management."
Advanced Information Systems. The Company has made substantial investments in
its management information systems in order to improve asset utilization and
financial performance. Every rental location has on-line access to a
centralized computer system that provides real-time transaction processing,
extensive fleet management tools and financial management reports. Use of these
systems allows the Company to improve its asset utilization by deploying assets
to locations generating higher returns and identifying underperforming assets
for disposition. These systems also allow an employee at any location to
identify and reserve a specific piece of equipment anywhere in a region, and
schedule delivery (generally within 24 hours) to a customer's job site. With
the acquisition of Center, the Company obtained Center's proprietary
information system, which, among other enhancements, automatically prioritizes
equipment for maintenance based on type, age and recent use. The Company
believes Center's system is scaleable over a large number of locations, and
expects to add it to the Company's existing systems. See "--Recent
Developments--Acquisition of Center Rental," "Business--Fleet Management" and
"--Information Systems"
Decentralized Management. Under the Company's decentralized management
structure, RSC's region vice presidents and district managers, who currently
average over 20 years of rental experience, are responsible for management,
customer service, marketing strategies and business growth, including pursuing
acquisitions and
6
<PAGE>
identifying start-up locations, in their regions. Each region vice president
and district manager is compensated through a stock option program and cash
bonus plan tied directly to the region's performance. A small corporate staff
at the Company's headquarters focuses on corporate planning, financial
reporting and analysis and overseeing execution of the Company's growth
strategy. The Company has also centralized its purchasing and equipment
disposal functions in order to maximize purchase discounts and sale prices for
used rental equipment.
Superior Customer Service. The Company believes it differentiates itself from
many of its competitors by providing responsive customer service, a broad
selection of high-quality rental equipment and "one-stop shopping" for a wide
range of supplies, tools, parts and equipment. Depending upon market needs, RSC
also offers value-added services to its customers such as a radio-dispatched
transportation fleet and 24 hours-a-day, seven days-a-week support services,
including on-site maintenance and repair. The Company believes its rapid
response time in delivering, servicing or replacing equipment at job sites
generates customer loyalty. A cornerstone to the Company's customer service
commitment is its extensive training system, Rental Service University ("RSU"),
which provides formal training to Company employees relating to customer
service, strategy, finance, information systems, fleet management, safety and
risk management and human resources. See "Business--Products" and "--Sales and
Marketing."
GROWTH STRATEGY
RSC's growth strategy is to continue to expand its presence in existing
markets and capitalize on opportunities to enter new geographic markets through
a combination of acquisitions and start-up locations. The Company is systematic
in its selection of new markets for expansion and, together with Arthur D.
Little, Inc., has developed a proprietary model to guide future expansion
efforts by identifying and ranking desirable locations based on more than 25
demographic characteristics found in the Company's most successful geographic
markets. The Company also seeks to increase revenues at new and existing
locations through fleet expansion, improved asset utilization and targeted
marketing efforts. Following the IAT Acquisition, the Company also has begun to
increase revenues across existing locations by cross-selling both equipment
rental services and MRO tools and supplies to its industrial customers.
Acquisitions. RSC's acquisition efforts focus on acquiring stable, respected
businesses in markets the Company believes offer opportunities for additional
growth. The Company primarily targets acquisitions of businesses in small- to
medium-sized markets where an existing owner has limited resources to expand
the rental equipment fleet and/or the owner's decision to sell coincides with
the decision to retire. The Company believes it can capitalize in such markets
on its competitive advantages relative to the small, local equipment rental
businesses and equipment dealers who have traditionally served such markets.
Immediately after completing an acquisition, the Company generally integrates
the operations of the acquired business into its management information
systems, consolidates its equipment purchasing and disposal functions, and
centralizes its fleet management, while seeking to provide consistent, high-
quality service to the acquired business' customers. The Company has a proven
track record in completing and integrating acquisitions. Proprietors of smaller
businesses often place significant emphasis on the Company's reputation in
these areas, and the Company believes this reputation provides it access to
additional acquisition opportunities. Since its formation in 1992, RSC has
acquired 44 businesses consisting of 138 locations. See "Business--Business
Strategy--Small- to Medium-Sized Market Focus" and "--Locations."
Start-Up Locations. RSC also enters targeted markets through start-up
locations where there is no quality business available for acquisition or where
such a business cannot be acquired on terms acceptable to the Company. The
Company's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. RSC enhances the flexibility of start-up locations by entering
into real estate leases with short initial terms and multiple option periods.
In addition, RSC typically minimizes capital expenditures at a start-up
location by redeploying and sharing equipment with an existing hub. If a start-
up location does not meet expectations, the Company can redeploy the
7
<PAGE>
equipment elsewhere. Since the Company opened its first start-up location in
October 1994, the Company has opened 46 additional start-up locations. See
"Business--Business Strategy--Cluster Strategy" and "--Locations."
Internal Growth. The Company focuses on achieving internal growth through an
emphasis on fleet expansion, improved asset utilization and targeted marketing
efforts. The Company intends to replace assets in, and increase the breadth and
depth of, its existing rental equipment fleet through capital expenditures. In
addition, RSC's information systems provide the data necessary to improve asset
deployment based upon such factors as price realization, time utilization and
individual asset return on investment. Through its national accounts marketing
program, the Company targets large petrochemical, industrial and commercial
customers. The Company offers these customers In-Plant Maintenance ("IPM")
services whereby RSC locates equipment at a customer's facility and assumes
complete responsibility for the maintenance of such equipment. The IPM program
allows the Company to eliminate operating expenses such as equipment
transportation and delivery, and to improve asset utilization rates. In
addition, through the IAT Acquisition, the Company has increased its MRO supply
business and its tool room management and small tool trailer business. The
Company has also created an Industrial Division, with a dedicated and specially
trained sales force focusing exclusively on industrial customers. See
"Business--Fleet Management," "--Information Systems" and "--Sales and
Marketing."
RECENT DEVELOPMENTS
ACQUISITION OF CENTER RENTAL
On December 2, 1997, the Company acquired all of the outstanding capital
stock of Rent-It-Center, Inc. d/b/a Center Rentals & Sales and substantially
all of the assets of certain affiliated entities (collectively, "Center") for
approximately $100.9 million in cash, 482,315 shares of RSC common stock (of
which 64,544 shares will be issued over seven years, subject to earlier
issuance within three years if certain performance objectives are achieved) and
the assumption of approximately $16.0 million of Center's debt (the "Center
Acquisition"). Center is a leading independent rental company and also sells a
variety of equipment ranging from small tools to heavy equipment, including
related commodity supplies. Center operates a total of 14 locations in
Colorado, New Mexico, Texas, Kansas, Missouri and Nebraska, and had combined
revenues of approximately $49.8 million for its fiscal year ended October 31,
1997. Center's balance sheet is consolidated with the Company's under the
purchase method of accounting as of December 2, 1997. Pursuant to the
acquisition agreements, the Company assumed effective control of Center's
operations on November 1, 1997, and has included Center's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
The Company believes Center's management philosophy and operating strategy
are similar to the Company's, and that Center is a strong strategic fit for the
Company. In addition, the Company believes Center is one of the best managed
independent rental companies of its size. For example, Center has developed a
proprietary information system that allows it to operate on a nearly paperless
basis. This system automatically prioritizes equipment for maintenance based on
type, age and recent use. The Company believes Center's system is scaleable
over a large number of locations, and expects to add it to the Company's
existing systems. Center also operates on a "hub" and "satellite" strategy
similar to that employed by the Company, and Center's locations in the Rocky
Mountains and the Southwest are a natural geographic extension of RSC's
existing locations.
Center's senior management team has remained with the Company. David P.
Lanoha, Center's chief executive officer, became a Senior Vice President of
Operations of RSC, with responsibility for RSC's western region. The Company
believes Mr. Lanoha's extensive contacts and reputation in the equipment rental
industry will enable him to assist RSC in attracting potential sellers and that
Mr. Lanoha's willingness to remain as an
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executive of the Company after the sale of Center may encourage other owners of
rental businesses to do the same. In addition, Jack Markle, President of
Center, has remained with RSC and is responsible for Center's operations.
ACQUISITION OF VALLEY RENTALS
On October 28, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of JDW Enterprises, Inc. d/b/a Valley Rentals
("Valley") for a total purchase price of $104.0 million, consisting of
$93.6 million of cash and $10.4 million of RSC common stock (the "Valley
Acquisition"). The purchase price is subject to adjustment based on levels of
accounts receivable, inventory and equipment. Valley is a leading independent
rental company in the Southwest, operates a total of ten locations in Arizona
and New Mexico, and had trailing twelve months revenues of approximately $36.2
million as of September 30, 1997. The transaction is anticipated to close by
January 31, 1998, and will be recorded under the purchase method of accounting.
The closing is subject to a number of closing conditions, including the
execution of a definitive purchase agreement, RSC board and bank approval and
early termination or expiration of the waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act").
The Company believes the Valley Acquisition is an excellent strategic fit
with both the Company's existing operations and the Colorado and New Mexico
locations of Center. Valley is a leader in the Arizona rental market, and
operates on a limited "hub" and "satellite" system similar to the Company and
Center. Valley's rental operations are concentrated in the construction
industry, given its primary locations in Maricopa County, Arizona. Based on
figures published in the Dodge Report, Maricopa County had the highest level of
construction spending in the United States for the last four years. Valley's
locations in the Southwest are a natural geographic extension of RSC's and
Center's existing locations.
OTHER ACQUISITIONS AND START-UPS
On December 12, 1997, the Company acquired all of the outstanding capital
stock of Siems Rental & Sales Co., Inc. ("Siems") for $8.0 million in cash,
126,315 shares of RSC common stock and the assumption of approximately $13.5
million of Siems' debt. Siems is an independent rental company engaged in the
rental, sales and service of various types of construction and industrial
equipment. Siems operates a total of six locations in Maryland, Delaware,
Pennsylvania and Virginia, and had trailing twelve months revenues of
approximately $21.0 million as of September 30, 1997. Siems' balance sheet is
consolidated with the Company's under the purchase method of accounting as of
December 12, 1997. Pursuant to the acquisition agreement, the Company assumed
effective control of Siems' operations on November 1, 1997, and has included
Siems' revenues, costs and expenses from such date in its consolidated
statements of operations, net of related imputed purchase price adjustments.
Subsequent to September 30, 1997, the Company completed the acquisitions of
substantially all of the assets of Kansas Enterprises, Inc. d/b/a AAA Rent-All;
Sunbelt Equipment & Rentals, Inc.; Roesch Equipment Company; Allen Equipment,
Inc. and R&M Rentals, Inc. for a total combined purchase price of approximately
$16.5 million. These acquisitions have a combined ten locations in Arkansas,
Florida, Illinois, Kansas and Missouri.
As of December 12, 1997, the Company is party to additional letters of intent
to acquire four businesses for a total combined purchase price of approximately
$9.7 million and having a combined ten locations in Florida, Georgia, South
Carolina and Tennessee. Each of these acquisitions is subject to a number of
closing conditions, including the execution of definitive purchase agreements
and RSC board approval.
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AMENDMENT OF REVOLVING CREDIT FACILITY
On December 2, 1997, the Company amended and restated its revolving credit
facility (the "Revolver") to increase its total available financing to $600.0
million. This increase consisted of an increase in the availability under the
Revolver from $300.0 million to $500.0 million and a new $100.0 million seven-
year term loan facility (the "Term Loan" and, together with the Revolver, the
"Bank Facility"). In addition, the Bank Facility extended the maturity date of
the Revolver to December 2, 2002, changed the methodology for determining the
interest rate margins, increased the allowed levels of capital expenditures and
investments and amended several covenants, including the computation
methodology of certain financial covenants. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
INCREASE IN AUTHORIZED COMMON STOCK
On November 3, 1997, the Company began soliciting written consent of its
stockholders for the approval of an increase in the number of authorized shares
of its common stock, par value $.01 per share, from 20 million to 40 million
shares. Stockholder approval of the increase became effective on November 28,
1997. On December 11, 1997, the Company amended its Certificate of
Incorporation to effect such increase.
THE OFFERING
The offering hereby of 3,200,000 shares of Common Stock, par value $.01 per
share, of the Company (the "Common Stock") in the United States and Canada (the
"U.S. Offering") and the concurrent offering of 800,000 shares of Common Stock
outside the United States and Canada (the "International Offering") are
collectively referred to as the "Offering." The closing of each of the U.S.
Offering and the International Offering is conditioned upon the closing of the
other.
Shares Offered by the Company:
U.S. Offering.............. 3,200,000 shares
International Offering..... 800,000 shares
Total..................... 4,000,000 shares
Shares Outstanding
Immediately After the
Offering................... 19,488,153 shares(1)
Use of Proceeds to the
Company.................... To reduce the Company's indebtedness under
the Revolver in order to provide borrowing
availability for general corporate purposes,
including acquisitions. See "Use of
Proceeds."
New York Stock Exchange
Symbol..................... RSV
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(1) Excludes (i) 877,241 shares subject to options outstanding as of December
12, 1997 pursuant to the Company's Equity Participation Plans at a weighted
average exercise price of $18.57 per share, (ii) 364,298 shares reserved
for issuance pursuant to the Company's Equity Participation Plans, (iii)
250,000 shares reserved for issuance pursuant to the Company's Employee
Qualified Stock Purchase Plan (the "QSP Plan") and (iv) up to 829,395
shares reserved for issuance in connection with certain pending and
completed acquisitions. See "Management--Equity Participation Plans," "--
Employee Qualified Stock Purchase Plan" and "--Recent Developments."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Common Stock, see "Risk Factors."
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated statement of operations data for the years
ended December 31, 1994, 1995 and 1996, and summary consolidated balance sheet
data as of December 31, 1995 and 1996, have been derived from the audited
consolidated financial statements of the Company appearing elsewhere in this
Prospectus. The summary consolidated financial data with respect to the
Company's statement of operations for the period ended December 31, 1992 and
for the year ended December 31, 1993, and with respect to the balance sheet as
of December 31, 1992, 1993 and 1994 has been derived from audited financial
statements of the Company not included in this Prospectus. The summary
consolidated financial data with respect to the Company's Statement of
operations for the nine months ended September 30, 1996 and 1997, and with
respect to the balance sheet as of September 30, 1997, has been derived from
the unaudited consolidated financial statements of the Company, 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 dates and for such periods. The
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results which may be expected for future periods, including
for the year ending December 31, 1997. The selected operating data presented
has not been audited. The summary consolidated financial and operating data
presented should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
JULY 17, NINE MONTHS ENDED
1992 YEARS ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) ---------------------------------------------- ------------------------------
THROUGH PRO FORMA PRO FORMA
DECEMBER 31, AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------------ ------- ------- ------- ------- ----------- ------- -------- -----------
(IN THOUSANDS, EXCEPT LOCATIONS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Revenues:
Equipment rentals...... $2,145 $17,238 $27,775 $47,170 $94,218 $227,548 $67,742 $111,549 $191,785
Sales of parts,
supplies and new
equipment............. 1,785 7,387 10,800 14,621 21,919 133,996 16,450 47,119 107,646
Sales of used
equipment(3).......... 257 1,007 3,240 4,126 12,217 N/A 8,903 13,664 N/A
------ ------- ------- ------- ------- -------- ------- -------- --------
Total revenues....... 4,187 25,632 41,815 65,917 128,354 361,544 93,095 172,332 299,431
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 1,153 11,405 16,284 27,854 55,202 114,922 40,977 57,506 93,217
Depreciation,
equipment rentals..... 245 2,161 4,020 7,691 17,840 42,157 12,375 24,493 39,015
Cost of sales of
parts, supplies and
new equipment......... 1,650 5,370 7,978 10,439 15,582 99,852 11,799 36,383 81,018
Cost of sales of used
equipment(3).......... 248 589 2,320 2,178 8,488 N/A 5,820 9,261 N/A
------ ------- ------- ------- ------- -------- ------- -------- --------
Total cost of
revenues............ 3,296 19,525 30,602 48,162 97,112 256,931 70,971 127,643 213,250
------ ------- ------- ------- ------- -------- ------- -------- --------
Gross profit............ 891 6,107 11,213 17,755 31,242 104,613 22,124 44,689 86,181
Selling, general and
administrative expense. 341 2,683 4,747 6,421 12,254 50,639 9,061 13,444 34,465
Depreciation and
amortization, excluding
equipment rental
depreciation........... 11 211 504 1,186 2,835 5,276 1,829 3,789 5,597
Amortization of
intangibles(4)......... 321 2,635 2,078 718 2,379 9,343 1,825 2,463 6,428
------ ------- ------- ------- ------- -------- ------- -------- --------
Operating income........ 218 578 3,884 9,430 13,774 39,355 9,409 24,993 39,691
Interest expense, net... 77 407 731 3,314 7,063 20,888 5,819 8,863 20,595
------ ------- ------- ------- ------- -------- ------- -------- --------
Income before income
taxes and extraordinary
items.................. 141 171 3,153 6,116 6,711 18,467 3,590 16,130 19,096
Provision for income
taxes.................. 81 465 1,177 2,401 2,722 7,497 1,411 7,172 8,498
------ ------- ------- ------- ------- -------- ------- -------- --------
Income (loss) before
extraordinary items.... 60 (294) 1,976 3,715 3,989 $ 10,970 2,179 8,958 $ 10,598
======== ========
Extraordinary items(5).. -- -- -- (478) (1,269) (1,269) (534)
------ ------- ------- ------- ------- ------- --------
Net income (loss)....... 60 (294) 1,976 3,237 2,720 910 8,424
Redeemable preferred
stock accretion........ 133 1,013 1,646 1,717 1,643 1,643 --
------ ------- ------- ------- ------- ------- --------
Net income (loss)
available to common
stockholders........... $ (73) $(1,307) $ 330 $ 1,520 $ 1,077 $ (733) $ 8,424
====== ======= ======= ======= ======= ======= ========
Income (loss) before
extraordinary items per
common share........... $ (.01) $ (.23) $ .06 $ .39 $ .33 $ .54 $ .09 $ .68 $ .52
======== ========
Extraordinary items per
common
share(5)............... -- -- -- (.09) (.18) (.22) (.04)
------ ------- ------- ------- ------- ------- --------
Net income (loss) per
common share........... $ (.01) $ (.23) $ .06 $ .30 $ .15 $ (.13) $ .64
====== ======= ======= ======= ======= ======= ========
Weighted average common
shares outstanding(6).. 5,590 5,632 5,428 5,088 7,218 20,260 5,773 13,150 20,256
SELECTED OPERATING DATA:
Beginning locations..... -- 11 21 25 50 50 94
Locations acquired...... 11 11 1 26 25 16 34
Locations opened........ -- -- 3 10 19 17 11
Locations closed, sold
or held for
sale(7)................ -- (1) -- (11) -- -- (5)
------ ------- ------- ------- ------- ------- --------
Ending locations........ 11 21 25 50 94 83 134
====== ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31, 1997
------------------------------------------- -----------------------
PRO FORMA
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment.............. $ 8,591 $16,223 $24,138 $ 52,818 $116,921 $229,894 $318,489
Total assets............ 18,360 35,877 48,098 137,832 218,933 462,577 759,507
Total debt (including
capital leases)........ 5,024 4,411 12,752 68,555 68,594 224,535 393,455
Redeemable preferred
stock (net of treasury
stock)................. 10,144 25,956 26,684 28,401 -- -- --
Common stockholders'
equity (deficit)....... 24 (1,281) (1,474) 46 95,072 171,889 287,588
</TABLE>
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- --------
(1) The pro forma as adjusted consolidated statements of operations for the
year ended December 31, 1996 give effect to the Pro Forma Combined
Acquisitions, the Pro Forma Acquisition Adjustments and the 1996 Pro Forma
Offering Adjustments, as described in "Unaudited Pro Forma Consolidated
Financial Data" as if such transactions had occurred on the first day of
the period presented. The pro forma as adjusted consolidated statements of
operations for the nine months ended September 30, 1997 and the pro forma
as adjusted balance sheet at September 30, 1997 give effect to the 1997
Completed Acquisitions, the Center Acquisition, the Valley Acquisition, the
Other Acquisitions and the 1997 Pro Forma Offering Adjustments, in the case
of the statement of operations as if such transactions had occurred on the
first day of the period presented and in the case of the balance sheet as
if they had occurred at September 30, 1997. See "Unaudited Pro Forma
Consolidated Financial Data."
(2) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statements of operations data from the effective date of acquisition. On
April 25, 1997, the Company completed the IAT Acquisition, and pursuant to
the acquisition agreement, the Company assumed effective control of IAT's
operations on March 1, 1997. Accordingly, the Company has included IAT's
revenues, costs and expenses from March 1, 1997 in its consolidated
statements of operations, net of related imputed purchase price
adjustments, and has included IAT's balance sheet in its consolidated
balance sheets since April 25, 1997.
(3) Sales of used equipment and cost of sales of used equipment are included
with sales of parts, supplies and new equipment and cost of sales of parts,
supplies and new equipment, respectively, on a pro forma as adjusted basis
for the year ended December 31, 1996 and the nine months ended
September 30, 1997.
(4) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(5) The extraordinary item in the year ended December 31, 1995 represents the
loss on extinguishment of debt related to the Company's $30.0 million
revolving credit facility (the "Old Revolver") paid off September 12, 1995.
The extraordinary item in the year ended December 31, 1996 and the nine
months ended September 30, 1996 represents the loss on extinguishment of
debt related to the amendment to the Revolver in September 1996. The
extraordinary item in the nine months ended September 30, 1997 represents
the loss on extinguishment of debt related to the amendment and restatement
of the Revolver in January 1997.
(6) See Note 1 to the Company's Consolidated Financial Statements.
(7) In 1996, the Company closed or disposed of its California locations, which
were previously classified as "assets held for sale" in the Company's
Consolidated Financial Statements.
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<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in
evaluating an investment in the Common Stock offered hereby. Certain
information contained in this Prospectus, including information with respect
to the Company's plans and strategy for its business, are forward-looking
statements. Prospective investors should carefully consider the factors set
forth below for a discussion of important factors that could cause actual
results to differ materially from the results referred to in forward-looking
statements contained in this Prospectus.
RISKS RELATING TO GROWTH STRATEGY
A principal component of the Company's growth strategy is to continue to
expand through additional acquisitions and start-up locations which complement
the Company's business in new or existing markets. Between its formation in
1992 and its initial public offering in September 1996, the Company, through
its aggressive expansion strategy, acquired 16 businesses consisting of 65
locations and opened 30 start-up locations. Since its initial public offering
through December 12, 1997, the Company has completed 28 acquisitions
consisting of 73 locations and has opened 17 start-up locations. At December
12, 1997, the Company was a party to letters of intent to acquire five
equipment rental businesses (including Valley) with an aggregate total of 20
locations in six states for an aggregate purchase price of approximately
$102.1 million in cash, $10.75 million in RSC Common Stock and the assumption
of approximately $813,000 of debt. The Company's future growth will be
dependent upon a number of factors including, among others, the Company's
ability to identify attractive acquisition candidates and start-up locations,
consummate acquisitions and obtain sites for start-up locations on favorable
terms, promptly and successfully integrate acquired businesses and start-up
locations with the Company's existing operations, expand its customer base,
realize acceptable returns on capital investments in its rental fleet and
obtain financing to support expansion. There can be no assurance that the
Company will successfully expand, that, despite the aggressive pace of the
Company's growth, any acquired business will be successfully integrated into
the Company's operations or that any expansion will perform as expected or
result in profitability. The failure to effectively identify, evaluate and
integrate acquired businesses and start-up locations could adversely affect
the Company's growth prospects and the market price of the Common Stock.
Through two recent acquisitions and the acquisitions of Center and Siems, the
Company began operating in the Midwest, the Southwest, the Rocky Mountain area
and the Mid-Atlantic region, areas in which it had no prior experience and, as
a result of the Valley Acquisition, the Company expects to expand its
operations in the Southwest. The results achieved to date by the Company may
not be indicative of its prospects or ability to succeed in these or other new
markets, many of which may have different competitive conditions, seasonality
and demographic characteristics than the Company's current markets. As a
result of the IAT Acquisition, the Company has substantially increased its
presence in the MRO supply business, which generally requires maintenance of
higher levels of inventory, is more dependent on industrial customers and has
historically had lower gross margins than the Company's rental equipment
business.
In connection with prospective acquisitions and start-up locations, the
Company expects to increase the number of its employees, the scope of its
operating and financial systems and the geographic area of its operations. The
Company believes this growth will increase operating complexities of the
Company and the level of responsibility for both existing and new management
personnel. To manage this expected growth, the Company intends to increase the
investment in its operating and financial systems and to continue to expand,
train and manage its employee base. There can be no assurance that the Company
will be able to attract and retain qualified management and employees, that
the Company's current operating and financial systems and controls will be
adequate as the Company grows, or that any steps taken to improve such systems
and controls will be sufficient. See "--Need for Additional Capital for Future
Growth; Restrictions Imposed by Lenders" and "Business--Growth Strategy."
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<PAGE>
NEED FOR ADDITIONAL CAPITAL FOR FUTURE GROWTH; RESTRICTIONS IMPOSED BY LENDERS
Expansion of the Company through acquisitions, start-up locations and
internal growth will require significant capital expenditures. The Company
made capital expenditures of $86.8 million and $117.8 million in the year
ended December 31, 1996 and the first nine months of 1997, respectively, and
completed acquisitions for $27.3 million and $122.7 million in the aggregate,
respectively, during such periods. The Company's capital expenditures have
principally been discretionary expenditures to finance growth of its rental
equipment fleet; however, the Company must continue to reinvest in ongoing
capital expenditures to maintain the condition of its rental equipment fleet
in order to remain competitive and provide its customers with high-quality
equipment. The Company historically has financed capital expenditures,
acquisitions and start-up locations primarily through the issuance of equity
securities, secured bank borrowings and internally generated cash flow. To
implement its growth strategy and meet its capital needs, the Company is
selling Common Stock in this Offering and may in the future issue additional
equity securities or may incur additional indebtedness. Such additional
indebtedness would increase RSC'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 force the Company to curtail its growth or delay capital
expenditures, which would have a material adverse effect on the Company and
the market price of the Common Stock.
The Company's ability to finance future acquisitions, start-ups and internal
growth is limited by the covenants contained in the Bank Facility, including a
number of significant covenants that, among other things, restrict the ability
of the Company to dispose of assets or merge, incur debt, pay dividends,
repurchase or redeem capital stock, create liens, make capital expenditures
and make certain investments or acquisitions and otherwise restrict corporate
activities. The Bank Facility also contains, among other covenants,
requirements that the Company maintain specified financial ratios, including
minimum cash flow levels and interest coverage. Furthermore, any additional
financing agreements are likely to contain certain restrictive covenants that
will affect, and in some cases will significantly limit or prohibit, among
other things, the ability of the Company to pay dividends, make investments,
engage in transactions with stockholders and affiliates, issue capital stock,
incur indebtedness, create liens, sell assets and engage in mergers and
consolidations. As a result of these covenants, the ability of the Company and
its subsidiaries to respond to changing business and economic conditions and
to secure additional financing may be significantly restricted, and the
Company may be prevented from engaging in transactions, including
acquisitions, that might otherwise be considered important to the Company's
growth strategy or otherwise beneficial to the Company, which could have a
material adverse effect on the market price of the Common Stock. See
"Business--Growth Strategy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: large national companies (such as Hertz
Equipment Rental Corporation, Prime Service, Inc., U.S. Rentals, Inc. and BET
Plant Services U.S.A.); regional competitors that operate in a few states;
small, independent businesses with one or two rental locations; and equipment
vendors and dealers who both sell and rent equipment directly to customers.
The industry's fragmented nature has attracted new competitors. Through its
acquisition of Prime Service, Inc., Atlas Copco North America Inc., a
subsidiary of Sweden-based Atlas Copco AB ("Atlas Copco"), an equipment
manufacturer, has entered into the equipment rental business, and the Company
believes equipment manufacturers, such as Caterpillar Inc. ("Caterpillar") and
John Deere Capital Corporation, a wholly owned subsidiary of Deere & Company
("John Deere"), and equipment dealers such as Neff Corp. ("Neff"), in which
General Electric Capital Corporation has an investment, also have entered or
may enter the equipment rental business. The Company also competes against MRO
suppliers, including large companies (such as W.W. Grainger and McMaster
Carr), as well as regional and independent competitors. Certain competitors
have greater financial resources, are more geographically diverse and have
greater name recognition than the Company. There can be no assurance that the
Company will not encounter increased competition from existing competitors or
15
<PAGE>
new market entrants that may be significantly larger and have greater
financial and marketing resources than the Company. In addition, to the extent
existing or future competitors seek to gain or retain market share by reducing
prices, the Company may be required to lower its prices, thereby impacting
operating results. There can be no assurance that the Company will be able to
maintain or increase its market share or its revenues or compete effectively
in any of its markets.
Existing or future competitors also may seek to compete with the Company for
acquisition candidates, which could have the effect of increasing the price
for acquisitions or reducing the already limited number of suitable
acquisition candidates. Management believes such competition has already
increased the prices obtained by businesses acquired by the Company and its
competitors. In addition, such competitors may also compete with the Company
for start-up locations, thereby limiting the number of attractive locations
for expansion. Competition in the rental or MRO business and competition in
making acquisitions could have a material adverse effect on the Company and
the market price of the Common Stock. See "Business--Competition."
GENERAL ECONOMIC CONDITIONS
The Company's business is sensitive to economic and competitive conditions,
including national, regional and local slowdowns in construction,
petrochemical or other industrial activity. After the consummation of the
Valley Acquisition, the Center Acquisition and the Other Acquisitions, the
Company will operate in 22 states (Alabama, Arizona, Arkansas, Colorado,
Delaware, Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Maryland,
Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Pennsylvania, South
Carolina, Tennessee, Texas and Virginia). The Company's operating results may
be adversely affected by events or conditions in a particular area, such as
regional economic slowdowns, 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 and higher debt
costs for the Company, while simultaneously resulting in higher interest
payments by the Company under its variable rate credit facilities. There can
be no assurance that economic slowdowns, a decline in the petrochemical
industry or adverse economic or competitive conditions will not have a
material adverse effect on the Company's operating results, its financial
condition or the market price of the Common Stock. See "Business--Locations."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing and cost of
acquisitions and start-up locations; the effectiveness of integrating acquired
businesses and start-up locations; the timing of fleet expansion capital
expenditures; the realization of targeted equipment utilization rates;
seasonal rental and purchasing patterns of the Company's customers; and price
changes in response to competitive factors. The Company incurs various costs
in establishing or integrating newly acquired locations or start-ups, and the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. In addition,
operating results historically have been seasonally lower during the first and
fourth fiscal quarters than during the other quarters of the fiscal year.
These factors, among others, make it likely that in some future quarter the
Company's results of operations may be below the expectations of securities
analysts and investors, which could have a material adverse effect on the
value of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Selected
Quarterly Operating Results."
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 Martin R. Reid, Chairman of the Board and Chief Executive
Officer, Douglas A. Waugaman, Ronald Halchishak and David G. Ledlow, each a
Senior Vice President of Operations, and David Lanoha, who became a Senior
Vice President of Operations upon the
16
<PAGE>
closing of the Center Acquisition. The loss of service of one or more members
of senior management could have a material adverse effect on the Company's
business and the market price of the Common Stock. The Company's future
success also will depend on its ability to attract, train and retain skilled
personnel in all areas of its business. See "Management."
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to various federal, state and
local 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 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 related costs of
investigation and property damage. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. 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 uses
hazardous materials such as solvents to clean and maintain its rental
equipment fleet. In addition, the Company generates and disposes 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 disposed. In addition, the Company dispenses
petroleum products from underground and 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 incurs ongoing expenses associated with the removal of
older underground storage tanks and other activities to come into compliance
with environmental laws, and the performance of appropriate remediation at
certain locations. The foregoing risks could have a material adverse effect on
the market price of the Common Stock. 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 or
service personnel are involved. The Company carries comprehensive insurance
subject to certain deductibles. There can be no assurance that existing or
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. Any of the foregoing risks could have a
material adverse effect on the market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws ("Bylaws")
include provisions that may delay, defer or prevent a takeover attempt that
may be in the best interest of stockholders. These provisions include the
ability of the Board of Directors to issue up to 500,000 shares of preferred
stock, having such rights, privileges and preferences as the Board of
Directors may determine, without any further stockholder approval, 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. Issuance of preferred stock, or the perception that
such issuance might occur, could also discourage bids for the Common Stock at
a premium as well as create a depressive effect on the market price of the
Common Stock. In addition, under certain conditions, Section 203 of the
Delaware
17
<PAGE>
General Corporation Law (the "DGCL") 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. The Bank Facility contains certain provisions which
may delay, defer or prevent a takeover attempt which may be in the best
interest of the Company's stockholders, including provisions providing that a
change in control of the Company is an event of default under the Bank
Facility. See "Description of Capital Stock" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
VOLATILITY OF STOCK PRICE
The Common Stock's market price has experienced and may be expected to
continue to experience significant volatility. Such volatility may be caused
by 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 NYSE 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. There can be no
assurance that the market price of the Common Stock will not decline below the
price at which shares of Common Stock are offered hereunder. See "Price Range
of Common Stock and Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the Offering, the Company will have outstanding an
aggregate of 19,488,153 shares of Common Stock (19,928,977 shares if the U.S.
Underwriters' overallotment option is exercised in full). After the Offering,
the holders of 3,028,432 shares of Common Stock (2,869,256 shares if the U.S.
Underwriters' overallotment option is exercised in full) will be entitled to
certain registration rights under the Securities Act, at the expense of the
Company. Such shares may also be sold under Rule 144 of the Securities Act,
depending on the holding period of such securities and subject to significant
restrictions in the case of shares held by persons deemed to be affiliates of
the Company. The Company, the Selling Stockholders, the Company's directors
and executive officers, and certain of the Company's other current
stockholders have, subject to certain exceptions in the case of the Company
described in "Underwriters" (including securities to be issued pursuant to
employee benefit plans and acquisitions), agreed not to directly or indirectly
offer, sell, contract to sell or otherwise dispose of or transfer any capital
stock of the Company, or any security convertible into, or exercisable or
exchangeable for, such capital stock, for a period of 90 days after the date
of this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated. In addition, the Company has the authority to issue additional
shares of Common Stock and shares of one or more series of preferred stock.
The issuance of such shares, or the perception that such shares may be issued,
and any dilutive effect on earnings per share may adversely affect the market
price of the Common Stock. No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale,
will have on the market price of the Common Stock. See "Description of Capital
Stock," "Principal and Selling Stockholders," "Shares Eligible for Future
Sale" and "Underwriters."
RHI'S BANKRUPTCY; INCREASE IN INDEBTEDNESS
In September 1995, the Company acquired Acme Holdings Inc. ("RHI"), an
equipment rental business with 22 locations, primarily serving Florida, the
Texas/Louisiana Gulf Coast and California. Between 1986 and 1990, RHI had
acquired nine equipment rental businesses financed primarily with debt. In
1993, RHI refinanced its debt through the public sale of $78.0 million of
senior notes (the "Retired Notes"). In 1994, due to a downturn in business
conditions, combined with RHI's highly leveraged capital structure, RHI faced
liquidity constraints and was unable to service its debt. In response, RHI
brought in a new management team and hired Martin R. Reid, the Company's
current Chief Executive Officer, as RHI's Chief Executive Officer in June
1994. This new management team initiated restructuring discussions with the
holders of the Retired Notes in August 1994,
18
<PAGE>
culminating in the prepackaged bankruptcy of RHI and its subsidiaries. On
September 12, 1995, the effective date of the prepackaged bankruptcy plan, the
holders of the Retired Notes received an aggregate of $35.4 million in cash
from the Company in exchange for the surrender of the Retired Notes and the
release of all claims against RHI. In addition, in exchange for providing the
financing necessary for the consummation of RHI's prepackaged bankruptcy plan,
the Company acquired RHI through a stock merger. Prior to such acquisition,
the Company and RHI shared certain common stockholders, including members of
RHI's management and affiliates of Brentwood Associates. In addition, from
July 1992 to September 1995, RHI provided executive management services to the
Company pursuant to a Management Agreement. RHI currently operates as a
subsidiary of the Company under the name RSC Holdings Inc. The Company's
growth strategy has increased and is expected to continue to increase the
Company's indebtedness. As a result of such increased levels of indebtedness,
a downturn in business could have a material adverse effect on the Company and
the market price of the Common Stock. See "Capitalization," "Unaudited Pro
Forma Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Management."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including
without limitation, statements concerning the Company's operations, economic
performance and financial condition, including in particular, the integration
of acquisitions and start-up locations into the Company's existing operations.
These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The words
"believe," "expect," "anticipate" and other similar expressions identify
forward-looking statements. Investors are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based largely on the Company's
current expectations and are subject to a number of important risks and
uncertainties, including those identified under "Risk Factors" and elsewhere
in this Prospectus. Actual results could differ materially from the forward-
looking statements. In light of these risks and uncertainties, there can be no
assurance that the results referred to in the forward-looking statements
contained in this Prospectus will in fact occur. The Company undertakes no
obligation to publicly release the result of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
19
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the Common Stock offered
hereby, after deducting discounts and estimated expenses of the Offering, are
estimated to be $90.4 million ($100.5 million if the U.S. Underwriters'
overallotment option is exercised in full).
The Company intends to use the net proceeds of the Offering to reduce its
indebtedness under the Revolver in order to provide borrowing availability for
general corporate purposes, including the Valley Acquisition and other
acquisitions. At December 12, 1997, the Company was a party to letters of
intent to acquire five equipment rental businesses, of which a significant
portion of the purchase price is expected to be funded by future borrowings by
the Company, including borrowings under the Bank Facility. See "Prospectus
Summary--Recent Developments."
Proceeds from the Revolver were used to, among other things, fund capital
expenditures, acquisitions and start-up locations and meet seasonal
fluctuations in working capital. A reduction of amounts outstanding under the
Revolver will increase the amount of borrowing availability under such
facility. On a pro forma basis giving effect to the Offering, the repayment of
indebtedness under the Revolver with a portion of the net proceeds of the
Offering, the amendment and restatement of the Revolver and the implementation
of the Term Loan and the completion of the Center Acquisition, the Valley
Acquisition and the Other Acquisitions, there would have been approximately
$86.0 million available for borrowing under the Bank Facility at September 30,
1997, after taking into account restrictions under the borrowing base, if any,
and other customary restrictions. The Revolver bears interest at specified
margins over the prime and Eurodollar interest rates based on the Company's
achievement of specified interest coverage ratios, and matures on December 2,
2002. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
20
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "RSV." The Company's Common Stock was traded on the Nasdaq
National Market ("Nasdaq") from September 18, 1996 until May 21, 1997 under
the symbol "RSVC." The following table sets forth for each period indicated,
the high and low closing sales prices for the Common Stock as reported by the
NYSE or Nasdaq, as applicable.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE
----------------
HIGH LOW
------- --------
<S> <C> <C>
Year Ended December 31, 1996
Third quarter (from September 18, 1996)................. $23 1/4 $21 1/2
Fourth quarter.......................................... 28 1/2 20 3/8
Year Ended December 31, 1997
First quarter........................................... 27 1/4 18
Second quarter.......................................... 26 3/8 18
Third quarter........................................... 28 22 7/16
Fourth quarter (through December 16, 1997).............. 28 22 7/8
</TABLE>
On December 16, 1997, the last reported sale price for the Common Stock on
the NYSE was as set forth on the cover page of this Prospectus. As of December
12, 1997, there were approximately 47 holders of record of the Common Stock.
The Company believes that the number of beneficial owners is substantially
greater than the number of record holders because a large portion of the
Common Stock is held of record in broker "street names."
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. Management anticipates that all earnings and other cash
resources of the Company, if any, will be retained by the Company for the
operation and expansion of its business and for general corporate purposes.
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 as the Board of
Directors may deem relevant. The Company is effectively restricted by the
terms of the Bank Facility 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."
21
<PAGE>
CAPITALIZATION
The following table sets forth the total debt and total capitalization of
the Company at September 30, 1997 on (i) an historical basis, (ii) a pro forma
combined basis to give effect to the Center Acquisition, the Valley
Acquisition and the Other Acquisitions as though such acquisitions were
consummated as of September 30, 1997 and (iii) a pro forma as adjusted basis
to give effect to the Center Acquisition, the Valley Acquisition and the Other
Acquisitions, the Bank Facility and the Offering and the application of the
net proceeds therefrom to repay indebtedness under the Revolver. This table
should be read in conjunction with "Use of Proceeds," "Unaudited Pro Forma
Consolidated Financial Data," "Selected Consolidated Financial and Operating
Data" and the Company's Consolidated Financial Statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Revolver(1)................................... $224,119 $483,479 $293,039
Term Loan(1).................................. -- -- 100,000
Notes payable................................. 293 293 293
Capital leases................................ 31 31 31
Equipment contracts payable................... 92 92 92
-------- -------- --------
Total debt.................................. 224,535 483,895 393,455
Common stockholders' equity:
Preferred stock, par value $.01 per share;
500,000 authorized and none outstanding,
actual, pro forma combined and pro forma as
adjusted..................................... -- -- --
Common stock, par value $.01 per share;
20,000,000 authorized and 14,930,784
outstanding, actual; 20,000,000 authorized
and 15,901,105 outstanding, pro forma
combined; 40,000,000 authorized and
19,901,105 outstanding, pro forma as
adjusted(2).................................. 149 159 199
Additional paid-in capital.................... 159,394 183,143 273,543
Common stock issuable(3)...................... 2,881 4,381 4,381
Retained earnings............................. 9,465 9,465 9,465
-------- -------- --------
Total Common stockholders' equity........... 171,889 197,148 287,588
-------- -------- --------
Total capitalization...................... $396,424 $681,043 $681,043
======== ======== ========
</TABLE>
- --------
(1) The total commitment of the Bank Facility is $600.0 million after giving
effect to the increase in the Revolver and the issuance of the Term Loan.
On a pro forma basis giving effect to the Offering, the repayment of
indebtedness under the Revolver with a portion of the net proceeds of the
Offering, the implementation of the Bank Facility and the completion of
the Center Acquisition, the Valley Acquisition and the Other Acquisitions,
the Company had borrowing availability of approximately $86.0 million
under the Bank Facility, after taking into account the restrictions under
the borrowing base, if any, and other customary restrictions.
(2) Excludes (i) 877,241 shares subject to options outstanding as of December
12, 1997 pursuant to the Company's Equity Participation Plans at a
weighted average exercise price of $18.57 per share, (ii) 364,298 shares
reserved for issuance pursuant to the Company's Equity Participation
Plans, (iii) 250,000 shares reserved for issuance pursuant to the
Company's QSP Plan and (iv) up to 829,395 shares reserved for issuance in
connection with certain pending and completed acquisitions. See
"Prospectus Summary--Recent Developments," "Management--Equity
Participation Plans," "--Employee Qualified Stock Purchase Plan," and
Notes 2 and 6 to the Company's Consolidated Financial Statements. Assumes
the increase of the number of authorized shares of the Company's Common
Stock from 20 million to 40 million. See "Description of Capital Stock."
(3) The common stock issuable is associated with the common stock relating to
the acquisitions of Foxx and Central States, and on a pro forma combined
and pro forma as adjusted basis also includes the Common Stock relating to
the Center Acquisition, which vests over future time periods. See Note 2
to the Company's Consolidated Financial Statements.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of the Company
presents the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1996 and the nine months ended September 30, 1997, and
the unaudited pro forma consolidated balance sheet at September 30, 1997. The
pro forma combined consolidated statement of operations for the year ended
December 31, 1996 has been adjusted to give effect to the following: (i) the
Company's acquisitions of certain assets and liabilities of Sun Construction
Equipment, Inc. (completed in January 1996), Blanchard Machinery, Inc.
(completed in March 1996), B&S Rental Company, Inc. (completed in May 1996),
Equipment Rental & Supply Inc. (completed in June 1996), Hughes Rental and
Equipment Company, Inc. (completed in October 1996), AMKA, Inc. (completed in
October 1996), Performance Equipment Rental & Sales, Inc. (completed in
October 1996), Jones Tractor & Equipment Company, Inc. (completed in November
1996), Tool Shed Inc. (completed in November 1996) and City Sales, Inc.
(completed in November 1996) (collectively, the "1996 Acquisitions"), (ii) the
Company's acquisitions of certain assets and liabilities of 3 W Services, Inc.
(completed in January 1997), Holt Equipment Rental & Supply (completed in
February 1997), Crider Electric Motor & Tool Rental Service, Inc. (completed
in March 1997), United Rental & Sales (completed in March 1997), Kastner
Rentals (completed in March 1997), Stop Agan Rentals & Sales, Inc. (completed
in May 1997), D & D Rentals, Inc. (completed in May 1997), Brute Equipment Co.
d/b/a Foxx Hy-Reach Company ("Foxx") (completed in June 1997), Central States
Equipment, Inc. and Equipment Lessors, Inc. (collectively, "Central States")
(completed in June 1997), Carter Rental & Equipment, Inc. (completed in June
1997), Super Rent Enterprises, Inc. (completed in June 1997), Plateau Rental,
Inc. (completed in June 1997), AMCA Equipment Corp. (completed in September
1997) and the acquisition of all of the outstanding shares of Comtect, Inc.
and subsidiaries d/b/a Industrial Air Tool ("IAT") (effective March 1, 1997)
(the "IAT Acquisition") (collectively, the "1997 Completed Acquisitions"),
(iii) the Center Acquisition, including the pro forma effect of Center's
acquisition of Zuni Rental Enterprises, L.L.C. (completed in October 1996),
(iv) the pending Valley Acquisition and (v) the Company's acquisitions of
certain assets and liabilities of Kansas Enterprises, Inc. d/b/a AAA Rent-All
(completed in October 1997), Sunbelt Equipment & Rentals, Inc. (completed in
October 1997), Roesch Equipment Company (completed in October 1997), Allen
Equipment, Inc. (completed in October 1997), R&M Rentals, Inc. (completed in
December 1997), Siems Rental & Sales Co., Inc. (completed in December 1997),
and the Company's proposed acquisitions of four other equipment rental
businesses with a combined ten locations in four states (collectively, the
"Other Acquisitions") (all such acquisitions, the "Pro Forma Combined
Acquisitions"). Such statements have been adjusted in each case as if such
transactions had occurred on January 1, 1996. The pro forma adjustments
relating to the Pro Forma Combined Acquisitions are referred to herein
collectively as the "Pro Forma Acquisition Adjustments."
The pro forma combined consolidated statements of operations for the nine
months ended September 30, 1997 have been adjusted to give effect to the 1997
Completed Acquisitions, the Center Acquisition, the Valley Acquisition and the
Other Acquisitions as if these transactions had occurred on January 1, 1997.
The pro forma combined consolidated balance sheet gives effect to the Valley
Acquisition, the Center Acquisition and the Other Acquisitions as if they had
occurred on September 30, 1997. There can be no assurance that the Valley
Acquisition or any of the pending Other Acquisitions will be consummated.
In addition to the Pro Forma Combined Acquisitions, the pro forma as
adjusted consolidated statement of operations for the year ended December 31,
1996 gives effect to the following transactions, in each case as if such
transactions had occurred on the first day of the period presented: (i) the
Offering, (ii) the sale by the Company of 6,027,813 shares of Common Stock in
its September 1996 initial public offering at a price of $16.00 per share and
the sale by the Company of 3,000,000 shares of Common Stock in June 1997 at a
price of $19.875 per share (collectively, the "Completed Common Stock
Offerings"); (iii) the redemption of the Company's 6% Cumulative Redeemable
Preferred Stock, par value $.01 per share (the "Redeemable Preferred Stock"),
with a portion of the net proceeds from its initial public offering (and the
related elimination of the Redeemable Preferred Stock accretion), (iv) the
repurchase of a warrant with a portion of the net proceeds from its initial
public offering, (v) a reduction in interest expense as a result of reductions
in indebtedness upon application of a portion of the net proceeds from the
Completed Common Stock Offerings and the Offering, (vi) the elimination
23
<PAGE>
of a $235,000 annual monitoring fee paid to an affiliate of a stockholder of
the Company and (vii) the reduction of interest expense resulting from
amendments and/or restatements to the Revolver in September 1996, January
1997, June 1997 and December 1997 (collectively, (i) through (vii) above, the
"1996 Pro Forma Offering Adjustments"). In addition to the 1997 Completed
Acquisitions, the Valley Acquisition, the Center Acquisition and the Other
Acquisitions, the pro forma as adjusted consolidated statements of operations
for the nine months ended September 30, 1997 and the pro forma as adjusted
balance sheet at September 30, 1997 give additional effect to the following
transactions, in the case of the statement of operations as if such
transactions had occurred on the first day of the period presented, and in the
case of the balance sheet as if they had occurred at September 30, 1997: (i)
the Offering, (ii) the sale by the Company of 3,000,000 shares of Common Stock
in June 1997 at a price of $19.875 per share (the "June Offering"), (iii) a
reduction in interest expense as a result of reductions in indebtedness upon
application of a portion of the net proceeds from the Offering and the June
Offering, and (iv) the reduction of interest expense resulting from amendments
and/or restatements to the Revolver in January 1997, June 1997 and December
1997 (collectively, (i) through (iv) above, the "1997 Pro Forma Offering
Adjustments"). The pro forma adjustments relating to the transactions referred
to in this paragraph are referred to herein collectively as the "Pro Forma
Offering Adjustments." See "Use of Proceeds," "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Relationships and Related Transactions" and the Company's
Consolidated Financial Statements and the notes thereto.
The Pro Forma Acquisition Adjustments and the Pro Forma Offering Adjustments
represent, in the opinion of management, 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 consolidated financial data
presented herein does not purport to present what the Company's financial
position or results of operations would actually have been had such events
leading to the Pro Forma Acquisition Adjustments and the Pro Forma Offering
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 consolidated financial data should be read in
conjunction with the Consolidated 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 Consolidated Financial Statements
and the notes thereto.
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1997 PRO FORMA PRO
HISTORICAL 1996 COMPLETED CENTER VALLEY OTHER ACQUISITION FORMA
COMPANY ACQUISITIONS(1) ACQUISITIONS ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED
---------- --------------- ------------ ----------- ----------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals........... $ 94,218 $5,775 $44,183 $ 34,030 $27,720 $21,622 $ -- $227,548
Sales of parts,
supplies and
equipment......... 34,136 3,213 59,340 11,772 5,048 20,487 -- 133,996
-------- ------ ------- -------- ------- ------- -------- --------
Total revenues..... 128,354 8,988 103,523 45,802 32,768 42,109 -- 361,544
Cost of revenues:
Cost of equipment
rentals,
excluding
equipment rental
depreciation...... 55,202 4,591 19,415 14,844 13,778 7,092 -- 114,922
Depreciation,
equipment
rentals........... 17,840 999 9,169 5,285 6,208 4,838 (2,182)(2) 42,157
Cost of sales of
parts, supplies
and equipment..... 24,070 1,403 46,440 10,236 3,504 14,199 -- 99,852
-------- ------ ------- -------- ------- ------- -------- --------
Total cost of
revenues........ 97,112 6,993 75,024 30,365 23,490 26,129 (2,182) 256,931
-------- ------ ------- -------- ------- ------- -------- --------
Gross profit....... 31,242 1,995 28,499 15,437 9,278 15,980 2,182 104,613
Selling, general
and administrative
expense............ 12,254 1,280 20,636 7,101 3,650 12,385 (6,432)(3) 50,874
Depreciation and
amortization,
excluding equipment
rental
depreciation....... 2,835 87 787 503 550 514 -- 5,276
Amortization of
intangibles........ 2,379 -- 61 30 20 4 6,849 (5) 9,343
-------- ------ ------- -------- ------- ------- -------- --------
Operating income... 13,774 628 7,015 7,803 5,058 3,077 1,765 39,120
Non-operating
(income) expense... -- -- (373) 325 -- -- 48 (6) --
Interest expense,
net................ 7,063 98 1,984 617 3,249 1,748 24,359 (7) 39,118
-------- ------ ------- -------- ------- ------- -------- --------
Income (loss)
before income taxes
and extraordinary
items.............. 6,711 530 5,404 6,861 1,809 1,329 (22,642) 2
Provision (benefit)
for income taxes... 2,722 (60) 98 2,369 -- 314 (5,442)(9) 1
-------- ------ ------- -------- ------- ------- -------- --------
Income (loss)
before
extraordinary items 3,989 590 5,306 4,492 1,809 1,015 (17,200) 1
Redeemable
preferred stock
accretion.......... 1,643 -- -- -- -- -- -- 1,643
-------- ------ ------- -------- ------- ------- -------- --------
Income (loss)
available to common
stockholders before
extraordinary
items.............. $ 2,346 $ 590 $ 5,306 $ 4,492 $ 1,809 $ 1,015 $(17,200) $ (1,642)
======== ====== ======= ======== ======= ======= ======== ========
Income before
extraordinary items
per common share... $ .33 $ (.18)
Weighted average
common shares...... 7,218 8,931
(11)(12)
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
----------- ----------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues:
Equipment
rentals........... $ -- $ 227,548
Sales of parts,
supplies and
equipment......... -- 133,996
------- ----------------
Total revenues..... -- 361,544
Cost of revenues:
Cost of equipment
rentals,
excluding
equipment rental
depreciation...... -- 114,922
Depreciation,
equipment
rentals........... -- 42,157
Cost of sales of
parts, supplies
and equipment..... -- 99,852
------- ----------------
Total cost of
revenues........ -- 256,931
------- ----------------
Gross profit....... -- 104,613
Selling, general
and administrative
expense............ (235)(4) 50,639
Depreciation and
amortization,
excluding equipment
rental
depreciation....... -- 5,276
Amortization of
intangibles........ -- 9,343
------- ----------------
Operating income... 235 39,355
Non-operating
(income) expense... -- --
Interest expense,
net................ (18,230)(8) 20,888
------- ----------------
Income (loss)
before income taxes
and extraordinary
items.............. 18,465 18,467
Provision (benefit)
for income taxes... 7,496 (9) 7,497
------- ----------------
Income (loss)
before
extraordinary items 10,969 10,970
Redeemable
preferred stock
accretion.......... (1,643)(10) --
------- ----------------
Income (loss)
available to common
stockholders before
extraordinary
items.............. $12,612 $ 10,970
======= ================
Income before
extraordinary items
per common share... $ .54
Weighted average
common shares...... 20,260
(11)(12)(13)(14)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
25
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) Represents the results of the 1996 Acquisitions prior to their
acquisition by the Company. Results of the 1996 Acquisitions subsequent
to the dates of their acquisition are included in the Company's
historical results for 1996. See Note 1 to the Company's Consolidated
Financial Statements.
(2) Represents the elimination of the historical carrying value of rental
depreciation of $25,642,000 and the Company's estimate of $23,460,000 for
rental depreciation assuming the rental fleet acquired was adjusted to
fair market value at the beginning of the period. As a result, pro forma
depreciation decreased by $2,182,000.
(3) Represents the elimination of salaries and other payments to officers
and/or stockholders of certain acquired businesses, as such officers
and/or stockholders will either be employed at lower contractual rates or
will not be employed by the Company. Also, represents the elimination of
$2,320,000 of nonrecurring litigation judgment expense associated with
the acquisition of Foxx.
(4) Represents elimination of a $235,000 annual monitoring fee paid to an
affiliate of a stockholder of the Company.
(5) Represents the Company's estimate of amortization of goodwill and
covenants not to compete for the 1996 Acquisitions, the 1997 Completed
Acquisitions, the Center Acquisition, the Valley Acquisition and the
Other Acquisitions of $6,849,000, as if the acquisitions were consummated
at the beginning of the period presented.
(6) Represents the elimination of income earned on, or expenses associated
with, assets or liabilities not acquired or assumed in connection with
certain of the acquisitions.
(7) Represents the elimination of historical interest expense of $7,632,000
and the addition of $31,991,000 of interest expense on borrowings to fund
the above acquisitions as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma interest
expense increased by $24,359,000.
(8) Represents the elimination of historical interest expense on the Bank
Note and a portion of the Revolver (after giving effect to the additional
borrowings resulting from the Pro Forma Combined Acquisitions) assuming
the repayment of such indebtedness at the beginning of the period
presented with a portion of the net proceeds from the Completed Common
Stock Offerings, this Offering and the Bank Facility, and the effect of
the reduction of interest expense resulting from the Company's amendments
and restatements to the Revolver, including the effect on capitalized
debt issuance costs.
(9) Represents the adjustment to provide income taxes at the Company's 1996
effective tax rate of 40.6%.
(10) Represents the elimination of historical accretion of dividends on the
Redeemable Preferred Stock assuming the Redeemable Preferred Stock was
redeemed at the beginning of the period presented.
(11) The acquisition agreements for IAT and Foxx provide for the potential
issuance of up to 108,108 and 89,630 shares of Common Stock,
respectively, over three-year periods following the acquisitions if
certain performance objectives are met. The effects of the potential
issuance of these shares were not considered in the pro forma
consolidated financial statements. See Note 2 to the Company's
Consolidated Financial Statements.
(12) Weighted average common shares includes 1,713,171 shares of Common Stock
for the acquisitions of IAT, Foxx, Central States, Center, Valley and
several of the Other Acquisitions.
(13) Reflects the issuance of capital stock on January 4, 1996, as if such
stock was sold at the beginning of the period presented. See Note 1 to
the Company's Consolidated Financial Statements.
(14) Gives additional effect to the repurchase and elimination of a warrant
and the issuance of shares in the Completed Common Stock Offerings and
the Offering, as if such transactions were consummated at the beginning
of the period presented. See Note 1 to the Company's Consolidated
Financial Statements.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
1997 PRO FORMA PRO FORMA
HISTORICAL COMPLETED CENTER VALLEY OTHER ACQUISITION PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS(1) ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- --------------- ----------- ----------- ------------ ----------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals......... $111,549 $15,346 $25,593 $22,548 $16,749 $ -- $191,785 $ -- $191,785
Sales of parts,
supplies and
equipment....... 60,783 14,693 10,910 4,779 16,481 -- 107,646 -- 107,646
-------- ------- ------- ------- ------- ------- -------- ------ --------
Total revenues... 172,332 30,039 36,503 27,327 33,230 -- 299,431 -- 299,431
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 57,506 5,889 11,903 11,763 6,156 -- 93,217 -- 93,217
Depreciation,
equipment
rentals......... 24,493 3,768 4,771 5,010 4,135 (3,162)(2) 39,015 -- 39,015
Cost of sales of
parts, supplies
and equipment... 45,644 11,310 9,805 3,016 11,243 -- 81,018 -- 81,018
-------- ------- ------- ------- ------- ------- -------- ------ --------
Total cost of
revenues......... 127,643 20,967 26,479 19,789 21,534 (3,162) 213,250 -- 213,250
-------- ------- ------- ------- ------- ------- -------- ------ --------
Gross profit..... 44,689 9,072 10,024 7,538 11,696 3,162 86,181 -- 86,181
Selling, general
and
administrative
expense.......... 13,444 5,175 5,592 3,175 8,610 (1,531)(3) 34,465 -- 34,465
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 3,789 272 656 533 347 -- 5,597 -- 5,597
Amortization of
intangibles...... 2,463 23 92 15 3 3,832 (4) 6,428 -- 6,428
-------- ------- ------- ------- ------- ------- -------- ------ --------
Operating income
(loss)........... 24,993 3,602 3,684 3,815 2,736 861 39,691 -- 39,691
Non-operating
(income) expense. -- (59) 7 -- -- 52 (5) -- -- --
Interest expense,
net.............. 8,863 814 1,157 2,383 1,387 11,812 (6) 26,416 (5,821)(7) 20,595
-------- ------- ------- ------- ------- ------- -------- ------ --------
Income (loss)
before income
taxes and
extraordinary
item............. 16,130 2,847 2,520 1,432 1,349 (11,003) 13,275 5,821 19,096
Provision
(benefit) for
income taxes..... 7,172 (12) 868 -- 297 (2,417)(8) 5,908 2,590 (8) 8,498
-------- ------- ------- ------- ------- ------- -------- ------ --------
Income (loss)
before
extraordinary
item............. $ 8,958 $ 2,859 $ 1,652 $ 1,432 $ 1,052 $(8,586) $ 7,367 $3,231 $ 10,598
======== ======= ======= ======= ======= ======= ======== ====== ========
Net income per
common share
before
extraordinary
item............. $ .68 $ .51 $ .52
Weighted average
common shares.... 13,150 14,553 20,256
(9)(10) (9)(10)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(1) Represents the results of the 1997 Completed Acquisitions prior to their
acquisition by the Company. Results of the 1997 Completed Acquisitions
subsequent to the dates of their acquisition are included in the
Company's historical results for the nine months ended September 30,
1997. See Note 1 to the Company's Consolidated Financial Statements.
(2) Represents the elimination of the historical carrying value of rental
depreciation of $17,483,000 and the Company's estimate of $14,321,000 for
rental depreciation assuming the rental fleet acquired was adjusted to
fair market value at the beginning of the period presented. As a result,
pro forma depreciation decreased by $3,162,000.
(3) Represents the elimination of salaries and other payments to officers
and/or stockholders of certain acquired businesses, as such officers
and/or stockholders will either be employed at lower contractual rates or
will not be employed by the Company.
(4) Represents the Company's estimate of amortization of goodwill and
covenants not to compete for the 1997 Completed Acquisitions, the Center
Acquisition, the Valley Acquisition and the Other Acquisitions of
$3,832,000, as if the acquisitions were consummated at the beginning of
the period presented.
(5) Represents the elimination of income earned on, or expenses associated
with, assets or liabilities not acquired or assumed in connection with
certain of the acquisitions.
(6) Represents the elimination of historical interest expense of $5,741,000
and the addition of $17,553,000 of interest expense on borrowings to fund
the above acquisitions as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma interest
expense increased by $11,812,000.
(7) Represents the elimination of historical interest expense on a portion of
the Revolver (after giving effect to the additional borrowings resulting
from the 1997 Completed Acquisitions, the Center Acquisition, the Valley
Acquisition and the Other Acquisitions) assuming the repayment of such
indebtedness at the beginning of the period presented with a portion of
the net proceeds from the June Offering and the Offering, and the effect
of the reduction of interest expense resulting from the Company's
amendments and restatements to the Revolver, including the effect on
capitalized debt issuance costs.
(8) Represents the adjustment to provide income taxes at the Company's 1997
effective tax rate of 44.5%.
(9) The acquisition agreements for IAT and Foxx provide for the potential
issuance of up to 108,108 and 89,630 shares of Common Stock,
respectively, over three-year periods following the acquisitions if
certain performance objectives are met. The effects of the potential
issuance of these shares were not considered in the pro forma
consolidated financial statements. See Note 2 to the Company's
Consolidated Financial Statements.
(10) Weighted average common shares includes 1,713,171 shares of Common Stock
for the acquisitions of IAT, Foxx, Central States, Center, Valley and
several of the Other Acquisitions.
28
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997(1)
<TABLE>
<CAPTION>
PRO FORMA PRO PRO FORMA
HISTORICAL CENTER VALLEY OTHER ACQUISITION FORMA OFFERING PRO FORMA
COMPANY ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- ------------ ----------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents........... $ 4,887 $ 347 $ (119) $ 741 $ (969)(4) $ 4,887 $ -- $ 4,887
Accounts receivable,
net................... 43,694 4,971 8,917 5,582 -- 63,164 -- 63,164
Other receivables and
prepaid expense....... 3,941 511 1,287 154 (1,435)(4) 4,458 -- 4,458
Income tax receivable. 1,117 -- -- 15 (15)(4) 1,117 -- 1,117
Parts and supplies
inventories, net...... 20,701 2,977 3,060 5,653 -- 32,391 -- 32,391
Deferred taxes........ 8,787 99 -- 114 (15)(4) 8,985 -- 8,985
Rental equipment, net. 229,894 35,301 33,120 23,771 (3,597)(5) 318,489 -- 318,489
Operating property and
equipment, at cost,
net................... 30,640 4,848 8,625 3,167 (503)(5) 46,777 -- 46,777
Intangible assets,
net................... 115,279 1,474 62 2 158,398 (6) 275,215 -- 275,215
Other assets.......... 3,637 220 -- 531 (364)(4) 4,024 -- 4,024
-------- ------- ------- ------- -------- -------- --------- --------
$462,577 $50,748 $54,952 $39,730 $151,500 $759,507 $ -- $759,507
======== ======= ======= ======= ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Accounts payable...... $ 16,168 $ 2,811 $ 1,864 $ 2,688 $ (3,354)(4) $ 20,177 $ -- $ 20,177
Payroll and other
accrued expenses...... 29,461 3,051 921 948 (1,550)(4) 32,831 -- 32,831
Accrued interest
payable............... 1,473 -- -- -- -- 1,473 -- 1,473
Income taxes payable.. 6,478 -- -- 271 -- 6,749 -- 6,749
Deferred taxes........ 12,573 3,931 -- 1,263 (533)(4) 17,234 -- 17,234
Bank debt and long
term obligations...... 224,504 18,068 41,705 24,778 174,809 (7) 483,864 (190,440)(8)(9) 293,424
Term Loan............. -- -- -- -- -- - 100,000 (9) 100,000
Obligations under
capital leases........ 31 -- 1,118 -- (1,118)(4) 31 -- 31
-------- ------- ------- ------- -------- -------- --------- --------
Total liabilities.. 290,688 27,861 45,608 29,948 168,254 562,359 (90,440) 471,919
Stockholders' equity:
Common stock(2)...... 149 12 600 -- (602)(10) 159 40 (8) 199
Additional paid-in
capital.............. 159,394 -- -- 745 23,004 (10) 183,143 90,400 (8) 273,543
Common stock
issuable(3).......... 2,881 -- -- -- 1,500 (3) 4,381 -- 4,381
Retained earnings.... 9,465 22,875 8,744 9,037 (40,656)(10) 9,465 -- 9,465
-------- ------- ------- ------- -------- -------- --------- --------
Total stockholders'
equity............. 171,889 22,887 9,344 9,782 (16,754) 197,148 90,440 287,588
-------- ------- ------- ------- -------- -------- --------- --------
$462,577 $50,748 $54,952 $39,730 $151,500 $759,507 $ -- $759,507
======== ======= ======= ======= ======== ======== ========= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet
29
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(1) The purchase method of accounting has been used in preparing the
Unaudited Pro Forma Consolidated Financial Statements of the Company with
respect to the Center Acquisition, the Valley Acquisition and the Other
Acquisitions. Purchase accounting values have been assigned to the Center
Acquisition, the Valley Acquisition and the Other Acquisitions on a
preliminary basis and are subject to adjustment when final information as
to the fair values of the net assets acquired is available.
(2) The acquisition agreements for IAT and Foxx provide for the potential
issuance of up to 108,108 and 89,630 shares of Common Stock,
respectively, over three-year periods following the acquisitions if
certain performance objectives are met. The effects of the potential
issuance of these shares were not considered in the pro forma
consolidated financial statements. See Note 2 to the Company's
Consolidated Financial Statements.
(3) The Common Stock issuable is associated with Common Stock for the
acquisitions of Foxx, Central States and Center that vests over future
time periods. See Note 2 to the Company's Consolidated Financial
Statements.
(4) Represents assets not acquired or liabilities not assumed in the Center
Acquisition, the Valley Acquisition and the Other Acquisitions.
(5) Represents the Company's preliminary estimates of the adjustments
necessary to record the assets acquired at fair market value.
(6) Represents the estimated fair market value of covenants not to compete
and goodwill represented by the excess purchase price over the estimated
fair market value of the net assets acquired.
(7) Represents borrowings under the Revolver to fund the Center Acquisition,
the Valley Acquisition and the Other Acquisitions.
(8) Represents the use of the net proceeds from the Offering to reduce the
Company's outstanding obligations under the Revolver.
(9) Represents the implementation of the Term Loan and the use of the net
proceeds therefrom to reduce the Company's outstanding obligations under
the Revolver.
(10) Represents the elimination of the equity accounts of the Center
Acquisition, the Valley Acquisition and the Other Acquisitions.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1994, 1995 and 1996, and selected consolidated
balance sheet data as of December 31, 1995 and 1996, have been derived from
the audited consolidated financial statements of the Company appearing
elsewhere in this Prospectus. The selected consolidated financial data with
respect to the Company's statement of operations for the period ended December
31, 1992 and for the year ended December 31, 1993, and with respect to the
balance sheet as of December 31, 1992, 1993 and 1994 has been derived from
audited financial statements of the Company not included in this Prospectus.
The selected consolidated financial data with respect to the Company's
statement of operations for the nine months ended September 30, 1996 and 1997,
and with respect to the balance sheet as of September 30, 1997, has been
derived from the unaudited consolidated financial statements of the Company,
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 dates and for such
periods. The results for the nine months ended September 30, 1997 are not
necessarily indicative of the results which may be expected for future
periods, including for the year ending December 31, 1997. The selected
operating data presented has not been audited. The selected consolidated
financial and operating data presented should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
JULY 17, 1992 ----------------------------------------------- ------------------------------
(INCEPTION) THROUGH PRO FORMA PRO FORMA
DECEMBER 31, AS ADJUSTED AS ADJUSTED
1992 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
------------------- ------- ------- ------- ------- ----------- ------- -------- -----------
(IN THOUSANDS, EXCEPT LOCATIONS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Revenues:
Equipment rentals..... $2,145 $17,238 $27,775 $47,170 $94,218 $227,548 $67,742 $111,549 $191,785
Sales of parts,
supplies and new
equipment............ 1,785 7,387 10,800 14,621 21,919 133,996 16,450 47,119 107,646
Sales of used
equipment(3)......... 257 1,007 3,240 4,126 12,217 N/A 8,903 13,664 N/A
------ ------- ------- ------- ------- -------- ------- -------- --------
Total revenues......... 4,187 25,632 41,815 65,917 128,354 361,544 93,095 172,332 299,431
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation......... 1,153 11,405 16,284 27,854 55,202 114,922 40,977 57,506 93,217
Depreciation,
equipment rentals.... 245 2,161 4,020 7,691 17,840 42,157 12,375 24,493 39,015
Cost of sales of
parts, supplies and
equipment............ 1,650 5,370 7,978 10,439 15,582 99,852 11,799 36,383 81,018
Cost of sales of used
equipment(3)......... 248 589 2,320 2,178 8,488 N/A 5,820 9,261 N/A
------ ------- ------- ------- ------- -------- ------- -------- --------
Total cost of revenues. 3,296 19,525 30,602 48,162 97,112 256,931 70,971 127,643 213,250
------ ------- ------- ------- ------- -------- ------- -------- --------
Gross profit........... 891 6,107 11,213 17,755 31,242 104,613 22,124 44,689 86,181
Selling, general and
administrative
expense............... 341 2,683 4,747 6,421 12,254 50,639 9,061 13,444 34,465
Depreciation and
amortization,
excluding equipment
rental depreciation... 11 211 504 1,186 2,835 5,276 1,829 3,789 5,597
Amortization of
intangibles(4)........ 321 2,635 2,078 718 2,379 9,343 1,825 2,463 6,428
------ ------- ------- ------- ------- -------- ------- -------- --------
Operating income....... 218 578 3,884 9,430 13,774 39,355 9,409 24,993 39,691
Interest expense, net.. 77 407 731 3,314 7,063 20,888 5,819 8,863 20,595
------ ------- ------- ------- ------- -------- ------- -------- --------
Income before income
taxes and
extraordinary items... 141 171 3,153 6,116 6,711 18,467 3,590 16,130 19,096
Provision for income
taxes................. 81 465 1,177 2,401 2,722 7,497 1,411 7,172 8,498
------ ------- ------- ------- ------- -------- ------- -------- --------
Income (loss) before
extraordinary items... 60 (294) 1,976 3,715 3,989 $ 10,970 2,179 8,958 $ 10,598
======== ========
Extraordinary items(5). -- -- -- (478) (1,269) (1,269) (534)
------ ------- ------- ------- ------- ------- --------
Net income (loss)...... 60 (294) 1,976 3,237 2,720 910 8,424
Redeemable preferred
stock accretion....... 133 1,013 1,646 1,717 1,643 1,643 --
------ ------- ------- ------- ------- ------- --------
Net income (loss)
available to common
stockholders.......... $ (73) $(1,307) $ 330 $ 1,520 $ 1,077 $ (733) $ 8,424
====== ======= ======= ======= ======= ======= ========
Income (loss) before
extraordinary items
per common share...... $ (.01) $ (.23) $ .06 $ .39 $ .33 $ .54 $ .09 $ .68 $ .52
======== ========
Extraordinary items per
common share(5)....... -- -- -- (.09) (.18) (.22) (.04)
------ ------- ------- ------- ------- ------- --------
Net income (loss) per
common share.......... $ (.01) $ (.23) $ .06 $ .30 $ .15 $ (.13) $ .64
====== ======= ======= ======= ======= ======= ========
Weighted average common
shares(6)............. 5,590 5,632 5,428 5,088 7,218 20,260 5,773 13,150 20,256
SELECTED OPERATING
DATA:
Beginning locations.... -- 11 21 25 50 50 94
Locations acquired..... 11 11 1 26 25 16 34
Locations opened....... -- -- 3 10 19 17 11
Locations closed, sold
or held for sale(7)... -- (1) -- (11) -- -- (5)
------ ------- ------- ------- ------- ------- --------
Ending locations....... 11 21 25 50 94 83 134
====== ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
AS OF DECEMBER 31, 1997
------------------------------------------- -----------------------
PRO FORMA
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment.............. $ 8,591 $16,223 $24,138 $ 52,818 $116,921 $229,894 $318,489
Total assets............ 18,360 35,877 48,098 137,832 218,933 462,577 759,507
Total debt (including
capital leases)........ 5,024 4,411 12,752 68,555 68,594 224,535 393,455
Redeemable preferred
stock (net of treasury
stock)................. 10,144 25,956 26,684 28,401 -- -- --
Common stockholders'
equity (deficit)....... 24 (1,281) (1,474) 46 95,072 171,889 287,588
</TABLE>
32
<PAGE>
- --------
(1) The pro forma as adjusted consolidated statements of operations for the
year ended December 31, 1996 give effect to the Pro Forma Combined
Acquisitions, the Pro Forma Acquisition Adjustments and the 1996 Pro Forma
Offering Adjustments, as described in "Unaudited Pro Forma Consolidated
Financial Data" as if such transactions had occurred on the first day of
the period presented. The pro forma as adjusted consolidated statements of
operations for the nine months ended September 30, 1997 and the pro forma
as adjusted balance sheet at September 30, 1997 give effect to the 1997
Completed Acquisitions, the Center Acquisition, the Valley Acquisition,
the Other Acquisitions and the 1997 Pro Forma Offering Adjustments, in the
case of the statement of operations as if such transactions had occurred
on the first day of the period presented and in the case of the balance
sheet as if they had occurred at September 30, 1997. See "Unaudited Pro
Forma Consolidated Financial Data."
(2) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statements of operations data from the effective date of acquisition. On
April 25, 1997, the Company completed the IAT Acquisition, and pursuant to
the acquisition agreement, the Company assumed effective control of IAT's
operations on March 1, 1997. Accordingly, the Company has included IAT's
revenues, costs and expenses from March 1, 1997 in its consolidated
statements of operations, net of related imputed purchase price
adjustments, and has included IAT's balance sheet in its consolidated
balance sheets since April 25, 1997.
(3) Sales of used equipment and cost of sales of used equipment are included
with sales of parts supplies and new equipment and cost of sales of parts,
supplies and new equipment, respectively, on a pro forma as adjusted basis
for the year ended December 31, 1996 and the nine months ended
September 30, 1997.
(4) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(5) The extraordinary item in the year ended December 31, 1995 represents the
loss on extinguishment of debt related to the Old Revolver paid off
September 12, 1995. The extraordinary item in the year ended December 31,
1996 and nine months ended September 30, 1996 represents the loss on
extinguishment of debt related to the amendment to the Revolver in
September 1996. The extraordinary item in the nine months ended September
30, 1997 represents the loss on extinguishment of debt related to the
amendment and restatement of the Revolver in January 1997.
(6) See Note 1 to the Company's Consolidated Financial Statements.
(7) In 1996, the Company closed or disposed of its California locations, which
were previously classified as "assets held for sale" in the Company's
Consolidated Financial Statements.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and consolidated results of operations should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
OVERVIEW
From its formation in 1992 through its initial public offering in September
1996, the Company acquired 16 businesses consisting of 65 locations and opened
30 start-up locations. Since the initial public offering, the Company has
completed 28 acquisitions consisting of 73 locations, has entered into letters
of intent to acquire an additional five companies consisting of 20 locations
and has opened 17 start-up locations. See "Prospectus Summary--Recent
Developments." The Company also focuses on increasing revenues and
profitability across its locations through investments in fleet expansion, the
implementation of information systems designed to improve asset utilization
and targeted marketing efforts. As a result, the Company has increased total
revenues from $41.8 million in the year ended December 31, 1994 to $128.4
million in the year ended December 31, 1996. Operating income has increased
from $3.9 million to $13.8 million during the same period. During the first
nine months of 1997, the Company generated revenues of $172.3 million with
operating income of $25.0 million, increases of 85.1% and 165.6%,
respectively, over the same period in 1996. Through the IAT Acquisition, the
Company has substantially increased its presence in the MRO supply business,
which has historically had lower gross margins than the Company's equipment
rental business.
The Company has historically financed its acquisitions, start-up locations
and capital expenditures primarily through the issuance of equity securities,
internally generated cash flow and bank borrowings. Such financings have
increased the Company's interest expense and resulted in the accretion of
dividends on Redeemable Preferred Stock prior to its redemption in September
1996. Because all of the acquisitions have been accounted for under the
purchase method of accounting, such acquisitions have increased the Company's
goodwill and other intangibles (including covenants not to compete). During
the initial phase of an acquisition or start-up location, the Company
typically incurs expenses related to completing acquisitions and opening
start-up locations, training employees, installing or converting information
systems, facility set-up and marketing expenses. As a result, the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. Integration of
acquisitions is generally completed within the first six months, while the
Company generally expects start-up locations to achieve normalized
profitability after one year. The Company anticipates that as it continues to
implement its growth strategy, new locations will continue to impact the
Company's margins until such locations achieve normalized profitability.
The Company is continually involved in the investigation and evaluation of
potential acquisitions and start-up locations. Acquisition transactions are
typically subject to numerous conditions, including due diligence
investigation, environmental review and negotiation of a definitive purchase
agreement. In evaluating acquisition targets, the Company considers, among
other things, the target's competitive market position, management team,
growth position, and the demographic characteristics of the target market. At
any time, the Company may have one or more offers outstanding and may have
executed one or more letters of intent or binding acquisition agreements. The
Company has entered into letters of intent to acquire five equipment rental
businesses (including Valley) with a total of 20 locations for an aggregate
purchase price of $113.7 million. There can be no assurance, however, that
such letters of intent or discussions will result in any particular
transaction being consummated.
The Company's capital expenditures have principally been discretionary
expenditures to finance the growth of its rental equipment fleet; however, the
Company must continually reinvest in ongoing capital expenditures in order to
acquire and maintain a competitive, high quality rental equipment fleet. For
the years ended December 31, 1994, 1995 and 1996, and the nine months ended
September 30, 1996 and 1997 the Company's capital expenditures aggregated
$17.0 million, $23.6 million, $86.8 million, $60.6 million and $117.8 million,
respectively. The Company depreciates rental equipment over periods ranging
from three to seven years, which
34
<PAGE>
has resulted in equipment rental depreciation of $4.0 million, $7.7 million,
$17.8 million, $12.4 million and $24.5 million for the years ended December
31, 1994, 1995 and 1996, and the nine months ended September 30, 1996 and
1997, respectively. Depreciation related to new rental equipment periodically
contributes to short-term margin pressure, since new rental equipment does not
immediately generate revenues at historical equipment utilization rates. In
recent years, the Company has also made substantial investments in its
information systems.
On September 18, 1996, the Company completed an initial public offering of
6,325,000 shares of its Common Stock, of which 6,027,813 shares were offered
by the Company, with the remainder offered by certain selling stockholders.
Net proceeds to the Company of approximately $87.9 million were utilized to
redeem all outstanding shares of its Redeemable Preferred Stock, repay in full
a senior secured term loan (the "Bank Note") and to repurchase the related
warrants, and reduce its outstanding obligations under the Revolver.
On June 4, 1997, the Company completed a public offering of 6,072,000 shares
of its Common Stock, of which 3,000,000 shares were sold by the Company, with
the remainder sold by certain selling stockholders. Net proceeds to the
Company of approximately $55.6 million were used to reduce the Company's
indebtedness under the Revolver in order to provide borrowing availability for
general corporate purposes, including acquisitions.
35
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company
expressed as a percentage of total revenues, and the percentage change in such
items compared to the same period in the prior year. There can be no assurance
that the trends in revenue growth or operating results will continue in the
future.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE INCREASE (DECREASE)
----------------------------------- -----------------------------------------
NINE MONTHS NINE MONTHS
YEARS ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------- -------------
1994 1995 1996 1996 1997 1995 VS. 1994 1996 VS. 1995 1997 VS. 1996
----- ----- ----- ------ ------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... 66.4% 71.6% 73.4% 72.8% 64.7% 69.8% 99.7% 64.7%
Sales of parts,
supplies and new
equipment............. 25.8 22.2 17.1 17.7 27.4 35.4 49.9 186.4
Sales of used
equipment............. 7.8 6.2 9.5 9.5 7.9 27.3 196.1 53.5
----- ----- ----- ------ ------
Total revenues....... 100.0 100.0 100.0 100.0 100.0 57.6 94.7 85.1
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 39.0 42.3 43.0 44.0 33.4 71.1 98.2 40.3
Depreciation,
equipment rentals..... 9.6 11.7 13.9 13.3 14.2 91.3 132.0 97.9
Cost of sales of
parts, supplies and
new equipment......... 19.1 15.8 12.2 12.7 21.1 30.8 49.3 208.4
Cost of sales of used
equipment............. 5.5 3.3 6.6 6.2 5.4 (6.1) 289.7 59.1
----- ----- ----- ------ ------
Total cost of
revenues............ 73.2 73.1 75.7 76.2 74.1 57.4 101.6 79.9
----- ----- ----- ------ ------
Gross profit............ 26.8 26.9 24.3 23.8 25.9 58.3 76.0 102.0
Selling, general and
administrative expense. 11.4 9.7 9.5 9.7 7.8 35.3 90.8 48.4
Depreciation and
amortization, excluding
equipment rental
depreciation........... 1.2 1.8 2.2 2.0 2.2 135.3 139.0 107.2
Amortization of
intangibles............ 4.9 1.1 1.9 2.0 1.4 (65.4) 231.3 35.0
----- ----- ----- ------ ------
Operating income........ 9.3 14.3 10.7 10.1 14.5 142.8 46.1 165.6
Interest expense, net... 1.8 5.0 5.5 6.2 5.1 353.4 113.1 52.3
----- ----- ----- ------ ------
Income before income
taxes and extraordinary
items.................. 7.5% 9.3% 5.2% 3.9% 9.4% 94.0 9.7 349.3
===== ===== ===== ====== ======
Other Data:
Rental gross profit.... 26.9% 24.6% 22.5% 21.2% 26.5% 55.6 82.2 105.4
Sales of parts,
supplies and new
equipment gross
profit................ 26.1 28.6 28.9 28.3 22.8 48.2 51.5 130.8
Sales of used
equipment gross
profit................ 28.4 47.2 30.5 34.6 32.2 111.7 91.4 42.8
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. Total revenues for the nine months ended September 30, 1997
increased 85.1% to $172.3 million from $93.1 million in the same period in
1996. This increase was primarily due to the inclusion of revenues from
acquisitions of 21 businesses (consisting of 43 locations) and the opening of
13 start-up locations since September 30, 1996. Also contributing to the
increased revenues was the larger rental fleet resulting from the Company's
significant investment in capital expenditures. Equipment rental revenues
increased 64.7% to $111.5 million from $67.7 million due to the larger rental
fleet resulting from acquisitions and capital expenditures. Sales of parts,
supplies and new equipment increased 186.4% to $47.1 million from
$16.4 million due primarily to the acquisition of IAT, effective in the
Company's results of operations from March 1, 1997, and the increased number
of rental locations selling these items. Sales of used equipment increased
53.5% to $13.7 million from $8.9 million due to the larger rental fleet and
the Company's continuing strategy of selling the older items in its fleet.
Gross Profit. Gross profit for the nine months ended September 30, 1997
increased to $44.7 million, or 25.9% of total revenues, from $22.1 million, or
23.8% of total revenues, in the same period in 1996. Gross margin on equipment
rentals increased to 26.5% of equipment rental revenues from 21.2% for the
nine months ended September 30, 1996, primarily due to the improved gross
profit resulting from the Company's cost controlling methods. Gross margin on
sales of parts, supplies and new equipment decreased to 22.8% of sales from
28.3%, due primarily to the acquisition of IAT, effective in the Company's
results of operations from March 1, 1997, and a change in the product mix of
parts, supplies and new equipment sales. Excluding the effect of the
acquisition of IAT, the Company's gross margin on sales of parts, supplies and
new equipment would have been 27.9% for the
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nine months ended September 30, 1997. The Company believes that the gross
margin on sales of parts, supplies and new equipment will likely remain at
this lower level due to the impact of IAT's product sales, which generally
have had lower gross margins than the parts, supplies and new equipment sold
by the Company prior to the acquisition of IAT. Gross margin on sales of used
equipment decreased to 32.2% of sales from 34.6%, due primarily to a change in
the mix and age of the equipment being sold.
Selling, General and Administrative Expenses. Selling, general and
administrative expense for the nine months ended September 30, 1997 was $13.4
million, or 7.8% of total revenues, compared to $9.1 million, or 9.7% of total
revenues in the same period in 1996. This percentage decrease is the result of
total revenues increasing at a faster rate than selling, general and
administrative expenses.
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the nine months ended September 30, 1997 was $3.8 million,
or 2.2% of total revenues, compared to $1.8 million, or 2.0% of total revenues
in the same period in 1996. This increase is primarily attributable to the
larger fleet of service and delivery vehicles in 1997 versus 1996, which has
grown as a result of the Company's increased number of locations and larger
rental fleet.
Amortization of Intangibles. Amortization of intangibles for the nine months
ended September 30, 1997 was $2.5 million, or 1.4% of total revenues, compared
to $1.8 million, or 2.0% of total revenues in the same period in 1996. This
increase is due to the additional goodwill and covenants not-to-compete
associated with acquisitions completed since September 30, 1996.
Interest Expense, net. Interest expense, net, for the nine months ended
September 30, 1997 was $8.9 million, compared to $5.8 million for the same
period in 1996. This increase is the result of the Company's increased average
debt outstanding for the nine month period ended September 30, 1997, compared
to the same period in 1996. The increased debt has resulted from acquisitions,
capital expenditures and start-up locations financed under the Revolver.
Interest expense will increase in subsequent periods to the extent that the
Company borrows under the Bank Facility, or otherwise, to fund acquisitions.
Provision for Income Taxes. Provision for income taxes was $7.2 million for
the nine months ended September 30, 1997, compared to $1.4 million in the same
period in 1996. The Company's effective tax rate was 44.5% for the nine months
ended September 30, 1997, compared to 39.3% for the same period in 1996. The
increase in the Company's effective tax rate is a result of increased levels
of non-deductible items, primarily goodwill.
Extraordinary Item. In connection with the implementation of an amendment to
the Revolver in January 1997, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of
$920,000, which has been classified as an extraordinary item, net of income
taxes of $386,000, in the consolidated statement of operations for the nine
months ended September 30, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues for the year ended December 31, 1996 increased
94.7% to $128.4 million compared to $65.9 million for the year ended December
31, 1995. This increase was primarily due to the full period impact of the
acquisition of RHI (consisting of 11 locations), the full period impact of ten
start-up locations opened in 1995 and the inclusion of revenues from 11
acquired businesses (consisting of 25 locations) and the opening of 19 start-
up locations during 1996. Equipment rental revenues increased 99.7% to
$94.2 million for the year ended December 31, 1996 from $47.2 million in the
same period in 1995 due to a larger rental equipment fleet as a result of
acquisitions, the partial year impact of $86.8 million in capital expenditures
in 1996 and the full year impact of 1995 capital expenditures of $23.6
million. Sales of parts, supplies and new equipment increased 49.9% to $21.9
million for the year ended December 31, 1996 from $14.6 million for the year
ended December 31, 1995 due primarily to the increased number of rental
locations selling
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these items. Sales of used equipment increased 196.1% to $12.2 million for the
year ended December 31, 1996 from $4.1 million for the year ended December 31,
1995 due to the larger rental equipment fleet resulting from acquisitions and
the Company's ongoing strategy of selling the older items in its fleet.
Gross Profit. Gross profit for the year ended December 31, 1996 increased to
$31.2 million, or 24.3% of total revenues, from $17.8 million, or 26.9% of
total revenues, for the year ended December 31, 1995. Gross margins on
equipment rentals decreased to 22.5% of equipment rental revenues from 24.6%
for the year ended December 31, 1995 primarily due to the impact of 44
location additions during the period. These new locations were comprised of 25
acquired locations and 19 start-ups, and operated for an average of seven
months during the period. Start-ups and acquisitions generally incur start-up
and integration expenses during their first nine months of operation resulting
in lower profit margins than the Company's more established locations. Gross
margin on sales of parts, supplies and new equipment increased slightly to
28.9% of sales from 28.6% for the year ended December 31, 1995. Gross margin
on sales of used equipment decreased to 30.5% of sales from 47.2% of sales for
the year ended December 31, 1995 due primarily to a change in the mix and age
of the equipment being sold.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased to $12.3 million, or 9.5% of total revenues,
for the year ended December 31, 1996, compared to $6.4 million, or 9.7% of
total revenues, for the year ended December 31, 1995. This increase is
attributable primarily to the increase in the number of locations from 1995.
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the year ended December 31, 1996 was $2.8 million, or 2.2%
of total revenues, compared to $1.2 million, or 1.8% of total revenues, for
the same period in 1995. This increase is primarily attributable to the larger
fleet of service and delivery vehicles in 1996 versus 1995, as well as to
capital expenditures on rental locations in order to standardize their
appearance.
Amortization of Intangibles. Amortization of intangibles for the year ended
December 31, 1996 was $2.4 million, or 1.9% of total revenues, compared to
$718,000, or 1.1% of total revenues, for the same period in 1995. This
increase is due to the full year impact of additional goodwill and covenants
not-to-compete associated with 1995 acquisitions, the partial year impact of
additional goodwill and covenants not-to-compete associated with 1996
acquisitions and amortization of the capitalized costs associated with the
Revolver entered into in September 1995, amended in January 1996 and amended
and restated in September 1996.
Interest Expense, net. Interest expense, net, for the year ended December
31, 1996 was $7.1 million, compared to $3.3 million for the year ended
December 31, 1995. This increase was the result of the Company's increased
average debt outstanding for the year ended December 31, 1996 compared to the
year ended December 31, 1995, as well as amortization of mandatory increases
in the prepayment price of the Bank Note. The increased debt resulted from
start-up locations, acquisitions and capital expenditures financed under the
Company's Revolver. In September 1996, the Company utilized proceeds from its
initial public offering of $13.0 million to repay the Bank Note and $37.7
million to reduce its indebtedness under the Revolver.
Provision for Income Taxes. Provision for income taxes was $2.7 million for
the year ended December 31, 1996, compared to $2.4 million for the same period
in 1995. The Company's effective tax rate was 40.6% for 1996, as compared to
39.3% for 1995. The Company's effective tax rate for the fourth quarter of
1996 increased to 42.0% as a result of increased levels of non-deductible
items. This higher tax rate is expected to continue in future periods.
Extraordinary Items. In connection with the implementation of the amended
Revolver in September 1996, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of $2.5
million, which has been classified as an extraordinary item, net of income
taxes of $964,000. Additionally, in September 1996, the Company repaid the
Bank Note and repurchased the related warrants for $13 million, resulting in a
gain on extinguishment of debt of $362,000, which has been classified as an
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extraordinary item, net of income taxes of $142,000. In 1995, the Company paid
off the borrowings under the Old Revolver upon entering into the Revolver,
resulting in a loss on extinguishment of such debt of $783,000 which has been
classified as an extraordinary item, net of income taxes of $305,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues for the year ended December 31, 1995 increased
57.6% to $65.9 million compared to $41.8 million for the year ended December
31, 1994. This increase was primarily due to the inclusion of revenues from
acquisitions of five businesses and the opening of ten start-up locations in
1995. Equipment rental revenues increased 69.8% to $47.2 million for the year
ended December 31, 1995 from $27.8 million in the same period in 1994. The
acquisition of RHI accounted for $10.2 million, or 52.6%, of the increase in
equipment rental revenues. In addition, rental revenues increased due to a
larger rental fleet as a result of acquisitions, the partial year impact of
approximately $23.6 million of capital expenditures in 1995 and the full year
impact of 1994 capital expenditures of $17.0 million. Sales of parts, supplies
and new equipment increased 35.4% to $14.6 million for the year ended December
31, 1995 from $10.8 million for the year ended December 31, 1994. The increase
was primarily due to an increase in the number of rental locations selling
these items. Sales of used equipment increased 27.3% to $4.1 million for the
year ended December 31, 1995 from $3.2 million for the year ended December 31,
1994 due to the larger rental fleet and the Company's ongoing strategy of
selling the older items in its fleet.
Gross Profit. Gross profit for the year ended December 31, 1995 increased to
$17.8 million, or 26.9% of total revenues, from $11.2 million, or 26.8% of
total revenues, for the year ended December 31, 1994. Gross margin on
equipment rentals decreased to 24.6% of rental revenues from 26.9% for the
year ended December 31, 1994 due primarily to an increase in rental
depreciation expense as a percentage of rental revenues from 14.5% to 16.3% as
a result of $23.6 million in capital expenditures in 1995, and a higher number
of acquisitions and start-ups in 1995, with correspondingly higher start-up
and acquisition expenses. Gross margin on sales of parts, supplies and new
equipment increased to 28.6% of sales from 26.1% for the year ended December
31, 1994 due to a favorable product mix among parts, supplies and equipment
sales. Gross margin on sales of used equipment increased to 47.2% of sales
from 28.4% for the year ended December 31, 1994 due primarily to the larger
rental fleet resulting from acquisitions and a change in the mix and age of
the equipment being sold.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased to $6.4 million, or 9.7% of total revenues,
for the year ended December 31, 1995, compared to $4.7 million, or 11.4% of
total revenues, for the year ended December 31, 1994. The increase of $1.7
million was attributable to infrastructure costs associated with start-ups and
acquisitions.
Depreciation and amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the year ended December 31, 1995 was $1.2 million, or 1.8%
of total revenues, compared to $504,000, or 1.2% of total revenues, for the
same period in 1994. The increase of $682,000 was attributable to a larger
fleet of vehicles associated with start-up locations and continued replacement
of older delivery vehicles.
Amortization of intangibles. Amortization of intangibles expense for the
year ended December 31, 1995 was $718,000, compared to $2.1 million for the
same period in 1994. The decrease of $1.4 million was caused by the completion
in 1994 of the amortization of covenants not-to-compete associated with 1993
acquisitions.
Interest Expense, net. Interest expense, net, for the year ended December
31, 1995 was $3.3 million, compared to $731,000 for the year ended December
31, 1994. The increase was attributable primarily to increased average debt
outstanding, as well as amortization of mandatory increases in the prepayment
price of the Bank Note. During the year, total debt increased from $12.8
million to $68.6 million. The increase in debt resulted from acquisitions,
capital expenditures and start-up locations financed under the Revolver.
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Provision for Income Taxes. Provision for income taxes was $2.4 million for
the year ended December 31, 1995, as compared to $1.2 million for the year
ended December 31, 1994. The Company's effective tax rate was 39.3% for 1995,
as compared to 37.3% for 1994.
Extraordinary Item. In 1995, the Company paid off the borrowings under the
Old Revolver upon entering into the Revolver, resulting in a loss on
extinguishment of such debt of $783,000, which has been classified as an
extraordinary item, net of income taxes of $305,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash have been the funding of capital
expenditures, acquisitions and start-up locations. The Company historically
has financed its capital expenditures, acquisitions and start-up locations
primarily through the issuance of equity securities, secured bank borrowings
and net cash provided by operating activities. The Company had cash and cash
equivalents of $4.9 million at September 30, 1997 and $1.5 million at December
31, 1996.
The Company received net proceeds of approximately $55.6 million from the
sale of 3,000,000 shares of Common Stock in a public offering completed on
June 4, 1997. Through the application of these proceeds, the Company has
improved its liquidity and capital resources through the replacement of a
portion of its secured debt, as well as the related interest and debt
obligations, with Common Stock. Specifically, the Company used these proceeds
to reduce the indebtedness under its Revolver to provide borrowing
availability for general corporate purposes, including acquisitions.
During the nine months ended September 30, 1997, the Company's operating
activities provided net cash flow of $21.8 million, compared to $11.2 million
for the same period in the prior year. The principal causes for the variation
in cash flow between the periods were higher net income and increased
depreciation and amortization.
During the year ended December 31, 1996, the Company's operating activities
provided net cash flow of $23.5 million, as compared to $9.9 million for the
prior year. The principal causes for the variation in cash flow between the
periods were an increased profit level due to an increased number of
locations, increased depreciation and amortization and higher average accounts
payable.
Net cash used in investing activities was $226.8 million in the nine months
ended September 30, 1997, compared to $55.5 million in the same period for the
prior year. The increase was attributable to a higher combined level of
capital expenditures and acquisitions. Acquisition spending totaled $122.7
million and $19.9 million in the nine months ended September 30, 1997 and
1996, respectively. In addition, the Company had capital expenditures of
$117.8 million and $60.6 million in the nine months ended September 30, 1997
and 1996, respectively. Capital expenditures were primarily for purchases of
rental equipment. Included in investing activities were proceeds from the sale
of used equipment, which were $13.7 million for the nine months ended
September 30, 1997, compared to $8.9 million for the same period in the prior
year.
Net cash used in investing activities was $84.7 million for the year ended
December 31, 1996, as compared to $58.9 million for the prior year. The
increase was primarily attributable to a higher combined level of capital
expenditures and acquisitions. The Company had capital expenditures of $86.8
million and $23.6 million in the years ended December 31, 1996 and 1995,
respectively. Acquisition spending totaled $27.3 million and $42.1 million in
the years ended December 31, 1996 and 1995, respectively. Capital expenditures
were primarily for purchases of rental equipment. Included in investing
activities were proceeds from the sale of equipment, which were $12.7 million
for the year ended December 31, 1996, compared to $4.1 million in the prior
year. This increase was primarily the result of a larger fleet resulting from
acquisitions and fleet investments made for start-up locations. Also included
in investing activities in the year ended December 31, 1996 were $16.7 million
of proceeds from assets held for sale.
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Net cash provided by financing activities was $208.5 million for the nine
months ended September 30, 1997, compared to $44.7 million in the same period
for the prior year. The net cash provided by financing activities was
primarily due to issuances of Common Stock, specifically from the public
offering completed on June 4, 1997, and from borrowings under the Revolver.
Net cash provided by financing activities was $61.3 million for the year
ended December 31, 1996, as compared to $49.8 million for the prior year. The
net cash provided by financing activities was primarily due to issuances of
capital stock, specifically from the Company's initial public offering, and
borrowings under the Revolver.
Since December 2, 1997, the Company's principal source of liquidity has been
the Bank Facility, which consists of the Revolver and the Term Loan. Prior to
December 2, 1997, the Company's principal source of liquidity was the
Revolver, which consisted of a revolving line of credit and availability of
letters of credit. On January 31, 1997, the Company amended the Revolver to,
among other things, increase the availability to $200.0 million, increase the
advance rates on eligible rental equipment to 100%, decrease the interest rate
margins by 0.50% and extend the maturity date to January 31, 2002. On June 4,
1997, the Company again amended the Revolver to, among other things, increase
the availability to $300.0 million, decrease the interest rate margins by
0.25% with further reductions if certain interest coverage ratios are met and
to reduce the unused line fee to 0.25% of the unused commitment. This
amendment increased the allowed level of investments and capital expenditures
to $90.0 million in 1997, $105.0 million in each of 1998 and 1999, $115.0
million in 2000 and $105.0 million in 2001 (plus amounts reinvested from asset
sales). Effective June 30, 1997, the Company further amended the Revolver to
increase the allowed level of investments and capital expenditures for 1997 to
$138.0 million and to increase the maximum allowed total indebtedness to
trailing EBITDA ratio for each of the last three quarters of 1997. In
connection with the implementation of the January 1997 amendment, the Company
recorded an extraordinary loss on extinguishment of debt of $920,000, net of
income taxes of $386,000, associated with the write-off of unamortized debt
issuance costs.
On December 2, 1997, the Company amended and restated the Revolver to
increase its total available financing to $600.0 million. This increase
consisted of an increase in the availability under the Revolver from $300.0
million to $500.0 million and a new $100.0 million seven-year term loan
facility. In addition, this new financing package extended the maturity date
of the Revolver to December 2, 2002; changed the methodology for determining
the interest rate margins; increased the allowed levels of capital
expenditures and investments to $160.0 million in 1997, $150.0 million in each
of 1998, 1999 and 2000, $160.0 million in 2001, $180.0 million in 2002, $225.0
million in 2003 and $240.0 million in 2004 (plus amounts reinvested from asset
sales); and amended several covenants, including the computation methodology
of certain financial covenants.
The amended and restated Revolver contains provisions to periodically adjust
the prime and Eurodollar interest rate margins based on the Company's
achievement of specified total debt to EBITDA ratios. The total amount of
credit available under the Revolver is limited to a borrowing base equal to
the sum of (i) 85% of eligible accounts receivable of the Company's
subsidiaries and (ii) 100% of the value (lower of net book value or market) of
eligible rental equipment through December 31, 1998; 90% of the value of
eligible rental equipment from January 1, 1999 through December 31, 1999; 85%
of the value of eligible rental equipment from January 1, 2000 through
December 31, 2000; and 80% of the value of eligible rental equipment from
January 1, 2001 through the expiration date of the Revolver. The Revolver
expires December 2, 2002. The obligation of the lenders to make loans or issue
letters of credit under the Revolver is subject to certain customary
conditions. In addition, the Revolver has financial covenants for RSC
regarding debt incurrence, interest coverage, capital expenditures and
investments (including acquisitions), rental equipment utilization and minimum
EBITDA levels. The Revolver also contains covenants and provisions that
restrict, among other things, the ability of the Company and its subsidiaries
to: (i) incur additional indebtedness; (ii) incur liens on their property,
(iii) enter into contingent obligations; (iv) make certain capital
expenditures and investments; (v) engage in certain sales of assets; (vi)
merge or consolidate with or acquire another person or engage in other
fundamental changes; (vii) enter into leases; (viii) engage in certain
transactions with affiliates; and (ix) declare or pay dividends. As
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of September 30, 1997, the Company was in compliance with all covenants of the
Revolver, and substantially all of the net consolidated assets of the Company
were restricted under the terms of the Revolver.
The Term Loan portion of the Bank Facility consists of a $100.0 million
seven-year term loan facility. The Term Loan requires mandatory principal
payments of $1.0 million on each of its first six anniversaries, with the
remaining principal amount due at maturity. The Term Loan matures on December
2, 2004. Interest on the Term Loan is payable monthly at either the prime rate
plus 1.0% or the Eurodollar rate plus 2.5% (at the Company's option). The Term
Loan contains the same conditions, covenants and restrictions as the Revolver.
Borrowings under the Bank Facility are secured by all of the real and
personal property of the Company's subsidiaries and a pledge of the capital
stock and intercompany debt of the Company's subsidiaries. RSC is a guarantor
of the obligations of its subsidiaries under the Bank Facility, and has
granted liens on substantially all of its assets (including the stock of its
subsidiaries) to secure such guaranty. The Bank Facility also restricts the
Company from declaring or paying dividends on its Common Stock. In addition,
the Company's subsidiaries are guarantors of the obligations of the other
subsidiaries under the Bank Facility. The Bank Facility includes a
$2.0 million letter of credit facility, with a fee equal to the applicable
margin on Eurodollar Rate loans under the Revolver (1.75% at December 12,
1997) multiplied by the face amount of letters of credit payable to the
lenders and other customary fees payable to the issuer of the letter of
credit. A commitment fee equal to 0.25% of the unused commitment, excluding
the face amount of all outstanding and undrawn letters of credit, is also
payable monthly in arrears.
At December 12, 1997, the principal amount outstanding under the Revolver
was $299.1 million, the average interest rate on such borrowings was 7.9%, and
an additional $27.3 million was available to the Company under the Revolver.
Additionally, $100.0 million was outstanding under the Term Loan at an
interest rate of 8.5% at December 12, 1997. Outstanding letters of credit
totaled $200,000 at December 12, 1997.
As part of its growth strategy, the Company is continually involved in the
investigation and evaluation of potential acquisitions and start-up locations.
The Company is currently evaluating a number of acquisition opportunities and
start-up locations and may at any time be a party to one or more letters of
intent or acquisition agreements. Since December 31, 1996, the Company has
completed 22 acquisitions of rental equipment businesses with an aggregate of
64 locations and has opened 15 new start-up locations. Additionally, the
Company has consolidated two of the locations acquired in the acquisition of
IAT with the Company's existing locations, has consolidated three additional
acquired locations and has closed two other locations. At December 12, 1997,
the Company operated 166 locations throughout the United States. The Company's
liquidity and capital resources have been and will continue to be
significantly impacted by the Company's growth strategy and by the need to
offer customers a modern and well-maintained rental equipment fleet. To pursue
its growth strategy, the Company must be able to complete acquisitions, open
start-up locations and make the capital expenditures necessary to acquire and
maintain its rental fleet. At December 12, 1997, the Company was obligated,
under noncancellable purchase commitments, to purchase approximately $19.3
million of equipment. Such purchases are expected to be financed with cash
flows from operations and through borrowings under the Revolver.
On December 2, 1997, the Company acquired Center for approximately $100.9
million in cash, 482,315 shares of RSC common stock (of which 64,544 shares
will be issued within seven years, subject to earlier issuance over three
years if certain performance objectives are achieved) and the assumption of
approximately $16.0 million of Center's debt. Center is a leading independent
rental company and also sells a variety of equipment ranging from small tools
to heavy equipment, including related commodity supplies. Center operates a
total of 14 locations in Colorado, New Mexico, Texas, Kansas, Missouri and
Nebraska, and had combined revenues of approximately $49.8 million for its
fiscal year ended October 31, 1997. Center's balance sheet is consolidated
with the Company's under the purchase method of accounting as of December 2,
1997. Pursuant to the acquisition agreements, the Company assumed effective
control of Center's operations on November 1, 1997 and has included Center's
revenues, costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments.
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On October 28, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of Valley for a total purchase price of $104.0
million, consisting of $93.6 million of cash and $10.4 million of RSC common
stock. The purchase price is subject to adjustment based on levels of accounts
receivable, inventory and equipment. Valley is a leading independent rental
company in the Southwest, operates a total of ten locations in Arizona and New
Mexico, and had trailing twelve months revenues of $36.2 million as of
September 30, 1997. The transaction is anticipated to close by January 31,
1998, and will be recorded under the purchase method of accounting. The
closing is subject to a number of closing conditions, including the execution
of a definitive purchase agreement, RSC board and bank approval and early
termination or expiration of the waiting period under the HSR Act.
On December 12, 1997, the Company acquired all of the outstanding capital
stock of Siems for $8.0 million in cash, 126,315 shares of RSC common stock
and the assumption of approximately $13.5 million of Siems' debt. Siems is a
leading independent rental company engaged in the rental, sales and service of
various types of construction and industrial equipment. Siems operates a total
of six locations in Maryland, Delaware, Pennsylvania and Virginia, and had
trailing twelve months revenues of approximately $21.0 million as of September
30, 1997. Siems' balance sheet is consolidated with the Company's under the
purchase method of accounting as of December 12, 1997. Pursuant to the
acquisition agreement, the Company assumed effective control of Siems'
operations on November 1, 1997 and has included Siems' revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
Subsequent to September 30, 1997, the Company completed the acquisitions of
substantially all of the assets of Kansas Enterprises, Inc. d/b/a AAA Rent-
All; Sunbelt Equipment & Rentals, Inc.; Roesch Equipment Company; Allen
Equipment, Inc. and R&M Rentals, Inc. for a total combined purchase price of
approximately $16.5 million. These acquisitions have a combined ten locations
in Arkansas, Florida, Illinois, Kansas and Missouri.
As of December 12, 1997, the Company is party to additional letters of
intent to acquire four businesses for a total combined purchase price of
approximately $9.7 million and having a combined ten locations in Florida,
Georgia, South Carolina and Tennessee. Each of these acquisitions is subject
to a number of closing conditions, including the execution of definitive
purchase agreements and RSC board approval.
The Company believes that cash flow from operations, together with
availability under the Revolver, and vendor financing in appropriate cases,
will be sufficient to support its current operations for at least the next 12
months. However, to complete the Valley Acquisition and certain other pending
acquisitions and if significant additional acquisition opportunities arise,
the Company will need to seek additional capital to complete them. Such
acquisitions could be financed through the incurrence of additional
indebtedness, including convertible debt, or the issuance of common or
preferred stock (which may be issued to third parties or to sellers of
acquired businesses), depending on market conditions. If such financing were
not available, the Company's growth strategy could be hampered and its cash
flow from operations reduced, thereby constraining funds available for growth
and acquisitions. Further, additional indebtedness would increase RSC's
leverage and may make the Company more vulnerable to economic downturns and
may limit its ability to withstand competitive pressures. However, there can
be no assurance that the Company's business will generate sufficient cash flow
or that future borrowings or additional capital, if and when required, will be
available on terms acceptable to the Company, or at all.
On November 3, 1997, the Company began soliciting written consent of its
stockholders for the approval of an increase in the number of authorized
shares of its Common Stock, par value $.01 per share, from 20 million to 40
million shares. Stockholder approval of the increase became effective on
November 28, 1997. On December 11, 1997, the Company amended its Certificate
of Incorporation to effect such increase.
REDEEMABLE PREFERRED STOCK AND ACCRETION
Between July 1992 and January 1996, the Company issued a total of 319,805
shares of its Redeemable Preferred Stock at a price of $100 per share. The
Redeemable Preferred Stock accrued dividends at the rate of
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6% per annum, compounded quarterly. The dividends accrued were $1.6 million,
$1.7 million and $1.6 million for the years ended December 31, 1994, 1995 and
1996, respectively. In September 1996, the Company utilized $37.9 million of
the proceeds from its initial public offering to redeem all outstanding shares
of its Redeemable Preferred Stock.
ENVIRONMENTAL
The Company and its operations are subject to a variety of federal, state
and local 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 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 related costs of
investigation and property damage. The Company incurs ongoing expenses
associated with the removal of older underground storage tanks and other
activities to come into compliance with environmental laws, and the
performance of appropriate remediation at certain locations. The Company has
accrued $763,000 at December 31, 1996 and September 30, 1997 related to the
removal of underground tanks and remediation expenses. The Company believes
that the impact of the cost of such remediation on its financial position,
results of operations and cash flows will not be material. See "Business--
Government and Environmental Regulation."
ASSETS HELD FOR SALE
In connection with the acquisition of RHI, the Company decided to sell,
close or dispose of RHI's rental locations in California, as they did not meet
the Company's financial performance criteria and were not part of the
Company's strategic plans. The assets related to those rental locations,
consisting primarily of rental equipment and accounts receivable, were
classified as assets held for sale in the Company's Consolidated Financial
Statements at December 31, 1995. The Company accrued the expected cash
outflows from operations of the rental locations through the expected date of
disposal as part of the allocation of the purchase price. The initial accrual
of $2,492,000 included $1,404,000 of allocated interest expense. The pre-tax
income during the period from September 12, 1995 through December 31, 1995 was
$508,000, which included allocated interest expense of $422,000 and a gain on
disposal of assets of $649,000, and was credited to the accrual. The pre-tax
loss during the year ended December 31, 1996 was $3,380,000, which included
allocated interest expense of $751,000 and a gain on disposal of assets of
$513,000, and was charged to the accrual. In 1996, the Company revised its
estimates of the operating cash outflows expected to be incurred as part of
the disposal of the California locations and accrued an additional $1,292,000,
which was recorded as an adjustment to goodwill. During 1996, the Company sold
or closed all of the California locations, and has a remaining balance in the
accrual of $912,000 at December 31, 1996. During the nine months ended
September 30, 1997, $362,000 was charged to the accrual, leaving a remaining
balance of $550,000 at September 30, 1997.
COMMITMENTS TO PURCHASE EQUIPMENT
At December 12, 1997, the Company was obligated, under noncancellable
purchase commitments, to purchase approximately $19.3 million of equipment.
Such purchases are expected to be financed with cash flows from operations and
through borrowings under the Revolver.
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SEASONALITY AND SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly consolidated statement of
operations data for the eight consecutive quarters through the quarter ended
September 30, 1997. The unaudited quarterly data has been prepared on the same
basis as the Company's annual financial statements and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for the quarters presented.
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing of acquisitions and
start-up locations and related costs; the effectiveness of integrating
acquired businesses and start-up locations; the timing of fleet expansion
capital expenditures; the realization of targeted equipment utilization rates;
seasonal rental patterns of the Company's customers; and price changes in
response to competitive factors. In addition, operating results have been
seasonally lower during the first and fourth fiscal quarters than during the
other quarters of the fiscal year. The operating results for any historical
quarter are not necessarily indicative of the results which may be expected
for any future period. See "Risk Factors--Seasonality and Quarterly
Fluctuations."
<TABLE>
<CAPTION>
1996 QUARTERS ENDED 1997 QUARTERS ENDED
1995 QUARTER ---------------------------------- -------------------------
ENDED SEPT. SEPT.
DECEMBER 31, MARCH 31 JUNE 30 30 DEC. 31 MARCH 31 JUNE 30 30
------------ -------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT LOCATIONS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Equipment rentals....... $18,689 $19,656 $22,874 $25,212 $26,476 $27,527 $36,800 $47,222
Sales of parts, supplies
and new equipment...... 5,091 4,838 5,722 5,890 5,469 9,165 17,787 20,167
Sales of used equipment. 1,141 2,703 2,671 3,529 3,314 4,617 3,967 5,080
------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 24,921 27,197 31,267 34,631 35,259 41,309 58,554 72,469
COST OF REVENUES:
Cost of equipment
rentals, excluding
equipment rental
deprecation............ 11,122 12,449 13,551 14,977 14,225 14,316 19,361 23,829
Depreciation, equipment
rentals................ 2,935 3,633 4,156 4,586 5,465 6,306 7,730 10,457
Cost of sales of parts,
supplies and new
equipment.............. 3,673 3,453 4,121 4,225 3,783 6,737 13,869 15,777
Cost of sales of used
equipment.............. 554 1,614 1,681 2,525 2,668 2,972 2,724 3,565
------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.. 18,284 21,149 23,509 26,313 26,141 30,331 43,684 53,628
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 6,637 6,048 7,758 8,318 9,118 10,978 14,870 18,841
Selling, general and
administrative expense. 2,752 2,734 3,028 3,299 3,193 3,784 4,685 4,975
Depreciation and
amortization, excluding
equipment rental
depreciation........... 597 571 607 651 1,006 1,068 1,219 1,502
Amortization of
intangibles............ 392 561 600 664 554 624 745 1,094
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 2,896 2,182 3,523 3,704 4,365 5,502 8,221 11,270
Interest expense, net... 1,613 1,639 2,045 2,135 1,244 1,597 3,030 4,236
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and extraordinary
items.................. 1,283 543 1,478 1,569 3,121 3,905 5,191 7,034
Provision for income
taxes.................. 507 213 581 617 1,311 1,722 2,336 3,114
------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary items.... 776 330 897 952 1,810 2,183 2,855 3,920
Extraordinary items, net
of income tax benefit
of $822 in 1996 and
$386 in 1997 .......... -- -- -- (1,269) -- (534) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 776 330 897 (317) 1,810 1,649 2,855 3,920
Redeemable preferred
stock accretion........ 439 554 565 524 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $ 337 $ (224) $ 332 $ (841) $ 1,810 $ 1,649 $ 2,855 $ 3,920
======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares................. 5,081 5,507 5,511 6,289 11,508 11,493 12,598 15,319
Income (loss) before
extraordinary items per
common share........... $ .07 $ (.04) $ .06 $ .07 $ .16 $ .19 $ .23 $ .26
Extraordinary items per
common share........... -- -- -- (.20) -- (.05) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per
common share........... $ .07 $ (.04) $ .06 $ (.13) $ .16 $ .14 $ .23 $ .26
======= ======= ======= ======= ======= ======= ======= =======
Net increase in
locations at period
end.................... 7 13 17 3 11 12 25 3
</TABLE>
45
<PAGE>
INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14.1 million that expire in
years 2005 through 2011. In addition, the Company had combined state income
tax net operating loss carryforwards of approximately $11.3 million that
expire in years 1997 through 2011. Approximately $8.5 million of the federal
carryforwards and $1.1 million of the state carryforwards are attributable to
the Company's September 12, 1995 acquisition of RHI. For financial reporting
purposes a valuation allowance of $4.0 million has been recognized to offset
the deferred tax assets related to those carryforwards. These separate Company
net operating loss carryforwards are subject to restrictions in accordance
with Section 382 of the Internal Revenue Code of 1986, as amended, and the
ultimate utilization of the net operating losses is further limited based on
the profitability of certain subsidiaries of RHI.
The Company also has alternative minimum tax credit carryovers of
approximately $1.4 million for federal and $165,000 for State of California
income tax purposes which are available to offset future regular income tax
that is in excess of the alternative minimum tax in such year, of which
$589,000 of the federal and all of the state alternative minimum tax credit
carryovers resulted from the Company's September 12, 1995 acquisition of RHI.
For financial reporting purposes a valuation allowance of $754,000 has been
recognized to offset the deferred tax assets related to all alternative
minimum tax credit carryovers. Limitations similar to those restricting the
use of the net operating losses also restrict the use of the credit
carryovers.
The valuation allowance decreased $3.1 million in 1996. This decrease is
principally due to a $9.5 million decrease in the estimated net operating loss
that is not expected to be realized from the Company's discontinued California
operations.
Any tax benefit resulting from the utilization of the net operating loss
carryforwards or the tax credit carryovers obtained in the acquisition of RHI
are accounted for as a reduction of the purchase price in the periods they are
realized.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its results of
operations. The Company's operating results may be adversely affected by
events or conditions in a particular region, such as regional economic,
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.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer and software systems as the millennium ("Year 2000")
approaches. The Year 2000 problem is pervasive and complex, as virtually every
computer operation could be affected in some way by the rollover of the two-
digit year value to "00". The issue is whether systems will properly recognize
date sensitive information when the year changes to 2000. Systems that do not
properly recognize such information could generate erroneous data or cause
complete system failures. The Company has received confirmation from all of
its current systems' vendors that each of their systems will properly handle
the rollover to the Year 2000. Although there can be no assurance, management
believes the Year 2000 problem will not have a material effect on the
financial position, results of operations or cash flows of the Company.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, which is required to be adopted on December 31, 1997. At that time,
the Company will be required to change the method currently used to compute
earnings per
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share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in no material change in
earnings per share (before or after extraordinary items) for the three and
nine month periods ended September 30, 1997 and 1996.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is required to be adopted in the first quarter of 1998. SFAS No. 130
established standards for the reporting and display of comprehensive income
and its components. Comprehensive income includes certain non-owner changes in
equity that are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS No. 130 is not expected to have a
material effect on the consolidated financial position, results of operations
or cash flows of the Company.
47
<PAGE>
BUSINESS
GENERAL
The Company is a leading consolidator in the rapidly-growing equipment
rental industry, serving the needs of a wide variety of industrial,
manufacturing, construction, government and homeowner markets. As of December
12, 1997, RSC operated the largest rental network in the United States with
166 rental locations. RSC rents a broad selection of equipment ranging from
small items such as pumps, generators, welders and electric hand tools to
larger equipment such as backhoes, forklifts, air compressors, scissor lifts,
booms, aerial manlifts and skid-steer loaders. The Company also sells MRO
supplies, small tools, contractor supplies, parts and used rental equipment,
and acts as a distributor for new equipment on behalf of certain national
equipment manufacturers.
Since its formation in 1992, the Company has pursued an aggressive expansion
strategy and has acquired 44 businesses comprised of 138 locations and has
opened 47 start-up locations through December 12, 1997. With a focus on
operating rental locations in underserved small- to medium-sized markets, RSC
intends to continue to expand its presence in existing markets and capitalize
on opportunities to enter new geographic markets through a combination of
acquisitions and start-up locations. The Company also seeks to increase
revenues across its locations through fleet expansion, improved asset
utilization and targeted marketing efforts. Management believes RSC is well-
positioned to capitalize on the substantial consolidation opportunities in the
equipment rental industry, and to take advantage of the growing demand for
rental equipment as businesses increasingly outsource non-core operations.
INDUSTRY OVERVIEW
The equipment rental industry serves a wide variety of industrial,
manufacturing, construction, governmental and homeowner markets. Equipment
available for rent ranges from construction and industrial equipment to
general tools and homeowners' equipment. A survey conducted for the Associated
Equipment Distributors estimates that industry rental revenues were
approximately $13 billion in 1993, which the author of the survey estimated
would increase to $15 billion in 1995. The Company's management estimates that
1996 industry rental revenues were approximately $20 billion.
Management believes the equipment rental industry benefits from the trend
among businesses to outsource non-core operations in order to reduce capital
investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. While customers traditionally rented
equipment for specific purposes such as supplementing capacity during peak
periods and using equipment in connection with special projects, customers are
increasingly looking to rental operators to provide an ongoing comprehensive
supply of equipment which can enable customers to benefit from the economic
advantages and convenience of rental. Many of the businesses that rent
equipment also purchase complementary tools and supplies from MRO
distributors. The Company believes such customers would be interested in a
one-stop solution consisting of both equipment rental and MRO supplies.
The equipment rental industry is highly fragmented and primarily consists of
a large number of relatively small, independent businesses typically serving
discrete local markets within 30 to 50 miles of the store location, and a
small number of multi-location regional or national operators. Traditionally,
large equipment rental companies have focused their operations on serving
relatively large customers, primarily in medium to large metropolitan markets,
while generally serving smaller markets through delivery from distant major
markets without establishing a local presence. In such smaller markets, the
primary source of rental equipment has traditionally been relatively small,
local equipment rental businesses and equipment dealers with product offerings
typically limited in both depth and breadth.
The Company believes the equipment rental industry offers substantial
consolidation opportunities for large, well capitalized equipment rental
companies such as RSC. Relative to smaller companies with only one or two
48
<PAGE>
rental locations, the Company believes RSC benefits from several competitive
advantages, including sophisticated management information systems, volume
purchasing discounts, professional management, a diverse customer base, a
modern and well maintained rental fleet, the ability to transfer equipment
among rental locations to satisfy customer demand and national brand identity.
In addition, the Company believes national operators are less sensitive to
localized cyclical downturns and can justify significant investments in
professional management and information systems. As a result of consolidation
and industry growth, 1996 rental revenues of the top 100 rental equipment
companies increased over 1995 rental revenues by approximately 24%, to $3.1
billion in 1996, according to estimates by the RER. In spite of this growth,
these top 100 companies represented only a small percentage of the estimated
$20 billion in industry rental revenues in 1996. See "--Competition."
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by taking
advantage of its strong market position and pursuing a business strategy that
includes the following key elements:
Small- to Medium-Sized Market Focus. The Company focuses on operating rental
locations in underserved small- to medium-sized rental markets where the
Company can capitalize on its competitive advantages relative to the small,
local equipment rental businesses and equipment dealers who have traditionally
served such markets. In addition, the Company believes small- to medium-sized
markets provide an extensive selection of acquisition candidates and
attractive start-up locations. The Company believes future acquisitions and
start-up locations will provide opportunities to achieve greater geographic
and customer diversification. Through its geographic diversification, the
Company believes it can more effectively manage economic fluctuations than
single-location businesses by transferring equipment to regions with higher
demand. See "--Locations" and "--Growth Strategy."
Cluster Strategy. Under its cluster strategy, RSC establishes a
comprehensive pool of rental equipment at a central, readily-accessible "hub"
location, and surrounds the hub with smaller "satellite" locations 30 to
150 miles away, which draw on this equipment pool to serve local customers'
needs. The hub locations provide full-service rental fleet maintenance and
repair operations for the satellite locations. The Company believes this
strategy increases fleet utilization and allows RSC to bring the benefits of a
large, high-quality and diversified rental equipment fleet to markets with
populations as small as 25,000 where a full-scale rental facility might not
otherwise be justified. See "--Fleet Management."
Advanced Information Systems. The Company has made substantial investments
in its management information systems in order to improve asset utilization
and financial performance. Every rental location has on-line access to a
centralized computer system that provides real-time transaction processing,
extensive fleet management tools and financial management reports. Use of
these systems allows the Company to improve its asset utilization by deploying
assets to locations generating higher returns and identifying underperforming
assets for disposition. These systems also allow an employee at any location
to identify and reserve a specific piece of equipment anywhere in a region,
and schedule delivery (generally within 24 hours) to a customer's job site.
With the acquisition of Center, the Company obtained Center's proprietary
information system, which, among other enhancements, automatically prioritizes
equipment for maintenance based on type, age and recent use. The Company
believes Center's system is scaleable over a large number of locations, and
expects to add it to the Company's existing systems. See "--Fleet Management,"
"--Information Systems" and "Prospectus Summary--Recent Developments--
Acquisition of Center Rental."
Decentralized Management. Under the Company's decentralized management
structure, RSC's region vice presidents and district managers, who currently
average over 20 years of rental experience, are responsible for management,
customer service, marketing strategies and business growth, including pursuing
acquisitions and start-up locations, in their regions. Each region vice
president and district manager is compensated through a stock option program
and cash bonus plan tied directly to the region's performance. A small
corporate staff at the Company's headquarters focuses on corporate planning,
financial reporting and analysis and overseeing
49
<PAGE>
execution of the Company's growth strategy. The Company has also centralized
its purchasing and equipment disposal functions in order to maximize purchase
discounts sale prices for used rental equipment.
Superior Customer Service. The Company believes it differentiates itself
from many of its competitors by providing responsive customer service, a broad
selection of high-quality rental equipment and "one-stop shopping" for a wide
range of supplies, tools, parts and equipment. Depending upon market needs,
RSC also offers value-added services to its customers such as a radio-
dispatched transportation fleet and 24 hours-a-day, seven days-a-week support
services, including on-site maintenance and repair. The Company believes its
rapid response time in delivering, servicing or replacing equipment at job
sites generates customer loyalty. A cornerstone to the Company's customer
service commitment is its extensive training system, RSU, which provides
formal training to Company employees relating to customer service, strategy,
finance, information systems, fleet management, safety and risk management and
human resources. See "--Products" and "--Sales and Marketing."
GROWTH STRATEGY
RSC's growth strategy is to continue to expand its presence in existing
markets and capitalize on opportunities to enter new geographic markets
through a combination of acquisitions and start-up locations. The Company is
systematic in its selection of new markets for expansion and, together with
Arthur D. Little, Inc., has developed a proprietary model to guide future
expansion efforts by identifying and ranking desirable locations based on more
than 25 demographic characteristics found in the Company's most successful
geographic markets. The Company also seeks to increase revenues at new and
existing locations through fleet expansion, improved asset utilization and
targeted marketing efforts. Following the IAT Acquisition, the Company also
has begun to increase revenues across existing locations by cross-selling both
equipment rental services and MRO tools and supplies to its industrial
customers.
Acquisitions. RSC's acquisition efforts focus on acquiring stable, respected
businesses in markets the Company believes offer opportunities for additional
growth. The Company primarily targets acquisitions of businesses in small- to
medium-sized markets where an existing owner has limited resources to expand
the rental equipment fleet and/or the owner's decision to sell coincides with
the decision to retire. The Company believes it can capitalize in such markets
on its competitive advantages relative to the small, local equipment rental
businesses and equipment dealers who have traditionally served such markets.
Immediately after completing an acquisition, the Company generally integrates
the operations of the acquired business into its management information
systems, consolidates its equipment purchasing and disposal functions, and
centralizes its fleet management, while seeking to provide consistent, high-
quality service to the acquired business' customers. The Company has a proven
track record in completing and integrating acquisitions. Proprietors of
smaller businesses often place significant emphasis on the Company's
reputation in these areas, and the Company believes this reputation provides
it access to additional acquisition opportunities. Since its formation in
1992, RSC has acquired 44 businesses consisting of 138 locations. See "--
Business Strategy--Small- to Medium-Sized Market Focus" and "--Locations."
Start-Up Locations. RSC also enters targeted markets through start-up
locations where there is no quality business available for acquisition or
where such a business cannot be acquired on terms acceptable to the Company.
The Company's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. RSC enhances the flexibility of start-up locations by entering
into real estate leases with short initial terms and multiple option periods.
In addition, RSC typically minimizes capital expenditures at a start-up
location by redeploying and sharing equipment with an existing hub. If a
start-up location does not meet expectations, the Company can redeploy the
equipment elsewhere. Since the Company opened its first start-up location in
October 1994, the Company has opened 46 additional start-up locations. See "--
Business Strategy--Cluster Strategy" and "--Locations."
Internal Growth. The Company focuses on achieving internal growth through an
emphasis on fleet expansion, improved asset utilization and targeted marketing
efforts. The Company intends to replace assets in,
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and increase the breadth and depth of, its existing rental equipment fleet
through capital expenditures. In addition, RSC's information systems provide
the data necessary to improve asset deployment based upon such factors as
price realization, time utilization and individual asset return on investment.
Through its national accounts marketing program, the Company targets large
petrochemical, industrial and commercial customers. The Company offers these
customers IPM services whereby RSC locates equipment at a customer's facility
and assumes complete responsibility for the maintenance of such equipment. The
IPM program allows the Company to eliminate operating expenses such as
equipment transportation and delivery, and to improve asset utilization rates.
In addition, through the IAT Acquisition, the Company has increased its MRO
supply business and its tool room management and small tool trailer business.
The Company has also created an Industrial Division, with a dedicated and
specially trained sales force focusing exclusively on industrial customers.
See "--Fleet Management," "--Information Systems" and "--Sales and Marketing."
PRODUCTS
The Company believes it has one of the most comprehensive and well-
maintained rental equipment fleets in the industry. The Company sells parts,
supplies and used rental equipment, and acts as a distributor for new
equipment on behalf of certain national equipment manufacturers.
Rental Equipment. The Company rents over 50 categories of equipment on a
daily, weekly or monthly basis, and occasionally for periods of up to one
year. The Company's rental equipment fleet of over 43,000 units includes a
broad selection of equipment ranging from small items such as pumps,
generators, welders, electric hand tools and concrete finishing equipment to
larger equipment such as air compressors, dirt equipment, booms, aerial
manlifts, forklifts, scissor lifts, skid-steer loaders and backhoes. Each of
the Company's rental locations has access to a product mix tailored to satisfy
the needs and preferences of the local customer base.
Sales of Parts, Supplies and Equipment. In addition to rental equipment,
most RSC locations carry a wide range of parts and supplies, including
"convenience consumables" used in conjunction with rental equipment, such as
safety equipment, diamond saw blades and sandpaper. This sales activity allows
the Company to attract and retain customers by offering the convenience of
"one-stop shopping." In addition, RSC is a distributor for new equipment on
behalf of certain national equipment manufacturers, including Black & Decker,
Genie, Honda, JLG, Lull, Multiquip, Norton, Sky-Jack, Sky Trak, Snorkel,
Terramite and Wacker; and as a result of the IAT Acquisition, Ingersoll-Rand,
Stanley Proto and Weldon Pumps. In connection with the Center Acquisition and
the Valley Acquisition, the Company will become a dealer for Kobelco. In
connection with the IAT Acquisition, the Company also began to offer its
customers a one-source catalog for a variety of equipment, tools and supplies.
The Company also routinely sells used rental equipment in order to maintain
an economically competitive fleet and to adjust to fluctuations in the demand
for specific rental products. The Company has developed a proprietary
algorithm, the "CAPCOM" model, which is designed to determine the optimal
timing for the sale and replacement of equipment given, among other things,
original purchase price, maintenance expense, rental demand and prices in the
used rental equipment market. RSC is able to realize attractive prices on used
equipment sales due to its strong preventative maintenance program, ability to
use offshore, retail and direct mail distribution channels to redirect
disposals to markets where the equipment is in highest demand, and ability to
negotiate attractive fee arrangements with third-party auctioneers. In
addition, the Company markets its used rental equipment via the Internet, and
is also currently evaluating additional disposal alternatives.
FLEET MANAGEMENT
The Company believes its advanced information systems, combined with its
cluster strategy and ability to redeploy equipment among locations, allow RSC
to better manage its fleet and achieve higher equipment utilization rates than
many of its competitors. Under this strategy, an employee at any location can
locate a specific piece of equipment throughout the region, whether on rent
(in which case the estimated date available is provided), in transit, in the
service bay or ready for rent. Once identified, the equipment can be reserved
for a customer through the system and scheduled for delivery (generally within
24 hours) to the job site or store
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<PAGE>
location by the Company's radio-dispatched transportation fleet of trucks,
trailers and independent carriers. The Company is able to further increase
fleet utilization and moderate capital expenditures through its "use-it-or-
lose-it" policy, whereby equipment is deployed to areas where it can provide
the highest return. Through its information systems, the Company generates a
monthly management report showing, for each region, every rental asset that
had an unacceptable utilization rate for the most recent 90-day period. Region
managers have 30 days to correct the problem or the asset may be redeployed to
another region where demand exceeds supply or sold, depending on the age of
the asset. The Company's information systems also track each individual rental
asset and automatically schedule preventative maintenance, frequently in
advance of that suggested by the manufacturer. As a result, the Company
believes it is able to enhance the reliability and extend the useful life of
its rental equipment fleet, and obtain favorable prices when used rental
equipment is sold.
INFORMATION SYSTEMS
Each rental location is networked with a commonly configured PC equipped
with electronic links to all other RSC locations and the Company's central
databases. The Company has developed a comprehensive set of management
information databases covering financial performance, fleet utilization, sales
and pricing. Company management can access these databases 24 hours-a-day at
all locations via the Internet to analyze such items as: (i) price trends by
store, region, salesperson, end-user, equipment category or customer; (ii)
sales trends by store, customer, region or end-user; (iii) fleet utilization
by individual asset or asset class; (iv) financial results and (v) performance
of selected acquisitions and start-up locations. In addition, all rental
transactions are processed in real-time through a centralized AS400 system
located at corporate headquarters, which can be accessed by the employee at
the point of sale to determine equipment availability. Local, regional and
corporate management can access this information to monitor current business
activity, including daily sales volume and fleet availability. As a result of
the IAT Acquisition, the Company also has a proprietary tool management
software system which controls the issuance, return and management of tools
and equipment used by plant personnel and contractors. With the acquisition of
Center, the Company obtained Center's proprietary information system, which
allows Center to operate on a nearly paperless basis. This system
automatically prioritizes equipment for maintenance based on the type, age and
recent use. Repair personnel merely log on to the system to get their
assignments. Simultaneously, the system forwards a list of the required parts
and supplies to the parts department at each Center location, so those parts
and supplies can be waiting for the repair personnel to pick them up. The
Company believes Center's system is scaleable over a large number of
locations, and expects to add it to the Company's existing systems. The
Company believes its use of advanced information technology will continue to
create profit improvement opportunities and improve equipment utilization. The
Company believes that the Year 2000 will not be a material issue with respect
to the Company's information systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
CUSTOMERS
In 1996, the Company rented equipment to over 20,000 customers, with no one
customer accounting for more than 3% of the Company's total revenues, and the
top ten customers representing less than 8% of total revenues. The composition
of RSC's customer base varies widely by location and is determined by several
factors, including the business composition of the local economy. The
Company's customer base consists of the following general categories: (i)
industrial, including manufacturers, petrochemical facilities, large chemical
processing companies, paper mills, entertainment companies and public
utilities; (ii) construction, including contractors; and (iii) government and
homeowners. For 1996, management estimates that industrial, construction and
government/homeowner customers accounted for approximately 45%, 45% and 10%,
respectively, of the Company's total revenues. The Company believes the loss
of any one customer would not have a material adverse effect on the Company's
business. Due to the IAT Acquisition and the formation by the Company of its
Industrial Division, the Company believes industrial customers will account
for an increased portion of the Company's total revenues in the future. See
"--Growth Strategy--Internal Growth."
52
<PAGE>
SALES AND MARKETING
The Company markets its products and services through a sales force of
approximately 375 salespeople as of December 12, 1997 (excluding the employees
of Center and Siems). The Company's field-based sales force calls regularly on
contractors' job sites and industrial facilities with the objective of
building strong business relationships and ensuring that such customers'
rental and supply needs are fulfilled. The Company's store-based sales force
handles telephone inquiries and assists customers at each rental location to
select the proper equipment and supplies to meet their needs. In addition,
through its national accounts program, the Company targets large
petrochemical, industrial and commercial customers in order to develop
national relationships and increase awareness of its IPM program. The
Company's sales force attends RSU in order to develop extensive product
knowledge and refine their customer service skills. See "--Business Strategy--
Superior Customer Service."
The Company supplements its sales and marketing activities through
participation in industry trade shows and conferences, direct mail, and
advertising in local industry publications and the yellow pages in the markets
it serves. In addition, the Company maintains a home page on the Internet
describing the Company's products and services, geographic locations and used
rental equipment for sale. RSC's home page can be found at
"http://www.rentalservice.com." The Company also maintains a Website on the
Internet describing the products and services of IAT at
"http://www.industrial.air.tool.mrop.net."
LOCATIONS
At December 12, 1997, the Company operated 166 rental locations in the
following 21 states: Alabama (12), Arkansas (15), Colorado (6), Delaware (1),
Florida (23), Georgia (21), Illinois (5), Iowa (4), Kansas (4), Louisiana (6),
Maryland (3), Mississippi (11), Missouri (6), Nebraska (1), New Mexico (3),
Oklahoma (1), Pennsylvania (1), South Carolina (5), Tennessee (10), Texas (26)
and Virginia (2). Through the completion of the Valley Acquisition and the
pending Other Acquisitions, the Company will add 20 locations in the following
six states: Arizona (8), Florida (1), Georgia (4), New Mexico (2),
South Carolina (3) and Tennessee (2).
The Company's locations are generally situated in industrial, commercial or
mixed-use zones. The buildings range from approximately 1,500 to 47,000 square
feet, consist of a customer showroom, an equipment service area and storage
facilities, and are located on parcels of one to seven acres of land. Eight of
the Company's rental locations are owned, with the remaining locations subject
to leases with terms expiring from 1997 to 2005, most with options to extend.
In a number of instances, the Company's rental locations are leased from the
former owners of businesses acquired by the Company.
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: large national companies (such as Hertz
Equipment Rental Corporation, Prime Service, Inc., U.S. Rentals, Inc. and BET
Plant Services U.S.A.); regional competitors that operate in a few states;
small, independent businesses with one or two rental locations; and equipment
vendors and dealers who both sell and rent equipment directly to customers.
The industry's fragmented nature has attracted new competitors. Through its
acquisition of Prime Service, Inc., Atlas Copco has entered into the equipment
rental business, and the Company believes equipment manufacturers, such as
Caterpillar and John Deere, and equipment dealers such as Neff, have entered
or may enter equipment rental business as well. The Company also competes
against MRO suppliers, including large companies (such as W.W. Grainger and
McMaster Carr), as well as regional and independent competitors. Certain
competitors have greater financial resources, are more geographically diverse
and 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. In addition, to the extent existing
or future competitors seek to gain or retain market share by reducing prices,
the Company may be required to lower its prices, thereby impacting operating
results.
53
<PAGE>
Existing or future competitors also may seek to compete with the Company for
acquisition candidates which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates.
Management believes such competition has already increased the prices obtained
by businesses acquired by the Company and its competitors. In addition, such
competitors may also compete with the Company for start-up locations, thereby
limiting the number of attractive locations for expansion. Competition in the
rental or MRO business and competition in making acquisitions could have a
material adverse effect on the Company. See "Risk Factors--Competition."
The equipment rental business is highly service-oriented. The success of an
individual rental operator is predicated on its customer handling and problem
solving abilities; quality, condition and servicing of its equipment; and
overall operation of its business. Other components of competition include
location, availability of equipment (both depth and breadth) and price. The
Company believes it competes in the markets it serves primarily on the basis
of responsive customer service, a broad selection of high-quality rental
equipment and supplies, and competitive prices. Relative to smaller companies
with only one or two rental locations, the Company believes RSC benefits from
several competitive advantages, including sophisticated management information
systems, volume purchasing discounts, professional management, a diverse
customer base, a modern and well maintained rental fleet, the ability to
transfer equipment among rental locations to satisfy customer demand, the
ability to service national accounts and national brand identity. In addition,
the Company believes national operators are less sensitive to localized
cyclical downturns and can justify significant investments in professional
management and information systems.
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to a variety of federal, state
and local 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 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 related costs of
investigation and property damage. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. In connection with its
acquisitions and start-up locations, the Company usually obtains Phase I
environmental assessment reports prepared by independent environmental
consultants. A Phase I 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. There can be
no assurance, however, 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 underground and 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 incurs ongoing expenses
associated with the removal of older underground storage tanks and other
activities to come into compliance with environmental laws, and the
performance of appropriate remediation at certain locations. The Company does
not believe such removal and remediation will have a material adverse effect
on the Company's operating results or financial position. The Company also
uses hazardous materials such as solvents to clean and maintain its rental
equipment fleet. In addition, the Company generates and disposes 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 disposed. The Company believes it
54
<PAGE>
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.
TRADE NAMES
The Company currently does business under the name Rental Service
Corporation(SM). The Company believes this brand name identity enables it to
more effectively target national accounts. In certain local markets the
Company also selectively continues to use the name of an acquired business
where there is strong local name recognition and customer loyalty.
EMPLOYEES
At December 12, 1997, the Company employed 1,813 people, including 375
salespeople, 1,355 operational employees and 83 corporate and regional
management employees. With the acquisitions of Center and Siems, the Company
added approximately 440 employees, which are not included in the above totals.
The Company's employees generally are not represented by a union or a
collective bargaining agreement; however, approximately 20 of the Company's
employees are represented by a union. The Company considers its labor
relations to be good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal and financial liability of the Company with
respect to such pending litigation cannot be estimated with certainty but the
Company believes, based on its examination of such matters, that such ultimate
liability will not have a material adverse effect on its business or financial
condition.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information with respect to the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<C> <C> <S>
Martin R. Reid.......... 54 Chairman of the Board and Chief Executive
Officer
Ronald Halchishak....... 50 Senior Vice President of Operations
David P. Lanoha......... 46 Senior Vice President of Operations
David G. Ledlow......... 38 Senior Vice President of Operations
Douglas A. Waugaman..... 39 Senior Vice President of Operations
Robert M. Wilson........ 40 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
David B. Harrington..... 43 Senior Vice President of Human Resources
Bruce A. Lisanti........ 47 Senior Vice President of Marketing
William M. Barnum, Jr. . 43 Director
James R. Buch........... 44 Director
Christopher A. Laurence. 30 Director
Eric L. Mattson......... 46 Director
Britton H. Murdoch...... 40 Director
John M. Sullivan........ 62 Director
</TABLE>
MARTIN R. REID was elected as a director and Chief Executive Officer of the
Company in June 1994 and became Chairman of the Board in October 1995. Mr.
Reid is a director of Tuboscope Vetco International Corporation ("Tuboscope"),
a provider of oilfield-related inspection and coating services. Mr. Reid
served as Chief Executive Officer of Tuboscope from May 1991 to October 1993
and as Chairman of the Board of Directors from October 1990 to April 1996.
From September 1986 to June 1990, Mr. Reid was Chief Executive Officer of
Eastman Christensen Co., a provider of oil and gas drilling systems. Mr. Reid
was also Vice Chairman of Eastman Christensen Co. from August 1989 to June
1990. Mr. Reid is a director of Cobblestone Holdings, Inc. and Cobblestone
Golf Group, Inc.
RONALD HALCHISHAK joined the Company in October 1991 as Vice President of
Purchasing and Director of Safety and became Region Manager for California in
1994. He was appointed Regional Vice President of Operations in January 1995
and was promoted to Senior Vice President of Operations in December 1996.
Prior to joining the Company, Mr. Halchishak worked for 13 years at Hertz
Equipment Corporation in various positions, including Director of European
Operations and Region Manager of the Midwest Division.
DAVID P. LANOHA joined the Company as Senior Vice President of Operations in
conjunction with the Center Acquisition. Prior to joining the Company, Mr.
Lanoha served in various capacities at Center, most recently as Chairman of
the Board from October 1989 to December 1997 and President from May 1984 to
October 1989.
DAVID G. LEDLOW joined the Company in conjunction with the acquisition of
Walker Jones Equipment, Inc. ("Walker Jones") in 1992. Mr. Ledlow had been
employed by Walker Jones since 1982, serving most recently as its Vice
President of Marketing. Mr. Ledlow was promoted to Regional Vice President of
Operations of the Company in February 1993 and to Senior Vice President of
Operations in December 1996.
DOUGLAS A. WAUGAMAN has served as Senior Vice President of Operations of the
Company since April 1997. From January 1994 through April 1997, Mr. Waugaman
served as Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company. From June 1993 until joining the Company, Mr. Waugaman served as
Operations Manager for Plastiglide Manufacturing Corporation, a subsidiary of
Illinois Tool Works. From September 1991 until June 1993, Mr. Waugaman was
Vice President of Finance for Knapp Communications Corporation, a magazine
publisher. From September 1989 until September 1991, Mr. Waugaman was
Controller for Plastiglide Manufacturing Corporation. Mr. Waugaman is a
Certified Public Accountant and has public accounting experience with Arthur
Andersen and Co.
56
<PAGE>
ROBERT M. WILSON joined the Company in April 1997 as Senior Vice President,
Chief Financial Officer, Secretary and Treasurer. From October 1994 until
joining the Company, Mr. Wilson served as Senior Vice President of Operations,
Finance and Administration for Shade/Allied Inc. From September 1989 through
October 1994, Mr. Wilson served in various positions at Simon Engineering plc,
including Vice President of Finance for the United States holding company and
President of Simon LGI. Mr. Wilson is a Certified Public Accountant and has
public accounting experience with Arthur Andersen and Co.
DAVID B. HARRINGTON joined the Company in June 1997 as Senior Vice President
of Human Resources. Prior to joining the Company, Mr. Harrington worked for 19
years at General Electric ("GE") in various positions, including the most
recent six years as Senior Vice President of Human Resources for GE Capital
Technology Management Services. Mr. Harrington serves on the board of the
Atlanta chapter of the Human Resources Planning Society.
BRUCE A. LISANTI joined the Company in April 1997 as Senior Vice President
of Marketing. From March 1992 until joining the Company, Mr. Lisanti served as
Vice President, Sales and Marketing for Petroleum Information Corporation.
Prior thereto, he served as Vice President, Sales and Marketing for Corporate
Express, National Sales Manager for General Electric Computer Services and in
various positions at Electronic Data Systems.
WILLIAM M. BARNUM, JR. has served as a director of the Company since its
formation in 1992 and served as Chairman of the Board from June 1993 through
October 1995. Mr. Barnum is a general partner of Brentwood Buyout Partners,
L.P. ("BBP"), the general partner of Brentwood RSC Partners, L.P. ("Brentwood
RSC Partners"). Brentwood RSC Partners is a significant stockholder of the
Company. See "Principal Stockholders." Mr. Barnum was an associate at Morgan
Stanley & Co. Incorporated from October 1981 until joining Brentwood
Associates, an affiliate of Brentwood RSC Partners, in July 1984. Mr. Barnum
is a director of Quiksilver, Inc., and several privately held companies.
JAMES R. BUCH has served as a director of the Company since October 1995.
From October 1990 through May 1996, Mr. Buch served as President and Chief
Executive Officer of Evans Rents, Inc. Since April 1997, Mr. Buch has been
Chief Executive Officer of Classroom Holdings, Inc. Previously, he served as
Director of U.S. Operations for Brittania Security Group.
CHRISTOPHER A. LAURENCE has served as a director of the Company since
October 1995. Mr. Laurence is a General Partner of Brentwood Associates and a
member of Brentwood Private Equity LLC. Prior to joining Brentwood Associates
in 1991, Mr. Laurence was an analyst at Morgan Stanley & Co. Incorporated.
ERIC L. MATTSON has served as a director of the Company since December 1996.
Mr. Mattson is and has been Vice President and Chief Financial Officer of
Baker Hughes Incorporated ("BHI") since July 1993. For more than five years
prior to 1993, Mr. Mattson was Vice President and Treasurer of BHI. Mr.
Mattson is also a director of Tuboscope.
BRITTON H. MURDOCH has served as a director of the Company since January
1997. Mr. Murdoch is and has been Managing Director of Wendover Corp., a
privately held company, since October 1996. From 1990 to 1996, Mr. Murdoch was
Vice President and Chief Financial Officer of Airgas, Inc., an industrial gas
distribution and manufacturing company, and from 1987 to 1990, he was Vice
President of Corporate Development of Airgas, Inc.
JOHN M. SULLIVAN has served as a director of the Company since July 1997. He
is presently a director of The Scotts Company, Cardinal Business Media
Holdings, Inc. and Cobblestone Holdings, Inc. From October 1987 to January
1993, Mr. Sullivan was Chairman of the Board and Chief Executive Officer of
Prince Holdings, Inc. ("Prince"). Prior to that and since September 1984, Mr.
Sullivan was President of Prince and Vice President of Chesebrough-Pond's,
Inc.
57
<PAGE>
Messrs. Reid, Waugaman and Barnum were also directors and/or executive
officers of RHI at the time RHI filed its prepackaged bankruptcy plan under
Chapter 11 of the United States Bankruptcy Code. See "Risk Factors--RHI's
Bankruptcy; Increase in Indebtedness."
The Board of Directors presently consists of seven members, including four
independent directors. Directors of the Company serve until their successors
are elected and qualified or until the director resigns or is removed.
Officers of the Company serve at the discretion of the Company's Board of
Directors. There are no family relationships among executive officers or
directors of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has the following standing committees: the Audit Committee, the
Compensation Committee and the Acquisition Committee. The Audit Committee was
established on August 20, 1996 to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the scope and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Audit Committee consists of Messrs. Buch and Murdoch.
The Compensation Committee was established on December 5, 1996 to establish
remuneration levels for executive officers of the Company and implement the
Company's stock option plans and any other incentive programs. The
Compensation Committee consists of Messrs. Mattson and Murdoch. The Audit
Committee and the Compensation Committee each met one time during 1996. The
Acquisition Committee was established on September 30, 1997 to approve
acquisitions by the Company in which the consideration to be paid by the
Company is $10 million or less. The Acquisition Committee consists of Messrs.
Reid and Laurence. As of the date of this Prospectus, the Company does not
have a committee responsible for reviewing and recommending candidates for
nomination to the Board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to December 5, 1996, the Company had no compensation committee or
other committee of the Board performing similar functions. Accordingly,
decisions concerning compensation of executive officers were made by the
entire Board. Other than Martin R. Reid, there were no officers or employees
of the Company who participated in deliberations concerning such compensation
matters. Mr. Reid was, until April 1996, an executive officer of Tuboscope,
and he currently serves on the Executive Committee of the Board of Directors
of Tuboscope, which is responsible for Tuboscope's compensation policies. Eric
L. Mattson, a director of the Company, is a director of Tuboscope.
COMPENSATION OF DIRECTORS
The Company did not pay any fees or remuneration to directors for their
service on the Board or any Board committee in 1996; however, the Company
reimbursed directors for their out-of-pocket expenses incurred in connection
with attending meetings of the Board. In addition, during 1996, Mr. Buch was
granted stock options under the 1995 Plan (as defined) in connection with his
election to the Board.
Effective January 1, 1997, in addition to reimbursement for out-of-pocket
expenses, all non-employee members of the Board will receive $10,000 per year
(payable $2,500 per quarter) as compensation for serving on the Board, plus
$1,500 for attendance at each Board meeting and $500 for attendance at each
committee meeting. Each committee chairman will receive an additional $1,500
per year. All non-employee directors receive non-qualified stock options under
the 1996 Plan (as defined) as described under "Equity Participation Plans."
58
<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the General Corporation Law of
the State of Delaware. The provision has no effect on any non-monetary
remedies that may be available to the Company or its stockholders, nor does it
relieve the Company or its directors from compliance with federal or state
securities laws. The Bylaws of the Company generally provide that the Company
shall indemnify, to the fullest extent permitted by law, any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities,
judgments, fines and amounts paid in settlement actually incurred by such
person in connection with such Proceeding. The Company has entered into, or
intends to enter into, agreements to provide indemnification for its directors
and executive officers in addition to the indemnification provided for in the
Bylaws. These agreements, among other things, will indemnify the Company's
directors and executive officers for certain expenses (including attorney's
fees), and all losses, claims, liabilities, judgments, fines and settlement
amounts incurred by such persons arising out of or in connection with their
service as a director or officer of the Company to the fullest extent
permitted by applicable law. In addition, the Company has obtained director
and officer liability insurance that insures the Company's directors and
officers against certain liabilities.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the other
executive officers of the Company whose salary and bonus amounts exceeded
$100,000 (collectively, the "Named Executive Officers") for all services
rendered in all capacities to the Company during the fiscal year ended
December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------- LONG-TERM
NAME AND PRINCIPAL ALL OTHER COMPENSATION
POSITION SALARY ($) BONUS ($)(1) COMPENSATION ($) OPTIONS (#)
------------------ ---------- ------------ ---------------- ------------
<S> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... 294,231 84,375 5,641(2) --
Douglas A. Waugaman
Senior Vice President
of Operations......... 155,923 42,900 7,149(3) --
Ronald Halchishak
Senior Vice President
of Operations......... 150,000 100,000 920(2) 71,250
David G. Ledlow
Senior Vice President
of Operations......... 117,692 36,709 4,200(4) 71,250
</TABLE>
- --------
(1) The amount of bonus presented in this table for 1996 represents the bonus
earned in 1995, which was paid during 1996. Bonuses earned with respect to
1996 were as follows: Mr. Reid, $300,000; Mr. Waugaman, $200,000; Mr.
Halchishak, $75,000 and Mr. Ledlow, $75,000. Such 1996 bonuses were paid
during March 1997.
(2) Consists of an automobile allowance.
(3) Consists of an automobile allowance ($2,175) and insurance premiums paid
by the Company ($4,974) for life insurance and disability policies
covering Mr. Waugaman.
(4) Consists of relocation expenses reimbursed by the Company.
59
<PAGE>
Stock Options Granted in Fiscal 1996. The following table sets forth
information concerning individual grants of stock options made by the Company
during the fiscal year ended December 31, 1996 to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING PERCENT OF TOTAL APPRECIATION FOR
OPTIONS OPTIONS GRANTED EXERCISE OR OPTION TERM
GRANTED TO EMPLOYEES BASE PRICE ---------------------
NAME (#) IN FISCAL YEAR ($/SH) EXP. DATE 5% ($) 10% ($)
---- ---------- ---------------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... -- -- -- -- -- --
Douglas A. Waugaman
Senior Vice President
of Operations.......... -- -- -- -- -- --
Ronald Halchishak
Senior Vice President 11,250(1) 5.4% $14.11 2006 $ 99,829 $ 252,987
of Operations.......... 60,000(2) 28.7% $21.00 2006 $ 792,407 $ 2,008,115
David G. Ledlow
Senior Vice President 11,250(1) 5.4% $14.11 2006 $ 99,829 $ 252,987
of Operations.......... 60,000(2) 28.7% $21.00 2006 $ 792,407 $ 2,008,115
</TABLE>
- --------
(1) Such options vest equally over three years on April 1, 1997, 1998 and 1999.
(2) Such options vest equally over four years on October 22, 1997, 1998, 1999
and 2000.
Aggregated Option Exercises. The following table sets forth information (on
an aggregated basis) concerning each exercise of stock options during the year
ended December 31, 1996 by each of the Named Executive Officers and the year-
end value of unexercised options.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS
SHARES END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... -- -- -- -- -- --
Douglas A. Waugaman
Senior Vice President
of Operations.......... -- -- -- -- -- --
Ronald Halchishak
Senior Vice President
of Operations.......... 5,580 -- -- 82,410 -- $847,426
David G. Ledlow
Senior Vice President
of Operations.......... 4,725 -- 855 82,410 $23,504 $847,426
</TABLE>
- --------
(1) Options are "in-the-money" at the fiscal year end if the fair market value
(based on the closing price of the Company's Common Stock on Nasdaq on
December 31, 1996 of $27.50 per share, less the exercise price) of the
underlying securities on such date exceeds the exercise or base price of
the option.
60
<PAGE>
401(K) PLAN
The Company maintains a 401(k) Retirement Savings Plan (the "401(k) Plan")
to provide retirement and other benefits to employees of the Company and to
permit employees a means to save for their retirement. 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.
Subject to legal limitations, participants may elect, by salary reduction,
to have 401(k) Plan contributions of 2% to 16% of their compensation made to
their accounts. 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 or six months of continuous
employment 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.
Participants in the 401(k) Plan always have a 100% vested and nonforfeitable
interest in the value of their 401(k) contributions. Participants become
vested in the Company's profit sharing and matching contributions based on a
graded 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.
EQUITY PARTICIPATION PLANS
The Company currently maintains two plans, the Stock Option Plan for Key
Employees (the "1995 Plan") and the 1996 Equity Participation Plan (the "1996
Plan"), pursuant to which certain employees or directors may obtain options or
other awards that enable them to participate in the Company's equity. The
Board adopted the 1996 Plan on December 5, 1996, and the 1996 Plan was
approved by the Company's stockholders on February 5, 1997. The principal
purposes of the 1996 Plan are to provide incentives for officers, directors,
key employees and consultants of the Company and its subsidiaries through
granting options, restricted stock and other awards that stimulate the
personal and active interest of such persons in the Company's development and
financial success and induce them to remain in the Company's service. In
addition to awards made to officers, key employees or consultants, the 1996
Plan provides for the granting of options ("Director Options") to the
Company's independent non-employee directors pursuant to a formula. The 1995
Plan is maintained for the benefit of certain employees of the Company for
similar purposes.
The 1995 Plan provides that the Board or a committee appointed by the Board
(in either case, the "1995 Plan Committee") may grant non-transferable
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to
key employees. The 1995 Plan Committee has the full authority and discretion,
subject to the terms of the 1995 Plan, to determine those individuals who are
eligible to be granted options and the amount and type of such options. Terms
and conditions of options are set forth in written option agreements. An
aggregate of up to 324,000 shares of Common Stock are issuable under the 1995
Plan, however, as of November 30, 1997, only 1,860 of these shares were
available for future stock option grants.
The 1996 Plan is administered by the Compensation Committee or a
subcommittee thereof (the "Committee") with respect to grants to employees or
consultants of the Company and by the full Board with respect to Director
Options. Subject to the terms and conditions of the 1996 Plan, the Committee
or the Board, as applicable, has the authority to select the persons to whom
awards are to be made, to determine the number of shares to be subject thereto
and the terms and conditions thereof, and to make all other determinations and
to take all other actions necessary or advisable for the administration of the
1996 Plan.
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The 1996 Plan provides that the Committee may grant or issue stock options,
stock appreciation rights ("SARs"), restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments, other stock related benefits
and other awards (collectively, "Awards"), or any combination thereof. Each
Award will be set forth in a separate agreement with the person receiving the
Award. Under the 1996 Plan, not more than 1,000,000 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise or vesting of any Awards. Furthermore, the maximum number of shares
which may be subject to options or SARs granted under the 1996 Plan to any
individual in any calendar year cannot exceed 200,000. As of November 30,
1997, 362,438 shares of Common Stock were available for future Awards under
the 1996 Plan.
Awards under the 1996 Plan may be granted to (i) individuals who are then
officers or other employees of the Company or any of its present or future
subsidiaries who are determined by the Committee to be key employees and (ii)
consultants of the Company selected by the Committee for participation in the
1996 Plan. Approximately 60 officers and other employees are currently
eligible to participate in the 1996 Plan. On February 26, 1997, Martin R. Reid
was granted options to purchase 200,000 shares and Douglas A. Waugaman was
granted options to purchase 100,000 shares. In addition, non-employee
directors of the Company are granted NQSOs by the Board under the 1996 Plan.
On February 26, 1997, Director Options to purchase an aggregate of 61,000
shares were granted to the Company's non-employee directors. During the term
of the 1996 Plan and pursuant to a formula, (a) each non-employee director is
automatically granted an option to purchase 10,000 shares of Common Stock on
the date of his initial election and (b) each then-current non-employee
director is automatically granted a NQSO to purchase 2,500 shares of Common
Stock at each subsequent annual meeting at which he is reelected to the Board.
On April 28, 1997, Robert M. Wilson and Bruce A. Lisanti were each granted
options to purchase 75,000 shares. On June 30, 1997, David B. Harrington was
granted options to purchase 25,000 shares.
EXECUTIVE INCENTIVE BONUS PLAN
The Company maintains a Corporate Management Bonus Plan (the "Management
Bonus Plan") for key corporate employees. The purpose of the Management Bonus
Plan is to offer incentives to key management of the Company so as to (i)
reward them for achieving financial goals and (ii) further the alignment of
interests of key management with the Company's stockholders. Bonuses under the
Management Bonus Plan are based on achieving certain earnings per share
objectives. Each participant's bonus award is calculated as a percentage of
base salary, and generally ranges from 20% to 30% of base salary.
In addition, the Company maintains Region Manager and General Manager Bonus
Plans (the "Operations Bonus Plan"). The Operations Bonus Plan is designed to
provide incentives to operations management to maintain a high level of
profitability and asset utilization and to achieve the Company's financial
goals in their individual market. Bonuses under the Operations Bonus Plan are
based on the degree to which region or individual location operating profit
objectives are met and generally range from 20% to 75% of the participant's
base salary if financial targets are achieved. If financial targets are
exceeded, participants may receive an additional bonus based on incremental
regional or store profit.
Bonuses under the Management Bonus Plan and the Operations Bonus Plan are
paid semi-annually. The first payment is made after finalization of the first
six months results, and the amount of the first payment is 50% of the bonus
earned for that six months, with the remainder of the bonus to be paid at year
end. The second payment is calculated after year end audited financial
statements are finalized, and the amount of the second payment is the total
bonus paid less the amount paid for the first six-month period.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1997, the Company adopted its Employee Qualified Stock Purchase Plan (the
"QSP Plan"). In general, the QSP Plan authorizes employees of the Company and
its subsidiaries to purchase shares of the Company's Common Stock, through
payroll deductions, at a purchase price of 85% of the fair market value of
such shares.
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The QSP Plan is intended to help the Company attract and retain experienced
and capable persons who can make significant contributions to the further
growth and success of the Company and to align further the interests of such
persons with those of the Company's stockholders.
The QSP Plan provides that an aggregate of up to 250,000 shares of the
Company's Common Stock may be issued thereunder. The QSP Plan also provides
for appropriate adjustments in the number and kind of shares subject to the
plan and to outstanding purchase rights in the event of a stock split, stock
dividend or certain other similar changes in the Company's Common Stock and in
the event of a merger, reorganization, consolidation or certain other types of
recapitalizations of the Company.
Each employee of the Company who has been employed by the Company for not
less than one year and who is customarily employed by the Company for more
than 20 hours per week and more than five months per calendar year is eligible
to participate in the QSP Plan. The Company presently has approximately 700
employees who are eligible to participate in the QSP Plan.
The per share exercise price of each purchase right shall be an amount equal
to the lesser of 85% of the fair market value of a share of Common Stock on
the first day of the Offering Period in which the eligible employee began
participating in the QSP Plan or 85% of the fair market value of a share of
Common Stock on the date of exercise of an installment of the purchase right.
The QSP Plan commenced on July 1, 1997.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock outstanding as of November 30, 1997
by: (i) each person known by the Company to own beneficially 5% or more of any
class of the Company's voting securities; (ii) each director and Named
Executive Officer of the Company; and (iii) all directors and executive
officers of the Company as a group. Except as otherwise indicated, each
stockholder listed below has informed the Company that such stockholder has
(i) sole voting and investment power with respect to such stockholder's shares
of stock, except to the extent that authority is shared by spouses under
applicable law, and (ii) record and beneficial ownership with respect to such
stockholder's shares of stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER
SHARES BENEFICIALLY THE FULL EXERCISE
OWNED PRIOR TO THE PERCENTAGE OF THE OVER-
OFFERING(1) BENEFICIALLY ALLOTMENT OPTION(1)(3)
--------------------- OWNED AFTER --------------------------
NAME NUMBER PERCENT OFFERING(1)(2) NUMBER PERCENT
- ---- ----------- --------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Brentwood RSC Partners,
L.P.(4).................... 1,235,945 8.2% 6.5% 1,235,945 6.4%
William M. Barnum,
Jr.(4)(5).................. 1,235,945 8.2 6.5 1,235,945 6.4
Frederick J. Warren(4)...... 1,235,945 8.2 6.5 1,235,945 6.4
David H. Wong(4)............ 1,235,945 8.2 6.5 1,235,945 6.4
Denver Investment Advisors
LLC(6)..................... 892,100 5.9 4.7 892,100 4.6
Thomas Foster............... 233,034 1.6 1.2 163,124 *
Equipment Lessors Inc. ..... 102,432 * * 71,702 *
UST Private Equity Investors
Fund Inc. ................. 47,097 * * 32,968 *
Martin R. Reid(5)(7)(8)..... 148,022 1.0 * 103,615 *
Douglas A.
Waugaman(5)(7)(8).......... 58,806 * * 58,806 *
Ronald Halchishak(5)(7)..... 32,800 * * 32,800 *
David G. Ledlow(5)(7)....... 27,778 * * 27,778 *
James R. Buch(5)(7)......... 3,600 * * 3,600 *
Britton H. Murdoch(5)(9).... 1,000 * * 1,000 *
David B. Harrington(5)(7)... -- -- -- -- --
David P. Lanoha(10)......... -- -- -- -- --
Christopher A.
Laurence(4)(5)............. -- -- -- -- --
Bruce A. Lisanti(5)(7)...... -- -- -- -- --
Eric L. Mattson(5)(11)...... -- -- -- -- --
John M. Sullivan(5)(7)...... -- -- -- -- --
Robert M. Wilson(5)(7)...... -- -- -- -- --
All directors and executive
officers as a group (13
persons)(4)(5)(7)(8)(9)(11). 1,507,951 10.1 7.9 1,463,544 7.5
</TABLE>
- -------
*Less than 1.0%.
(1) A person is deemed as of any date to have "beneficial ownership" of any
security that such person has a right to acquire within 60 days after
such date. Shares that each identified stockholder has the right to
acquire within 60 days of the date of the table set forth above are
deemed to be outstanding in calculating the percentage ownership of such
stockholder, but are not deemed to be outstanding as to any other person.
(2) Assumes (i) the persons in the table do not purchase shares in the
Offering and (ii) no exercise of the U.S. Underwriters' overallotment
option.
(3) The Common Stock to be sold pursuant to the exercise of the U.S.
Underwriters' overallotment option consists of: 440,824 shares to be
issued and sold by the Company, 44,407 shares to be sold by Martin R.
Reid, 69,910 shares to be sold by Thomas Foster, 30,730 shares to be sold
by Equipment Lessors Inc. and 14,129 shares to be sold by UST Private
Equity Investors Fund Inc. If the U.S. Underwriters' overallotment option
is not exercised, the Selling Stockholders will beneficially own the same
number of shares before and after the Offering.
(4) Mr. Barnum, a director of the Company, and Messrs. Warren and Wong are
general partners of BBP, the general partner of Brentwood RSC Partners;
accordingly, Messrs. Barnum, Warren and Wong may be deemed to be the
beneficial owners of the shares owned by BBP and for purposes of this
table they are included. Messrs. Barnum,
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Warren and Wong disclaim beneficial ownership of such shares. The address
of Brentwood RSC Partners, Mr. Barnum, Mr. Warren, Mr. Wong and Mr.
Laurence is 11150 Santa Monica Boulevard, Suite 1200, Los Angeles,
California 90025.
(5) Excludes shares issuable upon exercise of options that are not
exercisable within 60 days of the date of the table set forth above, as
follows: Mr. Barnum--10,000 shares; Mr. Reid--200,000 shares; Mr.
Waugaman--100,000 shares; Mr. Halchishak--55,290 shares; Mr. Ledlow--
55,503 shares; Mr. Buch--6,400 shares; Mr. Murdoch--10,000 shares; Mr.
Harrington--25,000 shares; Mr. Laurence--10,000 shares; Mr. Lisanti--
75,000 shares; Mr. Mattson--10,000 shares; Mr. Sullivan--10,000 shares;
and Mr. Wilson--75,000 shares.
(6) Based on a Form 13F filed on August 8, 1997. In such Form 13F, Denver
Investment Advisors LLC reported that it owned a total of 892,100 shares,
that it had sole investment discretion with respect to 880,800 shares,
that it shared investment discretion with respect to 7,300 shares, that
it had sole voting authority with respect to 582,200 shares and that it
had no voting authority with respect to 305,900 shares. The address of
Denver Investment Advisors is 1225 17th Street, 26th Floor, Denver,
Colorado 80202.
(7) The address of such person is c/o Rental Service Corporation, 14505 N.
Hayden Road, Suite 322, Scottsdale, Arizona 85260.
(8) Includes shares subject to vesting that may be repurchased by the Company
if they fail to vest.
(9) The address of such person is c/o Wendover Corporation, 354 W. Lancaster
Avenue, Haverford, PA 19041.
(10) Mr. Lanoha did not become an officer of the Company until December 2,
1997. His address is c/o Center Rental & Sales, 11250 East 40th Avenue,
Denver, Colorado 60239.
(11) The address of such person is c/o Baker Hughes Incorporated, 3900 Essex
Lane, Suite 1200, Houston, Texas 77027.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to a Corporate Development and Administrative Services Agreement
(the "Services Agreement"), the Company, prior to its initial public offering
in September 1996, paid BBP a monitoring fee in connection with management,
consulting and financial advisory services equal to one percent (1%) per annum
of the aggregate amount of debt and equity investment in the Company of or by
BBP and any persons or entities associated with BBP (collectively, the
"Brentwood Entities"), and investors in any of the Brentwood Entities, plus
reimbursement of customary costs and expenses. In 1996, the Company paid BBP a
monitoring fee of $235,000 pursuant to the Services Agreement. From time to
time, BBP has also received investment banking fees from the Company in
connection with the Company's acquisitions, calculated at 1.5% of the total of
the purchase price plus acquisition costs and net capital expenditures.
Investment banking fees paid to BBP totaled $388,000 during 1996 and $0 for
the nine months ended September 30, 1997. The Company's obligation to pay such
monitoring and investment banking fees terminated upon completion of its
initial public offering. Mr. Barnum, a general partner of BBP, who also serves
as a director of the Company, does not receive additional compensation from
BBP for service as a director.
OTHER ARRANGEMENTS
The Company and Mr. Waugaman are parties to a Separation and Stock Purchase
Agreement dated July 25, 1995 (the "Waugaman Purchase Agreement"). Pursuant to
the Waugaman Purchase Agreement, if Mr. Waugaman's employment is terminated
without cause or if he is not offered a substantially similar position with a
successor entity following a change of control, he will be entitled to
severance pay equal to nine months base salary. Mr. Waugaman has agreed that
in consideration of such severance benefits, he will not compete with the
Company for a period of nine months if his employment is terminated other than
for cause. In addition, pursuant to an oral arrangement supplementing the
Waugaman Purchase Agreement, RSC has purchased a $500,000 life insurance
policy under which Mr. Waugaman's wife is the beneficiary and a disability
policy for Mr. Waugaman.
The Company has entered into a severance agreement with each of Messrs.
Halchishak, Harrington, Ledlow, Lisanti and Wilson providing for certain
benefits upon termination of employment either by the Company without cause or
by such named executive officer due to a reduction in base salary and benefits
(other than across the board salary cuts for employees at such named executive
officer's level or changes in benefits). These benefits include a lump sum
severance payment equal to 100% of such named executive officer's base salary,
plus a pro rata portion of the current-year bonus opportunity, plus life,
disability, accident and group health insurance benefits substantially similar
to those received by such named executive officer immediately prior to
termination for a twelve (12) month period. In addition, all stock options
granted prior to 1996, all stock options that are scheduled to vest in the
year of termination and one-third of all other stock options held by him, if
any, shall become vested and exercisable effective as of the day immediately
prior to the date of termination of such named executive officer. As
consideration for these benefits, each of Messrs. Halchishak and Ledlow agreed
that during the term of the severance agreement and for twenty-four (24)
months after termination of employment for any reason they would not solicit
any customers of the Company or hire or offer employment to any employee of
the Company. Messrs. Harrington, Lisanti and Wilson agreed that during the
term of the severance agreement and for twelve (12) months after termination
of employment for any reason they would not solicit any customers of the
Company or hire or offer employment to any employee of the Company. The
severance agreements with Messrs. Halchishak and Ledlow will continue in
effect through December 31, 2001, those with Messrs. Lisanti and Wilson will
continue in effect through April 2000 and that with Mr. Harrington will
continue in effect through June 2000.
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FUTURE TRANSACTIONS
The Company has adopted a policy that it will not enter into any material
transaction in which a Company director or officer has a direct or indirect
financial interest, unless the transaction is determined by the Company's
Board of Directors to be fair to the Company or is approved by a majority of
the Company's disinterested directors or by the Company's stockholders, as
provided for under Delaware law. In addition, the Company's debt instruments
generally prohibit the Company from entering into any affiliate transaction on
other than arm's length terms.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation authorizes 40,000,000 shares of Common
Stock, par value $.01 per share, and 500,000 shares of Preferred Stock, par
value $.01 per share. As of December 12, 1997, no shares of Preferred Stock
and 15,488,153 shares of Common Stock were issued and outstanding, 877,241
shares of Common Stock were issuable upon exercise of outstanding options,
614,298 shares of Common Stock were reserved for issuance pursuant to the
Company's stock option and stock purchase plans and up to 415,933 shares of
Common Stock were reserved for issuance in connection with the Company's
acquisitions of IAT, Foxx, Central States and Center. In addition, upon
completion of the Valley Acquisition and the pending Other Acquisitions, the
Company expects to issue up to 413,462 additional shares of Common Stock.
The discussion below describes the capital stock of the Company as it will
exist upon the closing of this Offering, unless otherwise noted. In addition,
the discussion below does not purport to be complete, and is subject to and
qualified in its entirety by reference to the Certificate of Incorporation and
Bylaws of the Company, forms of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Board of Directors of the Company, in its sole discretion, may issue
Common Stock from the authorized and unissued shares of 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. Accordingly, the
holders of a majority of the outstanding shares of Common Stock can elect all
the directors if they choose to do so. 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. 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 fix the number of shares of any series of
preferred stock and to designate for issuance up to 500,000 shares of
preferred stock, par value $.01 per share, in such number of series and with
such rights, preferences, privileges and restrictions (including without
limitation voting rights) as the Board of Directors may from time to time
determine. Issuance of preferred stock, while providing flexibility in
connection with possible acquisitions, may
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<PAGE>
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 shares of preferred stock may also have
the effect of preventing or delaying a change in control of the Company
without further action by the stockholders and could make removal of present
management of the Company more difficult.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
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 two-thirds
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
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."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have outstanding an
aggregate of 19,488,153 shares of Common Stock (19,928,977 shares if the U.S.
Underwriters' overallotment option is exercised in full). All of the shares
sold in the Offering will be freely tradable by persons other than affiliates
of the Company which will be subject to the resale limitations of Rule 144
adopted under the Securities Act.
REGISTRATION RIGHTS
Pursuant to the Stockholders' Agreement, certain of the Company's
stockholders have been granted piggyback registration rights with respect to
Common Stock owned by such stockholders. Such piggyback registration rights
may be exercised by such stockholders, subject to the 90-day lock-up period
described under "Underwriters," on each occasion after the Offering that the
Company proposes to register any public offering
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<PAGE>
of shares of its capital stock under the Securities Act (other than with
respect to a registration of (i) securities to be offered and sold by the
Company pursuant to an employee benefit plan, dividend or reinvestment plan,
or other similar plan, (ii) debt securities of the Company, (iii) preferred
stock of the Company or (iv) securities for the purpose of consummating any
acquisition by the Company). In addition, the Company has granted similar
piggyback registration rights with respect to shares issued as a portion of
the consideration for certain pending and completed acquisitions.
Upon the consummation of the Offering, there will be 3,028,432 shares of
Common Stock (2,869,256 shares if the U.S. Underwriters' overallotment option
is exercised in full) subject to either piggyback or demand registration
rights. The Company is required to bear substantially all expenses of all such
registrations, except for underwriting discounts or commissions and fees and
disbursements of counsel for any stockholder; provided, however, the Company
is required to pay the reasonable fees and disbursements of one counsel for
all holders of Common Stock subject to demand registration rights. The Company
has reserved an aggregate of 1,574,000 shares of Common Stock for issuance
pursuant to the 1995 Plan, the 1996 Plan and the QSP Plan (collectively, the
"Plans"). As of the date hereof, the Company has issued options to purchase an
aggregate of 941,792 shares of Common Stock (excluding options which have been
cancelled) under the 1995 Plan and the 1996 Plan, of which options for 64,551
shares have been exercised. To the extent not held by affiliates or subject to
a lock-up agreement, shares of Common Stock issued under the Plans will be
available for sale in the public market without restriction. See "Management."
RULE 144
In general, Rule 144, as currently in effect, provides that a person (or
persons whose sales are aggregated) who is an affiliate of the Company or who
has beneficially owned shares which are issued and sold in reliance upon
exemptions from registration under the Securities Act ("Restricted Shares")
for at least one year is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent (1%) of the
then outstanding shares of Common Stock (beginning on the 91st day immediately
after this Offering) or the average weekly trading volume in the Common Stock
during the four calendar weeks preceding the filing of a notice of intent to
sell. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not deemed to have
been an "affiliate" of the Company at any time during the three months
preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, would be entitled to sell such shares under Rule 144(k)
without regard to volume limitations, manner-of-sale provisions, notice
requirements or the availability of current public information about the
Company. The Company, the Selling Stockholders, the Company's directors and
executive officers and certain of the Company's other present stockholders
have, subject to certain exceptions in the case of the Company, agreed that
they will not, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of or transfer any shares of capital stock of the Company,
or any security convertible into, or exercisable or exchangeable for, such
capital stock, for a period of 90 days after the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated. See
"Underwriters."
No predictions can be made as to the effect, if any, that sales of Common
Stock under Rule 144, pursuant to a registration statement or otherwise, or
the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock (including shares issued upon the exercise of stock options)
in the public market, or the perception that such sales could occur, could
adversely affect the prevailing market price and could impair the Company's
future ability to raise capital through an offering of its equity securities.
See "Risk Factors--Shares Eligible for Future Sale; Registration Rights."
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UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement, dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below (the "Underwriters"), for whom Morgan Stanley & Co.
Incorporated and William Blair & Company, L.L.C. are acting as U.S.
Representatives, and the International Underwriters, for whom Morgan Stanley &
Co. International Limited and William Blair & Company, L.L.C. are acting as
International Representatives, have severally agreed to purchase, and the
Company has agreed to sell to them severally, the respective number of shares
of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated.............................. 1,000,000
William Blair & Company, L.L.C. ............................... 1,000,000
BancAmerica Robertson Stephens................................. 120,000
Bear, Stearns & Co. Inc. ...................................... 120,000
BT Alex. Brown Incorporated.................................... 120,000
Deutsche Morgan Grenfell Inc. ................................. 120,000
Donaldson, Lufkin & Jenrette Securities Corporation............ 120,000
Interstate/Johnson Lane Corporation............................ 60,000
Janney Montgomery Scott Inc. .................................. 60,000
Legg Mason Wood Walker, Incorporated........................... 60,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............. 120,000
Raymond James & Associates, Inc. .............................. 60,000
The Robinson-Humphrey Company, LLC............................. 60,000
Smith Barney Inc. ............................................. 120,000
Wheat, First Securities, Inc. ................................. 60,000
----------
Subtotal....................................................... 3,200,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited..................... 400,000
William Blair & Company, L.L.C. ............................... 400,000
----------
Subtotal....................................................... 800,000
----------
Total........................................................ 4,000,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all of the shares of Common Stock offered hereby (other than
those covered by the Underwriters' overallotment option described below) if
any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as defined herein) for the account of anyone
other than a United States or Canadian Person (as defined herein) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to the Shares outside the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement between U.S. and International Underwriters,
each International Underwriter has represented and agreed that, with certain
exceptions: (i) it is not purchasing any Shares for the account of any United
States or Canadian Person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
70
<PAGE>
transactions or to certain other transactions specified in the Agreement
between U.S. and International Underwriters. As used herein, "United States or
Canadian Person" means any national or resident of the United States or
Canada, or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person), and includes any
United States or Canadian branch of a person who is otherwise not a United
States or Canadian Person. All shares of Common Stock to be purchased by the
Underwriters under the Underwriting Agreement are referred to herein as the
"Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from, or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by it
in connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
71
<PAGE>
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the price to public set forth on the cover
page hereof and part to certain dealers at a price that represents a
concession not in excess of $.72 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $.10 a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Common Stock, the offering price and other
selling terms may from time to time be varied by the Representatives.
The Company and certain Selling Stockholders have granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 600,000 additional shares of Common Stock at the
public offering price set forth on the cover page hereof, less underwriting
discounts and commissions. The Underwriters may exercise such option solely
for the purpose of covering overallotments, if any, made in connection with
the offering of the shares of Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares of Common Stock as the number set forth opposite to such
Underwriter's name in the preceding table bears to the total number of shares
of Common Stock set forth opposite to the names of all Underwriters in the
preceding table.
The Company, its executive officers and directors and certain Selling
Stockholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, they will not (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock (provided that such shares or securities are either currently owned by
such person or are acquired in connection with the Offering) or (ii) enter
into any swap or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of such shares of Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, for a
period of 90 days after the date hereof, other than (x) the sale to the
Underwriters of the shares of Common Stock offered hereby or (y) except for
the grant of stock options and purchase rights to employees of the Company
under the 1995 Plan, the 1996 Plan and the QSP Plan, the issuance of shares
upon the conversion or exercise of outstanding options and warrants, the
registration of the shares of Common Stock underlying the QSP Plan and the
issuance of shares in connection with the Center acquisition and other
acquisitions.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with this Offering, creating a short position in the Common Stock
for their own account. In addition, to cover overallotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Common Stock in this Offering, if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company, the Selling Shareholders, and the Underwriters have agreed to
indemnify each other against certain liabilities that may be incurred in
connection with the offering of the Common Stock, including liabilities under
the Securities Act, or to contribute to payments that the other may be
required to make in respect thereof.
Morgan Stanley & Co. Incorporated has provided investment banking services
and financial advisory services to the Company in the past, including acting
as an underwriter of the Company's equity offering in June 1997, for which
Morgan Stanley & Co. Incorporated has received usual and customary fees.
William Blair & Company, L.L.C. has also provided investment banking services
and financial advisory services to the Company in the past, including acting
as lead underwriter of the Company's initial public offering in September 1996
and lead underwriter of the Company's equity offering in June 1997, for which
William Blair & Company, L.L.C. has received usual and customary fees.
72
<PAGE>
CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder, as defined below. As used herein, the term "Non-
U.S. Holder" means a holder that for United States federal income tax purposes
is an individual or entity other than (i) a citizen or individual resident of
the United States, (ii) a corporation or partnership created or organized in
or under the laws of the United States or of any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust if both (A) a U.S. court is
able to exercise primary supervision over the administration of the trust and
(B) one or more U.S. persons have the authority to control all substantial
decisions of the trust. This discussion does not address all aspects of United
States federal income and estate taxes and does not deal with foreign, state
and local consequences that may be relevant to Non-U.S. Holders in light of
their personal circumstances, or to certain types of Non-U.S. Holders which
may be subject to special treatment under United States federal income tax
laws (for example, insurance companies, tax-exempt organizations, financial
institutions and broker-dealers). Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed regulations promulgated thereunder and administrative
and judicial interpretations thereof, all as of the date hereof, and all of
which are subject to change, possibly with retroactive effect. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company does not anticipate paying cash dividends on its capital stock
in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy." In the event, however, that dividends are paid on shares of Common
Stock, dividends paid to a Non-U.S. Holder of Common Stock will be subject to
withholding of United States federal income tax at a 30% rate, or such lower
rate as may be provided by an income tax treaty between the United States and
a foreign country if the Non-U.S. Holder is treated as a resident of such
foreign country within the meaning of the applicable treaty, unless (i) the
dividends are effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States and the Non-U.S. Holder provides
the payor with proper documentation and (ii) if a tax treaty applies, the
dividends are attributable to a United States permanent establishment
maintained by the Non-U.S. Holder. Dividends that are effectively connected
with the conduct of a trade or business within the United States and, if a tax
treaty applies, are attributable to such a United States permanent
establishment, are subject to United States federal income tax on a net income
basis (that is, after allowance for applicable deductions) at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
Dividends paid before January 1, 1999 to an address outside the United
States will be presumed to be paid to a resident of the country of such
address for purposes of the withholding tax rules discussed above (unless the
payor has knowledge to the contrary) and, under the current interpretation of
United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. However, under newly issued Treasury
73
<PAGE>
regulations, in the case of dividends paid after December 31, 1998, a Non-U.S.
Holder generally will be subject to United States withholding tax at a 31%
rate under the backup withholding rules described below, rather than at a 30%
rate or a reduced rate under an income tax treaty, as described above, unless
certain Internal Revenue Service ("IRS") certification procedures (or, in the
case of payments made outside the United States with respect to an offshore
account, certain IRS documentary evidence procedures) are complied with.
Further, in order to claim the benefit of an applicable tax treaty rate for
dividends paid after December 31, 1998, a Non-U.S. Holder must comply with IRS
certification requirements. Certain IRS certification and disclosure
requirements must be complied with in order to be exempt from withholding
under the effectively connected income exemption. The new regulations also
provide special rules for dividend payments made to foreign intermediaries.
U.S. or foreign wholly owned entities that are disregarded for U.S. federal
income tax purposes and entities that are treated as fiscally transparent in
the United States, the applicable income tax treaty jurisdiction, or both.
Prospective investors should consult with their own tax advisers concerning
the effect, if any, of the adoption of these new Treasury regulations on an
investment in the Common Stock.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, and (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-
U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain
provisions of the Code applicable to United States expatriates or (iv) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes at any time within the shorter of the five-
year period preceding such disposition or the period such Non-U.S. Holder held
the Common Stock. A corporation is a "U.S. real property holding corporation"
if the fair market value of the United States real property interests held by
the corporation is 50% or more of the aggregate fair market value of certain
assets of the corporation. The Company believes that it has not been and is
not currently a "U.S. real property holding corporation." If the Company were,
or were to become, a U.S. real property holding corporation, gains realized
upon a disposition of Common Stock by a Non-U.S. Holder which did not directly
or indirectly own more than 5% of the Common Stock during the shorter of the
periods described above generally would not be subject to United States
federal income tax so long as the Common Stock is "regularly traded" on an
established securities market. The Company believes that the Common Stock will
be treated as "regularly traded."
If a Non-U.S. Holder who is an individual falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale of
Common Stock under regular graduated United States federal income tax rates.
If an individual Non-U.S. Holder falls under clause (ii) above, such
individual generally will be subject to a flat 30% tax on the gain derived
from a sale, which may be offset by certain United States capital losses
(notwithstanding the fact that such individual is not considered a resident
alien of the United States). Thus, individual Non-U.S. Holders who have spent
(or expect to spend) more than a de minimis period of time in the United
States in the taxable year in which they contemplate a sale of Common Stock
are urged to consult their tax advisers prior to the sale as to the U.S. tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated
United States federal income tax rates and, in addition, will be subject to
the branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty.
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FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United
States federal estate tax purposes) at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax or other treaty provides otherwise and,
therefore, may be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report annually
to the IRS and to each Non-U.S. Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected with a trade or business in the United
States of the Non-U.S. Holder or withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder is a resident under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply (i) to dividends paid to Non-U.S.
Holders that are subject to the 30% withholding discussed above (or that are
not so subject because a tax treaty applies that reduces or eliminates such
30% withholding) or (ii) before January 1, 1999, to dividends paid to a Non-
U.S. Holder at an address outside of the United States. However, under newly
issued Treasury regulations, in the case of dividends paid after December 31,
1998, a Non-U.S. Holder generally will be subject to backup withholding at a
31% rate, unless certain IRS certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain IRS documentary evidence procedures) are complied with, directly or
through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. Before January 1, 1999, however, if such broker is, for
United States federal income tax purposes, a U.S. person, a controlled foreign
corporation or a foreign person, 50% or more of whose gross income for certain
periods is derived from activities that are effectively connected with the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a Non-U.S. Holder and certain other conditions are met or
(ii) the beneficial owner otherwise establishes an exemption. Further after
December 31, 1998, under the newly issued Treasury regulations referred to
above, information reporting and backup withholding may apply to payments of
the gross proceeds from the sale or redemption of Common Stock effected
through foreign offices of brokers having any of a broader class of
connections with the United States unless certain IRS certification
requirements are complied with. Prospective investors should consult with
their own tax advisers regarding these Treasury regulations, and in particular
with respect to whether the use of a particular broker would subject the
investor to these rules.
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's United States
federal income tax liability provided the required information is furnished to
the IRS.
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<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters in connection with the Offering will be passed upon for the Company by
Latham & Watkins, Los Angeles, California. Certain partners of Latham &
Watkins, members of their families, related persons and others have an
indirect interest in, through a limited partnership, less than 1% of the
Common Stock of the Company. Such persons do not have the power to vote or
dispose of such shares. Certain legal matters in connection with the Offering
will be passed upon for the Underwriters by Shearman & Sterling, New York, New
York.
EXPERTS
The consolidated financial statements and financial statement schedules of
Rental Service Corporation as of December 31, 1995 and 1996, and for each of
the three years in the period ended December 31, 1996, appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing herein.
The consolidated financial statements of Acme Holdings Inc. as of December 31,
1993 and 1994, and for each of the three years in the period ended December
31, 1994, appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing herein. The financial statements of Brute Equipment
Co., d/b/a Foxx Hy-Reach, Inc., as of December 31, 1995 and 1996, and for the
years then ended, appearing in this Prospectus and Registration Statement,
have been audited by McGladrey & Pullen, LLP, independent auditors, as set
forth in their report thereon appearing herein. The combined financial
statements of Industrial Air Tool as of March 31, 1996 and 1997 and for the
years then ended, appearing in this Prospectus and Registration Statement,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing herein. The combined financial statements of
Rent-It-Center, Inc. and Affiliates as of October 31, 1996, and 1997, and for
each of the three years in the period ended October 31, 1997, appearing in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
herein. The financial statements of JDW Enterprises, Inc. d/b/a Valley Rentals
as of December 31, 1996 and for the year then ended, appearing in this
Prospectus and Registration Statement, have been audited by Weintraub &
Morrison, P.C., independent auditors, as set forth in their report thereon
appearing herein. These financial statements and financial statement schedules
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Rental Service Corporation
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets--December 31, 1995 and 1996, and September
30, 1997 (unaudited)................................................... F-4
Consolidated Statements of Operations--for the years ended December 31,
1994, 1995 and 1996,
and for the nine months ended September 30, 1996 and 1997 (unaudited).. F-5
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity
(Deficit)--for the years ended December 31, 1994, 1995 and 1996, and
for the nine months ended September 30, 1997 (unaudited)............... F-6
Consolidated Statements of Cash Flows--for the years ended December 31,
1994, 1995 and 1996,
and for the nine months ended September 30, 1996 and 1997 (unaudited).. F-7
Notes to Consolidated Financial Statements--December 31, 1996, and
September 30, 1997 (unaudited)......................................... F-8
Consolidated Financial Statements of Acme Holdings Inc.
Report of Independent Auditors.......................................... F-27
Consolidated Balance Sheets--December 31, 1993 and 1994, and June 30,
1995 (unaudited)....................................................... F-28
Consolidated Statements of Operations--for the years ended December 31,
1992, 1993 and 1994,
and for the six months ended June 30, 1994 and 1995 (unaudited)........ F-29
Consolidated Statements of Shareholders' Deficit--for the years ended
December 31, 1992, 1993 and 1994, and for the six months ended June 30,
1995 (unaudited) ...................................................... F-30
Consolidated Statements of Cash Flows--for the years ended December 31,
1992, 1993 and 1994,
and for the six months ended June 30, 1994 and 1995 (unaudited)........ F-31
Notes to Consolidated Financial Statements--December 31, 1994, and June
30, 1995 (unaudited)................................................... F-33
Combined Financial Statements of Industrial Air Tool
Report of Independent Auditors.......................................... F-45
Combined Balance Sheets--March 31, 1996 and 1997........................ F-46
Combined Statements of Operations--for the years ended March 31, 1996
and 1997 .............................................................. F-47
Combined Statements of Redeemable Stock and Other Stockholders' and
Partners' Equity--for the years ended March 31, 1996 and 1997 ......... F-48
Combined Statements of Cash Flows--for the years ended March 31, 1996
and 1997 .............................................................. F-49
Notes to Combined Financial Statements--March 31, 1997.................. F-50
Financial Statements of Brute Equipment Co. d/b/a Foxx Hy-Reach
Independent Auditor's Report............................................ F-55
Balance Sheets--December 31, 1995 and 1996, and March 31, 1997
(unaudited)............................................................ F-56
Statements of Operations--for the years ended December 31, 1995 and
1996, and for the three months ended March 31, 1996 and 1997
(unaudited)............................................................ F-57
Statements of Stockholders' Equity--for the years ended December 31,
1995 and 1996, and for the three months ended March 31, 1997
(unaudited) ........................................................... F-58
Statements of Cash Flows--for the years ended December 31, 1995 and
1996, and for the three months ended March 31, 1996 and 1997
(unaudited)............................................................ F-59
Notes to Financial Statements--December 31, 1996, and March 31, 1997
(unaudited)............................................................ F-60
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Financial Statements of Rent-It-Center, Inc. and Affiliates d/b/a
Center Rental and Sales
Report of Independent Auditors.......................................... F-65
Combined Balance Sheets--October 31, 1996 and 1997...................... F-66
Combined Statements of Operations--for the years ended October 31, 1995,
1996 and 1997........................................................... F-67
Combined Statements of Stockholders' and Members' Equity (Deficit)--for
the years ended October 31, 1995, 1996 and 1997 ....................... F-68
Combined Statements of Cash Flows--for the years ended October 31, 1995,
1996 and 1997 ......................................................... F-69
Notes to Combined Financial Statements--October 31, 1997................ F-70
Financial Statements of JDW Enterprises, Inc. d.b.a. Valley Rentals
Independent Auditor's Report............................................ F-79
Balance Sheets--December 31, 1996, and September 30, 1997 (unaudited)... F-80
Statements of Operations--for the year ended December 31, 1996, and for
the nine months ended September 30, 1996 and 1997 (unaudited).......... F-81
Statements of Changes in Stockholders' Equity--for the year ended
December 31, 1996, and for the nine months ended September 30, 1997
(unaudited)............................................................ F-82
Statements of Cash Flows--for the year ended December 31, 1996, and for
the nine months ended September 30, 1996 and 1997 (unaudited).......... F-83
Notes to the Financial Statements--December 31, 1996, and September 30,
1997 (unaudited)....................................................... F-85
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying consolidated balance sheets of Rental
Service Corporation (Company) as of December 31, 1995 and 1996, and the
related consolidated statements of operations, redeemable preferred stock and
common stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Rental Service Corporation at December 31, 1995 and 1996, and the
consolidated 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
Phoenix, Arizona
February 28, 1997
F-3
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents............ $ 1,455,000 $ 1,452,000 $ 4,887,000
Accounts receivable, net of allowance
for doubtful accounts of $1,791,000
and $2,165,000 at December 31, 1995
and 1996, respectively, and
$4,867,000 at September 30, 1997.... 14,427,000 20,856,000 43,694,000
Other receivables and prepaid
expense............................. 2,178,000 3,170,000 3,941,000
Income tax receivable................ -- 1,563,000 1,117,000
Parts and supplies inventories, net
of reserve for obsolescence of
$603,000 and $782,000 at December
31, 1995 and 1996, respectively, and
$1,173,000 at September 30, 1997.... 5,997,000 10,099,000 20,701,000
Assets held for sale (Note 2)........ 16,054,000 -- --
Deferred taxes (Note 10)............. 7,310,000 8,645,000 8,787,000
Rental equipment, principally
machinery, at cost, net of
accumulated depreciation of
$11,747,000 and $24,743,000 at
December 31, 1995 and 1996,
respectively, and $43,892,000 at
September 30, 1997 (Notes 5 and 8).. 52,818,000 116,921,000 229,894,000
Operating property and equipment, at
cost, net (Note 3).................. 10,629,000 20,043,000 30,640,000
Intangible assets, net (Note 4)...... 24,154,000 34,801,000 115,279,000
Other assets, primarily deferred
financing costs, net................ 2,810,000 1,383,000 3,637,000
------------ ------------ ------------
$137,832,000 $218,933,000 $462,577,000
============ ============ ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED
STOCK,
AND COMMON STOCKHOLDERS' EQUITY
---------------------------------
<S> <C> <C> <C>
Accounts payable..................... $ 10,185,000 $ 20,302,000 $ 16,168,000
Payroll and other accrued expenses... 19,839,000 21,540,000 29,461,000
Accrued interest payable............. 771,000 514,000 1,473,000
Income taxes payable (Note 10)....... 220,000 48,000 6,478,000
Deferred taxes (Note 10)............. 9,815,000 12,863,000 12,573,000
Bank debt and long term obligations
(Note 5)............................ 67,910,000 68,526,000 224,504,000
Obligations under capital leases
(Note 8)............................ 645,000 68,000 31,000
------------ ------------ ------------
Total liabilities.................... 109,385,000 123,861,000 290,688,000
Commitments and contingencies (Notes
5, 8 and 12)........................
Redeemable preferred stock,
cumulative, $.01 par value (Note 6):
Authorized shares--350,000
Issued and outstanding shares--
244,805 and none at December 31,
1995 and 1996, respectively, and
none at September 30, 1997........ 28,401,000 -- --
Common stockholders' equity (Note 6):
Preferred stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--
none.............................. -- -- --
Common stock, $.01 par value:
Authorized shares--20,000,000
Issued and outstanding shares--
4,247,730 and 11,376,378 at
December 31, 1995 and 1996,
respectively, and 14,930,784 at
September 30, 1997................ 42,000 114,000 149,000
Additional paid-in capital......... 40,000 93,917,000 159,394,000
Common stock issuable--153,651
shares at September 30, 1997...... -- -- 2,881,000
Retained earnings (deficit)........ (36,000) 1,041,000 9,465,000
------------ ------------ ------------
Total common stockholders' equity.... 46,000 95,072,000 171,889,000
------------ ------------ ------------
$137,832,000 $218,933,000 $462,577,000
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals..... $27,775,000 $47,170,000 $ 94,218,000 $67,742,000 $111,549,000
Sales of parts,
supplies and new
equipment............ 10,800,000 14,621,000 21,919,000 16,450,000 47,119,000
Sales of used
equipment............ 3,240,000 4,126,000 12,217,000 8,903,000 13,664,000
----------- ----------- ------------ ----------- ------------
Total revenues....... 41,815,000 65,917,000 128,354,000 93,095,000 172,332,000
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation......... 16,284,000 27,854,000 55,202,000 40,977,000 57,506,000
Depreciation,
equipment rentals.... 4,020,000 7,691,000 17,840,000 12,375,000 24,493,000
Cost of sales of
parts, supplies and
new equipment........ 7,978,000 10,439,000 15,582,000 11,799,000 36,383,000
Cost of sales of used
equipment............ 2,320,000 2,178,000 8,488,000 5,820,000 9,261,000
----------- ----------- ------------ ----------- ------------
Total cost of
revenues............ 30,602,000 48,162,000 97,112,000 70,971,000 127,643,000
----------- ----------- ------------ ----------- ------------
Gross profit............ 11,213,000 17,755,000 31,242,000 22,124,000 44,689,000
Selling, general and
administrative
expense.............. 4,747,000 6,421,000 12,254,000 9,061,000 13,444,000
Depreciation and
amortization,
excluding equipment
rental depreciation.. 504,000 1,186,000 2,835,000 1,829,000 3,789,000
Amortization of
intangibles.......... 2,078,000 718,000 2,379,000 1,825,000 2,463,000
----------- ----------- ------------ ----------- ------------
Operating income........ 3,884,000 9,430,000 13,774,000 9,409,000 24,993,000
Interest expense, net... 731,000 3,314,000 7,063,000 5,819,000 8,863,000
----------- ----------- ------------ ----------- ------------
Income before income
taxes and extraordinary
items.................. 3,153,000 6,116,000 6,711,000 3,590,000 16,130,000
Provision for income
taxes
(Note 10).............. 1,177,000 2,401,000 2,722,000 1,411,000 7,172,000
----------- ----------- ------------ ----------- ------------
Income before
extraordinary items.... 1,976,000 3,715,000 3,989,000 2,179,000 8,958,000
Extraordinary items,
loss on extinguishment
of debt less applicable
income tax benefit
of $305,000, $822,000
and $386,000 in 1995,
1996 and the nine
months ended
September 30, 1997,
respectively (Note 5).. -- 478,000 1,269,000 1,269,000 534,000
----------- ----------- ------------ ----------- ------------
Net income.............. 1,976,000 3,237,000 2,720,000 910,000 8,424,000
Redeemable preferred
stock accretion........ 1,646,000 1,717,000 1,643,000 1,643,000 --
----------- ----------- ------------ ----------- ------------
Net income (loss)
available to common
stockholders........... $ 330,000 $ 1,520,000 $ 1,077,000 $ (733,000) $ 8,424,000
=========== =========== ============ =========== ============
Earnings (loss) per
common and common
equivalent share:
Income before
extraordinary items.. $ .06 $ .39 $ .33 $ .09 $ .68
Extraordinary items... -- (.09) (.18) (.22) (.04)
----------- ----------- ------------ ----------- ------------
Net income (loss)..... $ .06 $ .30 $ .15 $ (.13) $ .64
----------- ----------- ------------ ----------- ------------
Weighted average common
and common equivalent
shares................. 5,427,728 5,087,790 7,218,041 5,772,636 13,149,622
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
-----------------------------------
TREASURY
SHARES AMOUNT STOCK
-------- ------------ -----------
<S> <C> <C> <C>
Balance at
December 31,
1993............ 253,475 $ 25,956,000 $ --
Issuance of
preferred stock. 2,586 259,000 --
Purchase of
treasury stock.. -- -- (1,177,000)
Redeemable
preferred stock
accretion....... -- 1,646,000 --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1994............ 256,061 27,861,000 (1,177,000)
Issuance of
common stock.... -- -- --
Retirement of
treasury stock.. (11,256) (1,177,000) 1,177,000
Redeemable
preferred stock
accretion....... -- 1,717,000 --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1995............ 244,805 28,401,000 --
Issuance of
preferred stock. 75,000 7,500,000 --
Issuance of
common stock,
net of issuance
costs of
$8,723,000...... -- -- --
Exercise of
stock options... -- -- --
Repurchase of
preferred stock. (319,805) (37,874,000) --
Preferred stock
adjustment...... -- 330,000 --
Repurchase of
common stock
warrants........ -- -- --
Redeemable
preferred stock
accretion....... -- 1,643,000 --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1996............ -- -- --
Issuance of
common stock,
net of issuance
costs of
$3,982,000
(unaudited)..... -- -- --
Issuance of
common stock in
connection with
acquisitions
(unaudited)..... -- -- --
Exercise of
stock options
(unaudited)..... -- -- --
Common stock
issuable in
connection with
acquisitions
(unaudited)..... -- -- --
Net income
(unaudited)..... -- -- --
-------- ------------ -----------
Balance at
September 30,
1997
(unaudited)..... -- $ -- $ --
======== ============ ===========
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------
COMMON STOCK
-------------------------------- ADDITIONAL COMMON RETAINED
TREASURY PAID-IN STOCK EARNINGS
SHARES AMOUNT STOCK CAPITAL ISSUABLE (DEFICIT) TOTAL
----------- --------- ---------- ------------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ 4,675,320 $ 47,000 $ -- $ 52,000 $ -- $(1,380,000) $ (1,281,000)
Issuance of
preferred stock. -- -- -- -- -- -- --
Purchase of
treasury stock.. -- -- (523,000) -- -- -- (523,000)
Redeemable
preferred stock
accretion....... -- -- -- -- -- (1,646,000) (1,646,000)
Net income...... -- -- -- -- -- 1,976,000 1,976,000
----------- --------- ---------- ------------- ---------- ------------ -------------
Balance at
December 31,
1994............ 4,675,320 47,000 (523,000) 52,000 -- (1,050,000) (1,474,000)
Issuance of
common stock.... 278,685 2,000 -- (2,000) -- -- --
Retirement of
treasury stock.. (706,275) (7,000) 523,000 (10,000) -- (506,000) --
Redeemable
preferred stock
accretion....... -- -- -- -- -- (1,717,000) (1,717,000)
Net income...... -- -- -- -- -- 3,237,000 3,237,000
----------- --------- ---------- ------------- ---------- ------------ -------------
Balance at
December 31,
1995............ 4,247,730 42,000 -- 40,000 -- (36,000) 46,000
Issuance of
preferred stock. -- -- -- -- -- -- --
Issuance of
common stock,
net of issuance
costs of
$8,723,000...... 7,094,358 71,000 -- 95,152,000 -- -- 95,223,000
Exercise of
stock options... 34,290 1,000 -- -- -- -- 1,000
Repurchase of
preferred stock. -- -- -- -- -- -- --
Preferred stock
adjustment...... -- -- -- (330,000) -- -- (330,000)
Repurchase of
common stock
warrants........ -- -- -- (945,000) -- -- (945,000)
Redeemable
preferred stock
accretion....... -- -- -- -- -- (1,643,000) (1,643,000)
Net income...... -- -- -- -- -- 2,720,000 2,720,000
----------- --------- ---------- ------------- ---------- ------------ -------------
Balance at
December 31,
1996............ 11,376,378 114,000 -- 93,917,000 -- 1,041,000 95,072,000
Issuance of
common stock,
net of issuance
costs of
$3,982,000
(unaudited)..... 3,000,000 30,000 -- 55,613,000 -- -- 55,643,000
Issuance of
common stock in
connection with
acquisitions
(unaudited)..... 524,655 5,000 -- 9,785,000 -- -- 9,790,000
Exercise of
stock options
(unaudited)..... 29,751 -- -- 79,000 -- -- 79,000
Common stock
issuable in
connection with
acquisitions
(unaudited)..... -- -- -- -- 2,881,000 -- 2,881,000
Net income
(unaudited)..... -- -- -- -- -- 8,424,000 8,424,000
----------- --------- ---------- ------------- ---------- ------------ -------------
Balance at
September 30,
1997
(unaudited)..... 14,930,784 $149,000 $ -- $159,394,000 $2,881,000 $ 9,465,000 $171,889,000
=========== ========= ========== ============= ========== ============ =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 1,976,000 $ 3,237,000 $ 2,720,000 $ 910,000 $ 8,424,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 6,602,000 9,595,000 23,054,000 16,029,000 30,745,000
Extraordinary item..... -- 478,000 1,269,000 1,269,000 534,000
Interest paid in kind.. -- 710,000 1,706,000 1,706,000 --
Provision for losses
on accounts
receivable............ 621,000 1,040,000 1,692,000 989,000 1,789,000
Gain on sale of rental
equipment............. (920,000) (1,948,000) (3,729,000) (3,256,000) (4,403,000)
Changes in operating
assets and
liabilities, net of
effect of business
acquisitions:
Accounts receivable.. (2,834,000) (3,346,000) (5,725,000) (3,393,000) (12,186,000)
Other receivables and
prepaid expenses.... 200,000 (1,182,000) (1,703,000) (3,983,000) (179,000)
Income tax
receivable.......... -- -- (1,563,000) -- 446,000
Intangible assets and
other assets........ (192,000) 1,351,000 379,000 244,000 (105,000)
Parts and supplies
inventories......... (469,000) (1,403,000) (2,444,000) (2,369,000) (1,917,000)
Accounts payable..... 1,599,000 1,866,000 10,077,000 3,532,000 (6,959,000)
Payroll and other
accrued expenses and
related party
payables............ 410,000 (1,000,000) (3,523,000) 1,852,000 (1,738,000)
Accrued interest
payable............. (18,000) 737,000 (257,000) (131,000) 959,000
Income taxes payable. 211,000 (375,000) (172,000) (2,209,000) 6,383,000
Deferred taxes, net.. 223,000 132,000 1,713,000 -- --
------------ ------------ ------------- ------------- -------------
Net cash provided by
operating activities... 7,409,000 9,892,000 23,494,000 11,190,000 21,793,000
INVESTING ACTIVITIES
Acquisitions of rental
operations, net of cash
acquired............... (20,000) (42,057,000) (27,270,000) (19,858,000) (122,723,000)
Cash purchases of rental
equipment and operating
property and equipment. (17,043,000) (23,632,000) (86,842,000) (60,559,000) (117,759,000)
Proceeds from sale of
used equipment......... 3,240,000 4,126,000 12,695,000 8,903,000 13,664,000
Proceeds from (additions
to) assets held for
sale................... -- 2,652,000 16,668,000 16,054,000 --
------------ ------------ ------------- ------------- -------------
Net cash used in
investing activities... (13,823,000) (58,911,000) (84,749,000) (55,460,000) (226,818,000)
FINANCING ACTIVITIES
Proceeds from bank debt. 20,557,000 114,826,000 225,335,000 170,698,000 366,811,000
Payments on bank debt... (11,125,000) (69,108,000) (213,511,000) (175,793,000) (210,559,000)
Payments of debt
issuance costs......... (400,000) (2,024,000) (984,000) (885,000) (3,202,000)
Proceeds from long term
obligations............ -- 10,000,000 -- -- --
Payment on long term
obligations............ (894,000) (3,597,000) (12,916,000) (12,702,000) (275,000)
Payment on capital lease
obligations............ (197,000) (276,000) (577,000) (533,000) (37,000)
Purchase of treasury
stock--preferred....... (1,177,000) -- -- -- --
Purchase of treasury
stock--common.......... (523,000) -- -- -- --
Proceeds from issuance
of preferred stock..... 259,000 -- 7,500,000 7,500,000 --
Repurchase of preferred
stock.................. -- -- (37,874,000) (37,874,000) --
Proceeds from issuance
common stock, net of
issuance costs......... -- -- 95,223,000 95,223,000 55,643,000
Proceeds from exercise
of stock options....... -- -- 1,000 -- 79,000
Repurchase of common
stock warrants......... -- -- (945,000) (945,000) --
------------ ------------ ------------- ------------- -------------
Net cash provided by
financing activities... 6,500,000 49,821,000 61,252,000 44,689,000 208,460,000
------------ ------------ ------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents............ 86,000 802,000 (3,000) 419,000 3,435,000
Cash and cash
equivalents at
beginning of period.... 567,000 653,000 1,455,000 1,455,000 1,452,000
------------ ------------ ------------- ------------- -------------
Cash and cash
equivalents at end of
period................. $ 653,000 $ 1,455,000 $ 1,452,000 $ 1,874,000 $ 4,887,000
============ ============ ============= ============= =============
Supplemental disclosure
of cash flow
information:
Cash paid for
interest.............. $ 749,000 $ 1,863,000 $ 5,614,000 $ 4,244,000 $ 7,904,000
Cash paid for income
taxes................. $ 777,000 $ 1,545,000 $ 1,850,000 $ 1,540,000 $ 200,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(THE INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR
THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Presentation
Rental Service Corporation (RSC or Company), a Delaware Corporation, was
formed in June 1993 when all of the outstanding preferred and common shares of
RSC Acquisition Corp. (RSC Acquisition) were exchanged for the same number,
class and par value of shares of RSC. RSC Acquisition was formed in July 1992.
The Company operates in a single industry segment: the short-term rental of
equipment, including ancillary sales of parts, supplies and equipment, through
a network of rental locations throughout 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 consolidated balance sheets are presented
on an unclassified basis.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year financial statement
presentation.
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the consolidated statements of operations includes
revenues earned on equipment rentals, fuel sales and rental equipment delivery
fees. Revenue from the sale of parts, supplies and new equipment and revenue
from the sale of used equipment is recorded at the time of delivery to or
pick-up by the customer.
Credit Policy
Substantially all 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, although in
many cases mechanics' liens are filed to protect the Company's interests.
Invoices are generated when a piece of rental equipment is returned by the
customer or in any event after 21 days. The Company has diversified its
customer base by operating rental locations in 15 states, primarily in the
Southeast and Midwest. The Company maintains reserves it believes are adequate
for potential credit losses.
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, commodity type
supplies and small- to medium-sized equipment for sale. All inventories are
valued at the lower of cost (first-in, first-out) or market.
F-8
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................. 3-7 years
Operating property and equipment............................. 3-27 years
Leasehold improvements....................................... Term of lease
</TABLE>
Rental equipment is depreciated to a salvage value of 10% of cost.
Amortization of assets under capital leases is included in depreciation
expense. Rental equipment costing less than $600 in 1994 and 1995 and less
than $400 in 1996 and 1997 is immediately expensed at the date of purchase.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the straight-
line method over their estimated useful lives of usually one to three years
for covenants not to compete, and 30 to 40 years for goodwill. The
recoverability of goodwill attributable to the Company's acquisitions is
analyzed annually based on actual and projected levels of profitability and
cash flows of the locations acquired on an undiscounted basis.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards (SFAS) 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 effect 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 to be realized in future periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$407,000, $491,000, $1,050,000, $714,000 and $715,000 in advertising costs
during the years ended December 31, 1994, 1995 and 1996 and the nine months
ended September 30, 1996 and 1997, respectively.
Debt Costs
Deferred financing costs are amortized using the straight-line method over
the lives of the related debt. Deferred financing costs are expensed in
connection with refinancings if there are substantive changes in the terms of
the related debt. Interest expense for the Company's increasing interest rate
Bank Note (see Note 5) was determined based on the average effective interest
rate payable over the period in which the debt was expected to be outstanding,
which was three years.
F-9
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and,
accordingly, recognizes no compensation expense for stock option grants.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions located throughout the country in order to limit exposure to any
one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers.
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, 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 the balance sheet
date and approximates the carrying value of such debt because the underlying
instruments are at variable rates which are repriced frequently.
Interim Financial Statements
The accompanying consolidated balance sheet at September 30, 1997 and the
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity and cash flows for the nine-month periods ended September
30, 1996 and 1997 are unaudited and have been prepared on the same basis as
the audited consolidated financial statements included herein. In the opinion
of management, such unaudited consolidated 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.
Earnings (Loss) Per Share and Supplemental Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year. In accordance with the accounting rules of the Securities and Exchange
Commission common stock and stock options and warrants issued by the Company
in the twelve month period prior to the Company's initial public offering have
been included in the calculation of common and common equivalent shares as if
they were outstanding for all periods presented, computed using the treasury
stock method and the initial offering price, through the effective date of the
Company's initial public offering. Dilutive common stock equivalent shares
subsequent to the Company's initial public offering are computed using the
treasury stock method.
Supplementary pro forma net income per common and common equivalent share,
assuming the proceeds from the issuance of common shares in connection with
the initial public offering at the initial public offering
F-10
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
price of $16.00 ($14.88 net of issuance costs) were used to repay the Bank
Note (Note 5) and repurchase the related warrant and the Company's redeemable
preferred stock as of the beginning of the period, or the date upon which the
debt was created, whichever was later, would have been $.51 and $.36 for the
years ended December 31, 1995 and 1996, respectively, based upon 7,145,174 and
9,353,282 pro forma shares outstanding, respectively.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact is expected to
result in no material change in earnings (loss) per share (before or after
extraordinary items) for the years ended December 31, 1994, 1995 and 1996 and
the nine month periods ended September 30, 1996 and 1997.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is required to be adopted in the first quarter of 1998. SFAS No. 130
established standards for the reporting and display of comprehensive income
and its components. Comprehensive income includes certain non-owner changes in
equity that are currently excluded from net income. Because the Company
historically has not experienced transactions which would be included in
comprehensive income, adoption of SFAS No. 130 is not expected to have a
material effect on the consolidated financial position, results of operations
or cash flows of the Company.
2. BUSINESS ACQUISITIONS
A principal component of the Company's business strategy is to continue 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 reflected as goodwill in the accompanying consolidated financial
statements. Purchase accounting values for all acquisitions have been assigned
on a preliminary basis, and are subject to adjustment when final information
as to the fair values of the net assets acquired is available. The operations
of the acquired businesses are included in the consolidated statements of
operations from the date of acquisition.
The following table sets forth, for the periods indicated, the net assets
acquired, liabilities assumed, common stock issued or issuable and cash
purchase price for these acquisitions.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER
----------------------------------- 30,
1994 1995 1996 1997
-------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets acquired.......... $113,000 $ 50,109,000 $20,316,000 $ 64,706,000
Goodwill and covenants
not to compete.......... (91,000) 19,513,000 12,221,000 82,926,000
Less: common stock issued
or issuable............. -- -- -- (12,238,000)
Less: liabilities
assumed................. (2,000) (27,565,000) (5,267,000) (12,671,000)
-------- ------------ ----------- ------------
Cash purchase price...... $ 20,000 $ 42,057,000 $27,270,000 $122,723,000
======== ============ =========== ============
Number of acquisitions... 1 5 11 15
</TABLE>
F-11
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the unaudited pro forma results of operations
for each year in which acquisitions occurred and for the immediately preceding
year as if the acquisitions were consummated at the beginning of the
immediately preceding year:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER
----------------------------------------- 30,
1994 1995 1996 1997
----------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues.......... $85,712,000 $118,954,000 $240,865,000 $202,371,000
Income (loss) before
non-recurring and
extraordinary items.... (2,451,000) 1,660,000 4,915,000 9,500,000
Net income (loss)....... (2,451,000) 47,030,000(a) 3,646,000 8,966,000
Earnings (loss) per
common and common
equivalent share:
Income (loss) before
non-recurring and
extraordinary items.. (.76) (.01) .41 .70
Net income (loss)....... (.76) 8.15(a) .25 .66
</TABLE>
- --------
(a) Net income in 1995 includes non-recurring and extraordinary items related
to RHI's prepackaged bankruptcy of $45,370,000 ($8.17 per share),
including a gain on extinguishment of debt of $52,079,000 and charges for
fresh start accounting adjustment and reorganization items of $6,709,000.
On September 12, 1995, the Company acquired all of the assets and assumed
all of the liabilities of Acme Holdings Inc. (renamed as RSC Holdings Inc.)
(RHI) and its subsidiaries. RHI and its subsidiaries had filed a prepackaged
joint plan of reorganization under Chapter 11 of title 11 of the United States
Code on July 13, 1995, which was subsequently approved by the court on August
24, 1995 and became effective on September 12, 1995. Pursuant to the approved
plan, RHI was merged into a wholly owned subsidiary of the Company, the
Company entered into the Revolver and Bank Note agreements (see Note 5), and
used proceeds therefrom of $35,350,000 to pay in full satisfaction old
outstanding notes payable of RHI that had an aggregate principal balance at
that time of approximately $78,000,000. Additionally, the Company paid RHI's
debtor-in-possession facility of approximately $3,795,000 and assumed the
remaining liabilities of RHI in exchange for full releases from substantially
all of RHI's note holders.
In connection with the acquisition of RHI, the Company decided to sell,
close or dispose of RHI's rental locations in California, as they did not meet
the Company's financial performance criteria and were not part of the
Company's strategic plans. The assets related to those rental locations,
consisting primarily of rental equipment and accounts receivable, were
classified as assets held for sale in the accompanying consolidated balance
sheet at December 31, 1995. The Company accrued the expected cash outflows
from operations of the rental locations through the expected date of disposal
as part of the allocation of the purchase price. The initial accrual of
$2,492,000 included $1,404,000 of allocated interest expense. The pre-tax
income during the period from September 12, 1995 through December 31, 1995 was
$508,000, which included allocated interest expense of $422,000 and a gain on
disposal of assets of $649,000, and was credited to the accrual. The pre-tax
loss during the year ended December 31, 1996 was $3,380,000, which included
allocated interest expense of $751,000 and a gain on disposal of assets of
$513,000, and was charged to the accrual. In 1996, the Company revised its
estimates of the operating cash outflows expected to be incurred as part of
the disposal of the California locations and accrued an additional $1,292,000,
which was recorded as an adjustment to goodwill. During 1996, the Company sold
or closed all of the California locations, and had a remaining balance in the
accrual of $912,000 at December 31, 1996. During the nine months ended
September 30, 1997, $362,000 was charged to the accrual, leaving a remaining
balance of $550,000 at September 30, 1997.
F-12
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 25, 1997, the Company acquired all of the outstanding stock of
Comtect, Inc. and subsidiaries d/b/a Industrial Air Tool (IAT) for $32.6
million in cash and 189,189 shares of RSC common stock. Up to an additional
108,108 shares of RSC common stock may be paid to the sellers over a three
year period if certain performance objectives are met. IAT is an "on-site"
small tool provider, rental management company and maintenance, repair and
operations (MRO) supplier and operated a total of four locations in Texas and
Louisiana. IAT's balance sheet was consolidated with the Company's under the
purchase method of accounting as of April 25, 1997. This acquisition resulted
in approximately $23.8 million in goodwill, which is being amortized over 40
years. Pursuant to the acquisition agreement, the Company assumed effective
control of IAT's operations on March 1, 1997 and has included IAT's revenues,
costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments. The pro forma
information above includes this acquisition as if it had occurred as of the
beginning of 1996 and 1997, respectively.
On June 5, 1997, the Company acquired substantially all of the assets of
Brute Equipment Co. d/b/a Foxx Hy-Reach Company (Foxx) for $32.7 million in
cash and 284,250 shares of RSC common stock, of which 233,034 shares were paid
to the Seller at closing, with the remaining 51,216 shares to be issued one
year from the date of closing. Up to an additional 89,630 shares of RSC common
stock may be paid to the seller over a three year period if certain
performance objectives are met. Foxx specializes in the rental and sale of
aerial equipment to construction and industrial customers and operates a total
of four locations in Iowa and Illinois. This acquisition was recorded under
the purchase method of accounting and resulted in approximately $24.4 million
in goodwill, which is being amortized over 40 years. The pro forma information
above includes this acquisition as if it had occurred as of the beginning of
1996 and 1997, respectively.
On June 17, 1997, the Company acquired substantially all of the assets of
Central States Equipment, Inc. and Equipment Lessors, Inc. (collectively,
Central) for approximately $18.0 in cash and 204,867 shares of RSC common
stock, of which 102,435 shares of RSC common stock will be paid to the sellers
over a five year period, and may be accelerated to three years if certain
performance objectives are met. Central specializes in the rental and sale of
aerial equipment, ladders and scaffolding and operates a total of four
locations in Kansas, Missouri and Oklahoma. This acquisition was recorded
under the purchase method of accounting and resulted in approximately $11.0
million in goodwill, which is being amortized over 40 years. The pro forma
information above includes this acquisition as if it had occurred as of the
beginning of 1996 and 1997, respectively.
The common stock issuable in the accompanying consolidated balance sheets is
associated with the common stock relating to the acquisitions of Foxx (51,216
shares) and Central (102,435 shares) which vests over future time periods.
Common stock issuable is treated as if it were outstanding since the date of
the respective acquisition for the calculation of weighted average common and
common equivalent shares. Weighted average common and common equivalent shares
excludes the effects of the potential issuance of all shares contingent on the
achievement of certain performance objectives, as the related objectives have
not currently been achieved.
F-13
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment..... $ 7,010,000 $14,638,000 $25,018,000
Leasehold improvements................ 1,284,000 2,695,000 3,978,000
Furniture, fixtures and computer
equipment............................ 2,663,000 5,385,000 7,554,000
Land and building..................... 1,634,000 1,828,000 2,230,000
----------- ----------- -----------
Total............................... 12,591,000 24,546,000 38,780,000
Less: accumulated depreciation and
amortization......................... 1,962,000 4,503,000 8,140,000
----------- ----------- -----------
$10,629,000 $20,043,000 $30,640,000
=========== =========== ===========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Covenants not to compete............... $ 141,000 $ 2,281,000 $ 3,151,000
Goodwill............................... 24,685,000 34,766,000 116,822,000
----------- ----------- ------------
Total................................ 24,826,000 37,047,000 119,973,000
Less: accumulated amortization......... 672,000 2,246,000 4,694,000
----------- ----------- ------------
$24,154,000 $34,801,000 $115,279,000
=========== =========== ============
</TABLE>
The Company has entered into noncompetition agreements with the former
owners of certain acquired businesses. The agreements are generally for terms
of one to three 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.
5. BANK DEBT AND LONG TERM OBLIGATIONS
Bank debt and long term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
----------------------- 30,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
$300,000,000 Revolving Line of Credit
(Revolver) with a bank, interest at the
prime rate plus 0.25%, due monthly, or
Eurodollar rate plus 1.75%, due on
demand, at the Company's option,
principal due January 31, 2002. The
interest rate in effect at December 31,
1995 and 1996 and September 30, 1997 was
8.9%, 8.3%, and 7.5%, respectively...... $56,042,000 $67,867,000 $224,119,000
Note payable to bank (Bank Note)......... 10,710,000 -- --
Notes payable, interest at 8%, due in
aggregate monthly installments of $3,400
through 2008............................ 393,000 306,000 293,000
Equipment contracts payable, interest at
7-11%, payable in various monthly
installments through 1998,
collateralized by equipment............. 765,000 353,000 92,000
----------- ----------- ------------
$67,910,000 $68,526,000 $224,504,000
=========== =========== ============
</TABLE>
F-14
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On January 31, 1997, the Company amended the Revolver to, among other
things, increase the availability to $200 million, decrease the interest rate
margins by 0.5%, increase the advance rates on eligible rental equipment to
100% and extended the maturity date to January 31, 2002. On June 4, 1997, the
Company again amended the Revolver to, among other things, increase the
availability to $300.0 million, decrease the interest rate margins by 0.25%
with further reductions if certain interest coverage ratios are met and to
reduce the unused line fee to 0.25% of the unused commitment. The total amount
of credit available under the Revolver is limited to a borrowing base equal to
the sum of (i) 85% of eligible accounts receivable of the Company's
subsidiaries and (ii) 100% of the value (lower of net book value or market) of
eligible rental equipment through December 31, 1998; 90% of the value of
eligible rental equipment from January 1, 1999 through December 31, 1999; 80%
of the value of eligible rental equipment from January 1, 2000 through
December 31, 2000; and 75% of the value of eligible rental equipment from
January 1, 2001 through the expiration date of the Revolver. The Revolver
expires on January 31, 2002. The Revolver also contains provisions to annually
adjust the prime and Eurodollar interest rate margins based on the Company's
achievement of specified interest coverage ratios. The obligations of the
lenders to make loans or issue letters of credit under the Revolver is subject
to certain customary conditions. In addition, the Revolver has financial
covenants for RSC regarding debt incurrence, interest coverage, capital
expenditure investment and minimum EBITDA levels. The Revolver also contains
covenants and provisions that restrict, among other things, the Company's
subsidiaries ability to: (i) incur additional indebtedness; (ii) incur liens
on its property, (iii) enter into contingent obligations; (iv) make certain
capital expenditures and investments; (v) engage in certain sales of assets;
(vi) merge or consolidate with or acquire another person or engage in other
fundamental changes; (vii) enter into leases; (viii) engage in certain
transactions with affiliates; and (ix) declare or pay dividends to RSC.
Effective June 30, 1997, the Company further amended the Revolver to increase
the allowed level of investments and capital expenditures for 1997 to $138.0
million and to increase the maximum allowed total indebtedness to trailing
EBITDA ratio for each of the last three quarters of 1997. As of September 30,
1997, the Company was in compliance with all covenants of the Revolver, and
substantially all of the net consolidated assets of the Company were
restricted under the terms of the Revolver.
Borrowings under the Revolver are secured by all of the real and personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Revolver, and has granted liens on
substantially all of its assets (including the stock of its subsidiaries) to
secure such guaranty. The Revolver also restricts the Company from declaring
or paying dividends on its common stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Revolver. The Revolver includes a $2 million letter of credit facility,
with a fee equal to 2.75% of the face amount of letters of credit payable to
the lenders and other customary fees payable to the issuer of the letter of
credit. A commitment fee equal to 0.25% of the unused commitment, excluding
the face amount of all outstanding and undrawn letters of credit, is also
payable monthly in arrears.
The amounts outstanding under the Revolver at December 31, 1995 and 1996 and
September 30, 1997 were $56,042,000, $67,867,000, and $224,119,000,
respectively, with approximately $6,815,000 and $28,888,000, and $43,958,000,
respectively, available based on the borrowing base. Outstanding letters of
credit totaled $212,000, $0 and $0 at December 31, 1995 and 1996 and September
30, 1997, respectively.
F-15
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with an amendment to the Revolver in January 1997, the Company
wrote-off the related unamortized deferred financing costs and recorded a loss
on extinguishment of debt of $920,000, net of income taxes of $386,000, which
has been classified as an extraordinary item in the accompanying consolidated
statements of operations for the nine months ended September 30, 1997.
The Company utilized proceeds from its initial public offering in September
1996 to reduce the outstanding amounts under the Revolver by $37.7 million. In
connection with the implementation of an amendment to the Revolver in
September 1996, the Company wrote off the related deferred financing costs and
recorded a loss on extinguishment of debt of $2,453,000 which has been
classified as an extraordinary item, net of income taxes of $964,000, in the
accompanying consolidated statements of operations for the year ended December
31, 1996.
The Company entered into a redeemable note and warrant purchase agreement
(Bank Note) on September 12, 1995 with a financial institution that provided
$10,000,000 of 13% senior secured notes due September 15, 2005. Interest,
compounded quarterly, for the first two years was to be paid in kind through
the issuance of additional notes, thereafter paid semi-annually in cash. The
principal amount of the Bank Note was to be increased by $1,000,000 on each of
the first three anniversaries, which was being accounted for as interest
expense. Additionally, the financial institution was issued warrants entitling
the purchase of 87,120 shares of common stock at a purchase price of $4.83 per
share (subject to adjustment) through September 15, 2005. On September 24,
1996, the Company repaid the Bank Note and repurchased the related warrants
for $13,000,000, utilizing proceeds from its initial public offering. This
repayment resulted in a reduction of additional paid-in capital of $945,000
and a gain on extinguishment of debt of $362,000, which has been classified as
an extraordinary item, net of income taxes of $142,000, in the accompanying
consolidated statements of operations for the year ended December 31, 1996.
In 1995, the Company paid off the borrowings under a previous revolver upon
entering into the Revolver, resulting in a loss on extinguishment of such debt
of $783,000, which has been classified as an extraordinary item, net of income
taxes of $305,000, in the accompanying consolidated statements of operations
for the year ended December 31, 1995.
The aggregate annual maturities of bank debt and long term obligations as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
NOTES EQUIPMENT
REVOLVER PAYABLE CONTRACTS TOTAL
----------- -------- --------- -----------
<S> <C> <C> <C> <C>
1997............................ $ -- $ 16,000 $279,000 $ 295,000
1998............................ -- 17,000 74,000 91,000
1999............................ -- 19,000 -- 19,000
2000............................ -- 21,000 -- 21,000
2001............................ $67,867,000 23,000 -- 67,890,000
Thereafter...................... -- 210,000 -- 210,000
----------- -------- -------- -----------
$67,867,000 $306,000 $353,000 $68,526,000
=========== ======== ======== ===========
</TABLE>
6. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Board of Directors, without approval of the holders of the
common stock, is authorized to fix the number of shares of any series of
preferred stock and to designate for issuance up to 500,000 shares of
preferred stock, par value $.01 per share, in such number of series and with
such rights, preferences, privileges and restrictions (including without
limitations voting rights) as the Board of Directors may from time to time
determine.
F-16
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company had outstanding at December 31, 1995, 244,805 shares of a series
of cumulative redeemable preferred stock. On September 24, 1996, the Company
utilized proceeds from its initial public offering to redeem all outstanding
shares of this preferred stock, including accumulated dividends, for
$37,874,000. The Redeemable Preferred Stock was cumulative at a rate of 6% per
annum, computed on a quarterly basis. No dividends could be paid on the common
stock in any quarter until the accumulated dividends on the Redeemable
Preferred Stock had been paid for all quarters ending prior to the date of
payment of dividends on the common stock.
Stock Purchase Agreements
Between 1992 and 1995, the Company entered into various stock purchase
agreements with a former chairman, a former president, the current chairman
and the current chief financial officer for the sale of 675,000 shares of
common stock at $.02 per share and 372,195 shares of common stock at $.01 per
share. The stock was issued subject to certain vesting requirements over
generally a four to five year period. However, the vesting for a portion of
the stock which otherwise vested in the last two years could be accelerated if
the Company achieved certain performance targets, as determined by the
Company's Board of Directors. Upon a change of control (as defined), any
unvested shares generally immediately vested. In the event the participant
terminated employment with the Company, the Company generally has the option
to purchase any unvested shares at the original issuance price.
In connection with the former chairman's resignation, the Company in
September 1994 purchased all of his vested and unvested shares (675,000) of
the Company's common stock for $523,000, as well as all of his shares (11,256)
of the Company's preferred stock for $1,177,000. As of December 31, 1994,
these shares were held by the Company as treasury shares and were canceled
during 1995.
In April 1995, the Company purchased 31,275 shares of outstanding unvested
stock of the former president at $.01 per share, which were subsequently
canceled.
At December 31, 1995 and 1996 and September 30, 1997, there were 144,787,
81,923 and 81,923 of these shares, respectively, which had not yet vested and
were subject to the Company's repurchase option at $.01 per share.
Stock Option Plan
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
On July 25, 1995, the Board of Directors of the Company adopted the Stock
Option Plan for Key Employees (1995 Plan) whereby under the plan officers,
directors, and key employees may be granted options to purchase the Company's
common stock at a price set by the option committee not to be less than 100%
of the fair market value of such shares on the date such option is granted,
further, not to exceed 110% of the fair market price on the date such option
is granted. If the Company's common stock is not publicly traded on an
exchange or not quoted on Nasdaq or a successor quotation system, the fair
market value established by the option committee acting in good faith may be
used for valuation. The aggregate number of such shares that may be issued
upon exercise of options may not exceed 324,000. Generally, the incentive
stock options will expire ten years from the date such options were granted.
At September 30, 1997, 1,860 of these shares were available for future stock
option grants.
F-17
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The options currently outstanding generally become exercisable in various
amounts over either a four or five year period; however, the vesting for
certain portions of the options may be accelerated if the employee and the
Company achieve certain performance targets, as determined by the Company's
option committee.
On February 5, 1997, the Company's stockholders approved and the Company
adopted the 1996 Equity Participation Plan of Rental Service Corporation (1996
Plan). The 1996 Plan authorizes the issuance of not more than 1,000,000 shares
of the Company's common stock (or the equivalent in other equity securities)
upon the exercise of options, stock appreciation rights and other awards, or
upon vesting of restricted or deferred stock awards (Awards). Under the 1996
Plan, Awards may be granted to officers, non-employee directors, key employees
and consultants of the Company at a price not to be less than 100% of the fair
market price on the date such award is granted. At September 30, 1997, 362,438
shares of Common Stock were available for future Awards under the 1996 Plan.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 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 for 1995 and 1996: a risk-free interest rate of 6.28%, a dividend
yield of 0%, a volatility factor of the expected market price of the Company's
Common Stock of .641 and a weighted average expected life of the option of
five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that 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 the Company's employee
stock options.
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 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Pro forma net income................................ $3,237,000 $2,597,000
Pro forma net income per share...................... .30 .13
</TABLE>
Because SFAS No. 123 is applicable only to options granted after December
31, 1994, its pro forma effect will not be fully reflected until 1997. The
effects of applying SFAS No. 123 for the years ended December 31, 1995 and
1996 are not likely to be representative of the effects on reported net income
for future years.
F-18
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity, and related information,
for the years ended December 31, 1995 and 1996, and the nine months ended
September 30, 1997 follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE
AVAILABLE NUMBER EXERCISE PRICE
FOR OF PRICE PER PER
OPTIONS SHARES SHARE SHARE
--------- ------- ------------ --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994.... -- -- $ -- $ --
Authorized Shares--1995 Plan.... 324,000 -- -- --
Grants--1995 Plan............... (129,690) 129,690 .01 .01
--------- ------- ------
Balance at December 31, 1995.... 194,310 129,690 .01 .01
Grants--1995 Plan............... (209,190) 209,190 7.03-21.00 17.12
Exercises--1995 Plan............ -- (34,290) .01 .01
Forfeitures--1995 Plan.......... 16,740 (16,740) .01 .01
Cancellations--1995 Plan........ -- (12,510) .01 .01
--------- ------- ------
Balance at December 31, 1996.... 1,860 275,340 .01-21.00 13.01
Authorized Shares--1996 Plan
(unaudited).................... 1,000,000 -- -- --
Grants--1996 Plan (unaudited) .. (659,450) 659,450 18.00-26.875 20.19
Exercises--1995 Plan
(unaudited).................... -- (29,751) .01-14.11 2.66
Forfeitures--1996 Plan
(unaudited).................... 21,888 (21,888) 20.25 20.25
Cancellations--1995 Plan
(unaudited).................... -- (5,400) 14.11 14.11
--------- ------- ------
Balance at September 30, 1997
(unaudited).................... 364,298 877,751 $ .01-26.875 $18.57
========= ======= ======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1995 and 1996 was $.01 and $10.23, respectively.
There were no options exercisable at December 31, 1995 and 9,333 options
exercisable with a weighted average exercise price of $2.53 per share at
December 31, 1996. The weighted average remaining contractual life of the
options outstanding at December 31, 1996 is 9.2 years.
Employee Stock Purchase Plan
On April 28, 1997 at the Company's Annual Meeting of Stockholders, the
Company's stockholders approved, and the Company adopted, the Employee
Qualified Stock Purchase Plan of Rental Service Corporation (QSP Plan). Under
the QSP Plan, the Company has reserved 250,000 shares of common stock for sale
to employees. The QSP Plan allows eligible employees of the Company to
purchase shares of common stock at the lesser of 85% of the fair market value
of such shares at the beginning of each semiannual offering period or 85% of
the fair market value of such shares on the date of exercise of an installment
of the purchase right. Purchases are limited to 15% of an employee's eligible
compensation, subject to a maximum purchase of 1,500 shares in any semiannual
offering period. The QSP Plan commenced on July 1, 1997.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a Section 401(k) employees savings plan (Savings Plan)
covering substantially all full-time employees upon completion of at least
1,000 hours of service during the plan year or nine months of continuous
employment.
F-19
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Savings Plan is a defined contribution plan and provides for the Company
to make discretionary contributions as deemed appropriate by the
administrative committee. During the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1996 and 1997, the Company made
discretionary contributions totaling $0, $0, $150,000, $78,000 and $312,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company has capital lease obligations in connection with acquiring
certain rental equipment with aggregate costs and accumulated amortization of
$2,352,000 and $599,000, respectively, at December 31, 1995 and $107,000 and
$67,000, respectively, at December 31, 1996. Future minimum lease payments
under the capital leases and the present value of the minimum lease payments
as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $65,000
1998............................................................ 9,000
-------
Total minimum future lease payments............................. 74,000
Less amount representing interest............................... 6,000
-------
Present value of net minimum future lease payments.............. $68,000
=======
</TABLE>
Operating Leases
The Company leases certain operating premises and equipment under operating
leases. Substantially all of the property leases require the Company to pay
maintenance, insurance, taxes and certain other expenses in addition to the
stated rentals. Certain of the real property leases provide for escalation of
future rental payments based upon increases in the consumer price index.
Rental expense under such operating leases totaled $919,000, $2,397,000,
$3,081,000 $2,161,000 and $3,563,000 for the years ended December 31, 1994,
1995 and 1996 and the nine months ended September 30, 1996 and 1997,
respectively. Future minimum lease payments, by year and in the aggregate, for
noncancellable operating leases with initial or remaining terms of one year or
more are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997......................................................... $ 4,084,000
1998......................................................... 3,418,000
1999......................................................... 2,864,000
2000......................................................... 2,282,000
2001......................................................... 1,575,000
Thereafter................................................... 1,889,000
-----------
$16,112,000
===========
</TABLE>
Purchase Obligations
At December 31, 1996 and September 30, 1997, the Company was obligated,
under noncancellable purchase commitments, to purchase $28,145,000 and
$7,000,000, respectively, of equipment.
Risk Management
The Company is self-insured for physical damage or loss to its rental
equipment. Presently, the Company has an insurance deductible of $50,000 per
occurrence for claims related to general and vehicle liability. The
F-20
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
general and vehicle policy includes an annual aggregate liability limit of
$2,000,000 and a per occurrence liability limit of $1,000,000.
Environmental
The Company and its operations are subject to a variety of federal, state
and local 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 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 related costs of
investigation and property damage. The Company incurs ongoing expenses
associated with the removal of underground storage tanks and the performance
of appropriate remediation at certain of its locations. The Company has
accrued $800,000, $763,000 and $763,000 at December 31, 1995 and 1996 and
September 30, 1997, respectively, related to the removal of underground tanks
at the Company's locations. The actual costs of remediating these
environmental conditions may be different than that accrued by the Company due
to the difficulty in estimating such costs and due to potential changes in the
status of legislation and state reimbursement programs. The Company does not
believe that such removal and remediation will have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
Legal Proceedings
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal and financial liability of the Company with
respect to such pending litigation cannot be estimated with certainty, but the
Company believes, based on its examination of such matters, that such ultimate
liability will not have a material adverse effect on the business, or the
consolidated financial position, results of operations or cash flows of the
Company.
9. RELATED PARTY TRANSACTIONS
In July 1992, the Company entered into a five-year management agreement
(Management Agreement) with RHI, which also operated an equipment rental
business. Under the Management Agreement, RHI located potential acquisition
opportunities, provided administrative assistance in connection with
acquisitions and managed, supervised and provided administrative and
accounting support for the operation of the Company's rental center locations.
Pursuant to the Management Agreement, RHI agreed, until April 1, 1995, to make
available first to the Company any opportunities that came to its attention
for acquiring additional rental center locations. The Company reimbursed RHI
for any costs incurred in connection with such acquisitions. Additionally, the
Company paid a management fee based on a percentage of the acquisition cost
for each acquisition and the performance of the companies acquired. Total
management fee expense, included in general and administrative expense, was
$1,586,000 and $742,000 for the years ended December 31, 1994 and 1995,
respectively. The Management Agreement was terminated on September 12, 1995.
The Company and RHI agreed to re-rent equipment to each other in the event
the other party did not have sufficient rental equipment at a given location
to meet a customer's requirements. The party making such equipment available
received 70% of the gross rental receipts received by the other party related
to such re-rental. During the years ended December 31, 1994 and 1995, re-rent
revenue received by the Company from RHI was $230,000 and $72,000,
respectively, and re-rent expense paid by the Company to RHI was $39,000, and
$27,000, respectively. The agreement terminated on September 12, 1995.
During 1994 and 1995, certain expenses incurred by RHI were paid by the
Company and vice versa.
F-21
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
One of the stockholders of the Company received an investment banking fee
from the Company in connection with the Company's acquisitions. The fee was
calculated at 1.5% of the total of the purchase price plus acquisition costs
plus planned first year capital expenditures less one-seventh of the seller's
original cost of rental equipment. Such fees paid to the stockholder during
the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 totaled $0, $663,000, $388,000, $388,000 and $0,
respectively. Effective November 1, 1993, the stockholder also received a
monitoring fee, which equaled 1% of the aggregate amount of debt and equity
interest of or by the stockholder in the Company. Such fees paid to the
stockholder during the years ended December 31, 1994, 1995 and 1996 and nine
months ended September 30, 1996 and 1997 totaled $235,000, $235,000, $235,000,
$176,000 and $0, respectively, and are included in general and administrative
expense. The Company's obligation to pay such investment banking and
monitoring fees terminated in September 1996, in conjunction with the
Company's initial public offering, however, the Company, at its discretion,
can utilize the stockholder's investment banking services under the same fee
arrangement.
On December 31, 1994, RSC Acquisition purchased 37,512 shares of common
stock and 675,000 shares of preferred stock of RHI for $10 from a former
officer of RSC Acquisition. This equated to a voting interest of 34.2% in RHI
at December 31, 1994. These shares of RHI were canceled September 12, 1995 as
part of RHI's plan of reorganization.
10. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $ 793,000 $1,135,000 $ --
State................................... 161,000 337,000 187,000
---------- ---------- ----------
954,000 1,472,000 187,000
Deferred:
Federal................................. 123,000 581,000 1,550,000
State................................... 100,000 43,000 163,000
---------- ---------- ----------
223,000 624,000 1,713,000
Extraordinary items....................... -- 305,000 822,000
---------- ---------- ----------
$1,177,000 $2,401,000 $2,722,000
========== ========== ==========
</TABLE>
For interim periods, the provision for income taxes is based upon the
estimated income tax rate for the full fiscal year.
F-22
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities.......................... $ 4,601,000 $ 3,310,000
Inventory reserve............................ 559,000 677,000
Bad debt reserve............................. 1,161,000 1,245,000
Net operating loss carryforwards............. 7,189,000 6,563,000
Alternative minimum tax credit............... 1,658,000 1,590,000
Valuation allowance.......................... (7,858,000) (4,740,000)
----------- ------------
7,310,000 8,645,000
Deferred tax liabilities:
Depreciation................................. (9,815,000) (12,863,000)
----------- ------------
Net deferred tax liability..................... $(2,505,000) $ (4,218,000)
=========== ============
</TABLE>
The Company's effective income tax rate varied from the statutory U.S.
federal income tax rate of 34% as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected provision using the
statutory tax rate.................. $1,072,000 $2,079,000 $2,282,000
State taxes, net of federal tax
benefit............................. 172,000 290,000 204,000
Permanent differences................ 80,000 213,000 341,000
Other................................ (147,000) (181,000) (105,000)
---------- ---------- ----------
$1,177,000 $2,401,000 $2,722,000
========== ========== ==========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,100,000 that expire in years
2005 through 2011. In addition the Company had combined state net operating
loss carryforwards of approximately $11,300,000 that expire in years 1997
through 2011. Approximately $8,500,000 of the federal carryforwards and
$1,100,000 of the state carryforwards are attributable to the Company's
September 12, 1995 acquisition of RHI. For financial reporting purposes a
valuation allowance of $6,200,000 and $3,986,000 at December 31, 1995 and
1996, respectively, has been recognized to offset the deferred tax assets
related to those carryforwards. These separate company net operating loss
carryforwards are subject to restrictions in accordance with Internal Revenue
Service Code Section 382 and the ultimate utilization of the net operating
losses is further limited based on the profitability of certain subsidiaries
of RHI.
The Company also has alternative minimum tax credit carryovers of
approximately $1,425,000 for federal and $165,000 for state of California
income tax purposes which are available to offset future regular income tax
that is in excess of the alternative minimum tax in such year. $589,000 of the
federal and all of the state alternative minimum tax credit carryovers
resulted from the Company's September 12, 1995 acquisition of RHI. For
financial reporting purposes a valuation allowance of $1,658,000 and $754,000
at December 31, 1995 and 1996, respectively, has been recognized to offset the
deferred tax assets related to all alternative minimum tax credit carryovers.
Limitations similar to those restricting the use of the net operating losses
also restrict the use of the credit carryovers.
F-23
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowances increased $7,831,000 in 1995 and decreased
$3,118,000 in 1996. The decrease in the 1996 valuation allowance is
principally due to a $9,506,000 decrease in the estimated net operating loss
that is not expected to be realized from the Company's discontinued California
operations.
Any tax benefit resulting from the utilization of the net operating loss
carryforwards or the tax credit carryovers obtained in the acquisition of RHI
will be accounted for as a reduction of the purchase price in the periods they
are realized.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR-TO-DATE
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues:
1995.................. $11,583,000 $12,952,000 $16,461,000 $24,921,000 $ 65,917,000
1996.................. 27,197,000 31,267,000 34,631,000 35,259,000 128,354,000
1997.................. 41,309,000 58,554,000 72,469,000 N/A 172,332,000
Gross profit:
1995.................. 3,240,000 3,644,000 4,234,000 6,637,000 17,755,000
1996.................. 6,048,000 7,758,000 8,318,000 9,118,000 31,242,000
1997.................. 10,978,000 14,870,000 18,841,000 N/A 44,689,000
Income before
extraordinary items:
1995.................. 899,000 1,019,000 1,021,000 776,000 3,715,000
1996.................. 330,000 897,000 952,000 1,810,000 3,989,000
1997.................. 2,183,000 2,855,000 3,920,000 N/A 8,958,000
Net income (loss):
1995.................. 899,000 1,019,000 543,000 776,000 3,237,000
1996.................. 330,000 897,000 (317,000) 1,810,000 2,720,000
1997.................. 1,649,000 2,855,000 3,920,000 N/A 8,424,000
Earnings (loss) per
common and common
equivalent share:
1995
Income before
extraordinary items.. $ .09 $ .12 $ .11 $ .07 $ .39
Extraordinary items... -- -- (.09) -- (.09)
----------- ----------- ----------- ----------- ------------
Net income............ $ .09 $ .12 $ .02 $ .07 $ .30
=========== =========== =========== =========== ============
1996
Income (loss) before
extraordinary items.. $ (.04) $ .06 $ .07 $ .16 $ .33
Extraordinary items... -- -- (.20) -- (.18)
----------- ----------- ----------- ----------- ------------
Net income (loss)..... $ (.04) $ .06 $ (.13) $ .16 $ .15
=========== =========== =========== =========== ============
1997
Income before
extraordinary items.. $ .19 $ .23 $ .26 $ .68
Extraordinary items... (.05) -- -- (.04)
----------- ----------- ----------- ------------
Net income............ $ .14 $ .23 $ .26 N/A $ .64
=========== =========== =========== ============
</TABLE>
F-24
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS (UNAUDITED)
On December 2, 1997, the Company acquired all of the outstanding capital
stock of Rent-It-Center, Inc. d/b/a Center Rentals and Sales and substantially
all of the assets of certain affiliated entities (collectively, Center) for
approximately $100.9 million in cash, 482,315 shares of RSC common stock (of
which 64,544 shares will be issued over seven years, subject to earlier
issuance within three years if certain performance objectives are achieved)
and the assumption of approximately $16.0 million of Center's debt. Center is
an independent rental company and also sells a variety of equipment ranging
from small tools to heavy equipment, including related commodity supplies.
Center operates a total of 14 locations in Colorado, New Mexico, Texas,
Kansas, Missouri and Nebraska. Center's balance sheet is consolidated with the
Company's under the purchase method of accounting as of December 2, 1997.
Pursuant to the acquisition agreements, the Company assumed effective control
of Center's operations on November 1, 1997 and has included Center's revenues,
costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments.
On October 28, 1997, the Company signed a letter of intent to acquire
substantially all of the assets of JDW Enterprises, Inc. d.b.a Valley Rentals
(Valley) for a total purchase price of $104.0 million, consisting of
$93.6 million of cash and $10.4 million of RSC common stock. The purchase
price is subject to adjustment based on levels of accounts receivable,
inventory and equipment. Valley is an independent rental company located in
the Southwest and operates a total of ten locations in Arizona and New Mexico.
The transaction is anticipated to close by January 31, 1998, and will be
recorded under the purchase method of accounting. The closing is subject to a
number of closing conditions, including the execution of a definitive purchase
agreement, RSC board and bank approval and early termination or expiration of
the waiting period under the Hart-Scott-Rodino Act.
On December 12, 1997, the Company acquired all of the outstanding capital
stock of Siems Rental & Sales Co., Inc. (Siems) for $8.0 million in cash,
126,315 shares of RSC common stock and the assumption of approximately $13.5
million of Siems' debt. Siems is an independent rental company engaged in the
rental, sales and service of various types of construction and industrial
equipment. Siems operates a total of six locations in Maryland, Delaware,
Pennsylvania and Virginia. Siems' balance sheet is consolidated with the
Company's under the purchase method of accounting as of December 12, 1997.
Pursuant to the acquisition agreement, the Company assumed effective control
of Siems' operations on November 1, 1997 and has included Siems' revenues,
costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments.
On November 3, 1997, the Company began soliciting written consent of its
stockholders for the approval of an increase in the number of authorized
shares of its common stock, $.01 par value, from 20 million to 40 million
shares. Stockholder approval of the increase became effective on November 28,
1997. On December 11, 1997, the Company amended its Certificate of
Incorporation to effect such increase.
On December 2, 1997, the Company amended and restated the Revolver to
increase its total available financing to $600.0 million. This increase
consisted of an increase in the availability under the Revolver from $300.0
million to $500.0 million and a new $100.0 million seven-year term loan
facility (Term Loan). In addition, this new financing package extended the
maturity date of the Revolver to December 2, 2002; changed the methodology for
determining the interest rate margins; increased the allowed levels of capital
expenditures and investments to $160.0 million in 1997, $150.0 million in each
of 1998, 1999 and 2000, $160.0 million in 2001, $180.0 million in 2002, $225.0
million in 2003 and $240.0 million in 2004 (plus amounts reinvested from asset
sales); and amended several covenants, including the computation methodology
of certain financial covenants.
The Term Loan requires mandatory principal payments of $1.0 million on each
of its first six anniversaries, with the remaining principal amount due at
maturity. The Term Loan matures on December 2, 2004. Interest on
F-25
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Term Loan is payable monthly at either the prime rate plus 1.0% or the
Eurodollar rate plus 2.5% (at the Company's option). The Term Loan contains
the same conditions, covenants and restrictions as the Revolver.
Subsequent to September 30, 1997, the Company completed the acquisitions of
substantially all of the assets of Kansas Enterprises, Inc. d/b/a AAA Rent-
All; Sunbelt Equipment & Rentals, Inc.; Roesch Equipment Company; Allen
Equipment, Inc. and R&M Rentals, Inc. for a total combined purchase price of
approximately $16.5 million. These acquisitions have a combined ten locations
in Arkansas, Florida, Illinois, Kansas and Missouri.
As of December 12, 1997, the Company is party to additional letters of
intent to acquire four businesses for a total combined purchase price of
approximately $9.7 million and having a combined ten locations in Florida,
Georgia, South Carolina and Tennessee. Each of these acquisitions is subject
to a number of closing conditions, including the execution of definitive
purchase agreements and RSC board approval.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Acme Holdings Inc.
We have audited the accompanying consolidated balance sheets of Acme
Holdings Inc. ("Holdings") as of December 31, 1993 and 1994, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Holdings' 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 consolidated financial position of Holdings at
December 31, 1993 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Holdings will continue as a going concern. Holdings has incurred recurring
losses and has a net capital deficiency. In addition, as more fully described
in Note 3, Holdings has not complied with certain covenants of loan agreements
and has not made an interest payment due on December 1, 1994. These conditions
raise substantial doubt about the ability of Acme Holdings Inc. to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in Note 9 to the consolidated financial statements, in 1993
Acme Holdings Inc. changed its method of accounting for income taxes.
ERNST & YOUNG LLP
Orange County, California
March 30, 1995
F-27
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1993 1994 1995
------------ ------------ ------------
(UNAUDITED)
ASSETS (NOTE 3)
---------------
<S> <C> <C> <C>
Cash and cash equivalents (Note 1).. $ 599,000 $ 3,183,000 $ 1,627,000
Accounts receivable, net of
allowance for doubtful accounts of
$1,097,000 in 1993, $1,352,000 in
1994 and $1,786,000 in 1995........ 9,025,000 9,145,000 8,829,000
Other receivables................... 164,000 316,000 235,000
Receivables from related parties
(Note 7)........................... 220,000 138,000 298,000
Parts and supplies inventories (Note
1)................................. 1,453,000 1,180,000 1,099,000
Prepaid expenses.................... 609,000 585,000 897,000
Rental equipment, principally
machinery, at cost, net of
accumulated depreciation of
$32,515,000 in 1993, $32,576,000 in
1994 and $33,102,000 in 1995
(Notes 1, 3 and 6)................. 33,027,000 28,277,000 30,049,000
Operating property and equipment, at
cost, net of accumulated
depreciation of $3,505,000 in 1993,
$3,856,000 in 1994 and $4,019,000
in 1995 (Notes 1 and 3)............ 3,931,000 3,067,000 3,698,000
Goodwill, net of accumulated
amortization of $724,000 in 1993,
$869,000 in 1994 and $941,000 in
1995 (Note 1)...................... 3,646,000 3,501,000 3,429,000
Other assets, net (Notes 1 and 6)... 3,830,000 3,001,000 2,682,000
------------ ------------ ------------
$ 56,504,000 $ 52,393,000 $ 52,843,000
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
DEFICIT
-----------------------------
<S> <C> <C> <C>
Accounts payable.................... $ 3,369,000 $ 2,720,000 $ 3,238,000
Unfunded disbursements.............. 1,214,000 1,635,000 3,093,000
Payroll and other accrued expenses.. 7,240,000 8,804,000 8,339,000
Accrued interest payable............ 763,000 5,398,000 10,309,000
Income taxes payable (Note 9)....... 230,000 99,000 81,000
Deferred taxes based on income (Note
9)................................. 425,000 375,000 325,000
Obligations under capital leases
(Note 6)........................... 990,000 685,000 505,000
Senior Notes (Note 3)............... 77,566,000 77,618,000 77,644,000
Senior secured borrowings (Note 3).. 5,839,000 5,058,000 4,353,000
------------ ------------ ------------
Total liabilities................... 97,636,000 102,392,000 107,887,000
Commitments (Note 6)
Shareholders' deficit (Notes 1, 4
and 8):
Preferred stock, $1.00 par value:
Authorized, issued and
outstanding shares at
December 31, 1993 and 1994 and
June 30, 1995--3,000,000....... 3,000,000 3,000,000 3,000,000
Common stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--at
December 31, 1993 and 1994--
112,095 and 104,598, respectively
and 102,596 at June 30, 1995..... 1,000 1,000 1,000
Additional paid-in capital........ 724,000 724,000 724,000
Accumulated deficit............... (44,857,000) (53,724,000) (58,769,000)
------------ ------------ ------------
Total shareholders' deficit......... (41,132,000) (49,999,000) (55,044,000)
------------ ------------ ------------
$ 56,504,000 $ 52,393,000 $ 52,843,000
============ ============ ============
</TABLE>
See accompanying notes.
F-28
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals
(Note 1)............. $58,423,000 $ 55,504,000 $57,444,000 $28,296,000 $26,772,000
Sales of parts,
supplies and used
equipment............ 10,166,000 7,985,000 10,890,000 4,765,000 5,282,000
----------- ------------ ----------- ----------- -----------
Total revenues.......... 68,589,000 63,489,000 68,334,000 33,061,000 32,054,000
Costs and expenses:
Operating expenses.... 36,134,000 40,454,000 37,912,000 18,569,000 17,516,000
Cost of sales of
parts, supplies and
used equipment....... 7,074,000 6,087,000 8,188,000 3,565,000 3,912,000
General and
administrative
expense.............. 7,106,000 7,338,000 11,180,000 4,631,000 5,648,000
Depreciation and
amortization expense. 10,494,000 11,347,000 9,933,000 5,132,000 4,765,000
Restructure costs
(Note 2)............. -- 1,887,000 -- -- --
Provision for rental
equipment
retirements.......... -- 880,000 -- -- --
----------- ------------ ----------- ----------- -----------
Total costs and
expenses............... 60,808,000 67,993,000 67,213,000 31,897,000 31,841,000
----------- ------------ ----------- ----------- -----------
Operating income (loss). 7,781,000 (4,504,000) 1,121,000 1,164,000 213,000
Interest expense........ 8,422,000 9,279,000 9,927,000 4,897,000 5,198,000
----------- ------------ ----------- ----------- -----------
Loss before income
taxes.................. (641,000) (13,783,000) (8,806,000) (3,733,000) (4,985,000)
Provision for income
taxes (Note 9)......... 427,000 274,000 61,000 124,000 60,000
----------- ------------ ----------- ----------- -----------
Net loss................ $(1,068,000) $(14,057,000) $(8,867,000) $(3,857,000) $(5,045,000)
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1991...... -- $ -- 111,111 $1,000 $724,000 $(29,732,000) $(29,007,000)
Net loss................ -- -- -- -- -- (1,068,000) (1,068,000)
Issuance of preferred
stock, $1.00 par value. 3,000,000 3,000,000 -- -- -- -- 3,000,000
--------- ---------- ------- ------ -------- ------------ ------------
Balance at
December 31, 1992...... 3,000,000 3,000,000 111,111 1,000 724,000 (30,800,000) (27,075,000)
Net loss................ -- -- -- -- -- (14,057,000) (14,057,000)
Issuance of common
stock, $.01 par value.. -- -- 5,985 -- -- -- --
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4)..................... -- -- (5,001) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at December 31,
1993................... 3,000,000 3,000,000 112,095 1,000 724,000 (44,857,000) (41,132,000)
Net loss................ -- -- -- -- -- (8,867,000) (8,867,000)
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4)..................... -- -- (7,497) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at December 31,
1994................... 3,000,000 3,000,000 104,598 1,000 724,000 (53,724,000) (49,999,000)
--------- ---------- ------- ------ -------- ------------ ------------
Net loss (unaudited).... -- -- -- -- -- (5,045,000) (5,045,000)
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4) (unaudited)......... -- -- (2,002) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at June 30, 1995
(unaudited)............ 3,000,000 $3,000,000 102,596 $1,000 $724,000 $(58,769,000) $(55,044,000)
========= ========== ======= ====== ======== ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,068,000) $(14,057,000) $(8,867,000) $(3,857,000) $(5,045,000)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization......... 10,327,000 11,394,000 9,985,000 5,157,000 4,792,000
Interest payable
financed through
borrowings........... 2,648,000 421,000 -- -- --
Provision for doubtful
accounts............. 726,000 1,252,000 816,000 400,000 434,000
(Gain) loss on sale of
equipment............ (409,000) 1,666,000 (679,000) (230,000) (333,000)
Increase (decrease) in
deferred taxes....... 233,000 (26,000) (50,000) -- --
Write-off of deferred
financing fees....... -- 329,000 -- -- --
Changes in operating
assets:
(Increase) decrease
in accounts
receivable......... (2,307,000) 51,000 (936,000) (35,000) (119,000)
Decrease in income
tax refund
receivable......... 211,000 -- -- -- --
Increase in other
and related party
receivables........ (153,000) (52,000) (70,000) (440,000) (79,000)
(Increase) decrease
in parts and
supplies
inventories........ (201,000) 367,000 273,000 193,000 81,000
(Increase) decrease
in prepaid
expenses........... (115,000) (97,000) 24,000 47,000 (313,000)
(Increase) decrease
in other assets.... 37,000 (97,000) 259,000 (198,000) 94,000
Increase (decrease)
in accounts payable
and unfunded
disbursements...... (405,000) 83,000 (228,000) (1,016,000) 1,976,000
Increase (decrease)
in payroll and
other accrued
expenses........... (1,205,000) 3,042,000 1,564,000 1,035,000 (471,000)
Increase (decrease)
in accrued interest
payable............ 1,219,000 (1,066,000) 4,635,000 27,000 4,911,000
Increase (decrease)
in income taxes
payable............ 349,000 (119,000) (131,000) (51,000) (66,000)
----------- ------------ ----------- ----------- -----------
Net cash provided by
operating activities... 9,887,000 3,091,000 6,595,000 1,032,000 5,862,000
INVESTING ACTIVITIES
Proceeds from sale of
rental equipment and
operating plant and
equipment.............. 1,500,000 2,194,000 5,122,000 1,866,000 2,204,000
Cash purchases of rental
equipment and operating
plant and equipment.... (3,287,000) (4,219,000) (5,653,000) (1,322,000) (8,737,000)
Financed purchases of
rental equipment and
operating equipment.... (3,163,000) (3,789,000) (2,394,000) (2,535,000) --
----------- ------------ ----------- ----------- -----------
Net cash used in
investing activities... (4,950,000) (5,814,000) (2,925,000) (1,991,000) (6,533,000)
</TABLE>
See accompanying notes.
F-31
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Borrowings under
revolving facility..... $ 71,325,000 $ 40,238,000 $ 55,078,000 $ 23,766,000 $ 36,321,000
Payments under revolving
facility............... (71,840,000) (53,336,000) (55,952,000) (22,182,000) (36,109,000)
Proceeds from secured
borrowings............. 3,015,000 2,765,000 2,242,000 2,409,000 --
Payments on secured
borrowings............. (9,387,000) (28,664,000) (2,149,000) (1,339,000) (917,000)
Payments on subordinated
debt................... -- (33,828,000) -- -- --
Payments of loan
origination costs...... (678,000) (3,074,000) -- -- --
Proceeds from capital
lease borrowings....... 148,000 1,024,000 152,000 126,000 --
Payments on capital
lease obligations...... (324,000) (648,000) (457,000) (266,000) (180,000)
Proceeds from sale of
preferred stock........ 3,000,000 -- -- -- --
Proceeds from issuance
of Senior Notes........ -- 77,544,000 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided (used)
in financing
activities............. (4,741,000) 2,021,000 (1,086,000) 2,514,000 (885,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 196,000 (702,000) 2,584,000 1,555,000 (1,556,000)
Cash and cash
equivalents at
beginning of period.... 1,105,000 1,301,000 599,000 599,000 3,183,000
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 1,301,000 $ 599,000 $ 3,183,000 $ 2,154,000 $ 1,627,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-32
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND JUNE 30, 1995
(THE INFORMATION AS OF JUNE 30, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Acme Holdings Inc., a Delaware corporation, and its wholly owned subsidiaries
(together, "Holdings") Acme Rents, Inc. ("Acme Rents"), Acme Duval Inc. ("Acme
Duval") and Acme Dixie Inc. ("Acme Dixie"). All material intercompany accounts
and transactions have been eliminated. Certain reclassifications have been
made to prior years' amounts to conform to the current year presentation.
Holdings operates in a single industry segment: the rental of equipment
through a network of rental center locations in California, Florida, Texas and
Louisiana, including sales of equipment, parts, supplies and used rental
equipment. The nature of Holdings' 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.
Interim Financial Statements
The accompanying consolidated balance sheet at June 30, 1995 and the
consolidated statements of operations, shareholders' deficit and cash flows
for the six-month periods ended June 30, 1994 and 1995 are unaudited and have
been prepared on the same basis as the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
consolidated 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 period are
not necessarily indicative of results for the full year.
Operations
During the years ended December 31, 1992, 1993 and 1994, and six months
ended June 30, 1994 and June 30, 1995 Holdings had operating income (loss) of
$7,781,000, ($4,504,000), $1,121,000, $1,164,000 and $213,000 and net loss of
$1,068,000, $14,057,000, $8,867,000, $3,857,000 and $5,045,000, respectively.
The losses are primarily attributable to the interest expense associated with
Holdings' debt level. The results for the year ended December 31, 1994 and six
months ended June 30, 1995 include expenses related to discussions with
holders of Holdings' 11.75% $78,000,000 Senior Notes due 2000 (the Senior
Notes) regarding a possible recapitalization (Note 3). In the fourth quarter
of 1993, Holdings implemented a restructuring plan and recorded a charge of
$1,887,000 (Note 2).
Effective March 31, 1992, Holdings sold 3,000,000 shares of newly authorized
preferred stock for $3,000,000 cash, and restructured the terms of its
financing agreements with its lenders as more fully described in Notes 3 and
4. The restructured agreements reduced the amounts available to borrow,
accelerated certain bank principal payments, deferred certain subordinated
debt interest payments and modified certain loan terms, conditions and
covenants. The restructured agreements were amended in March and April 1993 to
defer certain principal and interest payments and extend the term of the
revised covenant provisions.
In June 1993, Holdings issued the Senior Notes (Note 3). Proceeds from this
issuance were used to pay off all then existing bank debt, senior subordinated
notes payable and junior subordinated notes payable.
Holdings did not make an interest payment on the Senior Notes in the amount
of $4,582,500 which was due December 1, 1994 and another payment due June 1,
1995 for the accrued interest on the Senior Notes since
F-33
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 1, 1994. The failure to make such payments constitutes an event of
default under the terms of the indenture to the Senior Notes (Note 3).
Simultaneously with the offering of Senior Notes, Holdings established a
revolving credit facility (the New Credit Facility) with Citicorp USA Inc. and
other lenders (Citicorp). As of December 31, 1994 and June 30, 1995 Holdings
was not in compliance with the interest coverage ratio, fixed charges ratio,
leverage ratio, and capital expenditure limits in the covenant provisions
contained in the New Credit Facility agreement. In addition, Holdings' failure
to make the December 1, 1994 and June 1, 1995 interest payments on the Senior
Notes constitute an event of default under the terms of the New Credit
Facility. As of June 30, 1995, and July 12, 1995, Citicorp was making
discretionary advances to Holdings under the terms of the New Credit Facility
without any assurance that it would make such discretionary advances in the
future.
In August 1994, Holdings hired Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") as its financial advisor to help Holdings explore
alternatives for restructuring the Senior Notes and to identify long term
solutions to strengthen Holdings' financial position (Note 3). Also, in August
1994, certain holders of the Senior Notes formed an unofficial committee (the
"Unofficial Committee") to evaluate and respond to proposals.
On April 28, 1995, Holdings reached an agreement in principle with the
Unofficial Committee of the holders of the Senior Notes on a financial
restructuring of Holdings. On July 11, 1995, Holdings received and accepted
the requisite number of votes from holders of the Senior Notes approving the
contemplated financial restructuring plan. As part of the plan, on July 13,
1995, Holdings filed a prepackaged joint plan of reorganization involving
Holdings and its wholly-owned subsidiaries under Chapter 11 of the Bankruptcy
Code ("Chapter 11 Filing"). Simultaneous with the Chapter 11 Filing, the
Bankruptcy Court approved and Holdings established a $5,000,000 DIP Facility
with Citicorp USA, Inc. The DIP Facility paid off the $1,835,000 outstanding
under Holdings' New Credit Facility.
An order confirming the Plan was entered by the Court on August 24, 1995 and
the Plan became effective September 11, 1995 (the "Effective Date"). For each
$1,000.00 principal amount of Holdings' 11% Senior Notes, holders received a
total of $525.75 consisting of $497.81 as payment for the Senior Notes and
$28.94 as payment for the Releases solicited with the Plan. All of the notes
were canceled pursuant to the Plan. The Plan provided that the holders of
Holdings' Preferred Stock, Common Stock, warrants and all other options to
acquire Holdings' stock and securities claims were not entitled to receive or
retain any property under the Plan and were deemed to reject the Plan, which
was approved by the Court. All applicable shares were canceled, annulled and
extinguished on the Effective Date. The other classes of claims and interests
were unimpaired under the Plan. The Plan provided for the payment of 100% of
their claims in the ordinary course of business, with the exception of two
rejected real estate leases.
On September 12, 1995, Holdings was merged into a subsidiary of Rental
Service Corporation, and the Senior Notes, DIP Facility and certain equipment
financing were paid off.
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the consolidated statements of operations include
revenues earned on fuel sales and equipment delivery fees. Revenue from the
sale of parts, supplies and equipment are recorded at the time of delivery to
or pick-up by the customer.
F-34
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, supplies and
small- to medium-sized equipment for sale. All inventories are valued at the
lower of cost (first-in, first-out) or market.
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
for financial statement purposes primarily using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................. 3-7 years
Operating property and equipment............................. 3-7 years
Leasehold improvements....................................... Term of lease
</TABLE>
Rental equipment costing less than $400 is immediately expensed at date of
purchase.
Goodwill
Goodwill represents the excess of purchase price over fair market value of
net assets acquired and is amortized using the straight-line method over the
estimated periods to be benefited, ranging from five to thirty years. Included
in depreciation and amortization expense for the years ended December 31,
1992, 1993 and 1994 and the six months ended June 30, 1994 and 1995 is
$175,000, $167,000, $145,000, $73,000 and $72,000, respectively, of such
amortization expense. It is Holdings' policy to account for goodwill and all
other intangible assets at the lower of amortized cost or fair value. The
carrying value of goodwill is reviewed periodically (at least annually) based
on the undiscounted cash flows of the entity over the remaining amortization
period. Should this review indicate that goodwill will not be recoverable,
Holdings' carrying value of goodwill will be reduced by the estimated short
fall of undiscounted cash flows. In addition, management reviews the valuation
and amortization of other intangible assets, taking into consideration any
events and circumstances which might have diminished fair value.
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Recapitalization and deferred finance costs,
net of accumulated amortization of
$277,000, $726,000 and $955,000 in 1993,
1994 and 1995 respectively................. $2,813,000 $2,364,000 $2,135,000
Noncompetition and consulting agreements,
net of accumulated amortization of
$1,951,000 in 1993......................... 121,000 -- --
Other, primarily deposits................... 896,000 637,000 547,000
---------- ---------- ----------
$3,830,000 $3,001,000 $2,682,000
========== ========== ==========
</TABLE>
In March 1992 Holdings entered into revised credit agreements (Note 3), and
amended the terms of the subordinated notes (the Refinancing). Costs incurred
in connection with the Refinancing were being amortized over two years, the
estimated benefit period. In June 1993 Holdings issued Senior Notes (Note 3),
therefore unamortized costs of $320,000 in connection with the 1992
refinancing were written off in 1993. Noncompetition and consulting agreements
are amortized ratably over the terms of the agreements (two to five years).
Included
F-35
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in depreciation and amortization expense for the years ended December 31,
1992, 1993 and 1994 and the six months ended June 30, 1994 and 1995 is
$919,000, $1,217,000, $574,000, $344,000 and $229,000, respectively, of other
assets' amortization expense.
Statements of Cash Flows
For purposes of the statements of cash flows, Holdings considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- -------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the
year for:
Interest.............. $4,550,000 $9,924,000 $5,240,000 $4,876,000 $297,000
Income taxes.......... 160,000 282,000 381,000 324,000 54,000
</TABLE>
Concentration of Credit Risk
Holdings extends credit to its commercial customers based on evaluations of
their financial condition and generally no collateral is required, although in
many cases mechanics' liens are filed to protect Holdings' interests. Holdings
has diversified its customer base by operating rental center locations in
California, Florida, Texas and Louisiana. Customers of the Texas and Louisiana
and certain California rental center locations are primarily large
petrochemical companies or the maintenance contractors working therein.
Holdings maintains adequate reserves for potential credit losses and such
losses have been within management's estimates.
2. RESTRUCTURING PLAN
In the fourth quarter of 1993, Holdings implemented a restructuring plan
which focused on critical aspects of its business. As a result, Holdings
recorded a charge to operations of $1,887,000. Costs applied against the
reserve in the fourth quarter were $466,000, resulting in a reserve balance at
December 31, 1993 of $1,421,000. The restructuring charge includes $356,000 of
noncash items and $1,531,000 of cash items, of which $112,000 of noncash items
and $354,000 of cash items were realized in 1993. The primary components of
the restructuring charge are as follows:
<TABLE>
<S> <C>
Closure and realignment of rental center locations (includes
future lease commitments and the write down to net realizable
value of owned locations)...................................... $1,398,000
Severance or relocation of 19 employees......................... 489,000
----------
$1,887,000
==========
</TABLE>
For the year ended December 31, 1994, Holdings applied $1,166,000 of costs
against the restructuring reserve of which $866,000 related to cash items and
$300,000 related to noncash items. As of December 31, 1994 and June 30, 1995,
the restructuring reserve was $255,000 and $195,000 respectively, which
related to the incremental costs associated with the sublet of the Hollywood,
California location, which is a future cash item.
F-36
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. FINANCING AGREEMENTS
Secured and unsecured debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
JUNE 30,
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank debt under revolving advances.... $ 1,919,000 $ 1,045,000 $ 1,257,000
Equipment contracts payable........... 3,920,000 4,013,000 3,096,000
----------- ----------- -----------
Senior secured borrowings............. 5,839,000 5,058,000 4,353,000
11.75% senior notes due 2000.......... 77,566,000 77,618,000 77,644,000
----------- ----------- -----------
$83,405,000 $82,676,000 $81,997,000
=========== =========== ===========
</TABLE>
Bank Debt
On March 30, 1992, Holdings entered into a revised credit agreement (the
1992 Credit Agreement) with its banks which consisted of $20 million available
($18 million at December 31, 1992) through a revolving line of credit, a $22
million acquisition note and an $8.9 million equipment note; the amounts
available decreased over the term of the agreement. Amounts outstanding under
the 1992 Credit Agreement bore interest, due monthly, at the bank's prime rate
plus 2.25% or LIBOR plus 3.50% (8.25% or 7.5%, effective rate at December 31,
1992), provided that not more than 80% of such amounts outstanding could be at
LIBOR plus 3.50%. The bank debt was paid off in June 1993 with proceeds from
the issuance of the Senior Notes.
Simultaneous with the issuance of Senior Notes in June 1993, Holdings
established the $10,000,000 New Credit Facility with a financial institution.
Holdings may borrow, on a revolving basis, up to the amount of a borrowing
base calculated as a percentage of eligible accounts receivable and a
percentage of resale inventory. The financial institution has a security
interest in all of Holdings' accounts receivable, inventory, and proceeds
thereof. The New Credit Facility is available for general corporate purposes,
including working capital requirements. Interest is due monthly at a rate of
1.25% over the financial institution's prime rate or 2.50% over the LIBOR rate
(9.75% or 9.0%, effective rate at December 31, 1994 and 10.25% or 9.0%,
effective rate at June 30, 1995), at Holdings' option. Availability on the
revolving facility and principal borrowings outstanding were $5,027,000 and
$1,045,000, respectively, at December 31, 1994 and $4,134,000 and $1,257,000,
respectively, at June 30, 1995. Commitment fees on the unused portion of the
revolving credit facility at the rate of one-half of 1% per annum, payable in
arrears on March 1, June 1, September 1, and December 1, are due commencing
September 1, 1993. Principal is due in its entirety on June 2, 1998, unless
accelerated prior thereto.
Up to $1,000,000 of letters of credit may be issued under the New Credit
Facility. Outstanding letters of credit totaled $114,000 and $14,000 at
December 31, 1994 and June 30, 1995, respectively. Fees at the rate of 2.5%
per annum are paid upon issuance of letters of credit.
Certain financial covenants and other affirmative and negative covenants are
required to be maintained as called for by the New Credit Facility agreement.
The financial covenants were amended in 1993 and again on March 29, 1994. As
of December 31, 1994 and June 30, 1995, Holdings was not in compliance with
the interest coverage ratio, fixed charges ratio, leverage ratio and capital
expenditure limits of the covenant provisions. Holdings' failure to make the
interest payment on the Senior Notes is also an event of default under the
terms of its New Credit Facility. As of March 15, 1995, Citicorp acknowledged
all the covenant non-compliance and defaults, did not waive such defaults and
reserved any and all rights and remedies under or with respect to the New
Credit Facility and the Loan Documents (as defined in the credit agreement)
resulting from such event of
F-37
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
default. Moreover, because the covenants are based on the trailing 12 months'
earnings, pursuant to Management's estimates for 1995, Holdings anticipates
not being in compliance with covenant provisions of the New Credit Facility at
the end of any quarter during 1995. As of June 30, 1995 and July 12, 1995,
Citicorp was making discretionary advances under the New Credit Facility
without assurance that it would make discretionary advances or issue a waiver
or continue to preserve their rights for any future defaults. If Holdings is
not able to obtain an advance or a waiver in the future and a default is
declared and demand is made for the payment of all amounts outstanding under
the New Credit Facility, Holdings does not believe it will be able to satisfy
such demand. In this event, Citicorp under the New Credit Facility would also
be entitled to exercise their rights and remedies under the related Security
Agreement, which include all rights and remedies of a secured party upon
default under the New York Uniform Commercial Code.
There can be no assurance that demand for payment of all amounts outstanding
under the New Credit Facility will not be made or how much longer Citicorp
will continue to make discretionary advances under the New Credit Facility or
that funds will otherwise be available under the New Credit Facility.
Subordinated Notes Payable
In 1990, Holdings issued $25 million in senior subordinated notes to a
financial institution for cash, and granted a warrant to purchase 27,778
shares of Holdings' common stock at an exercise price of $146.25 per share
(the Original Warrant); the Original Warrant was valued at $500,000. On April
1, 1993, the senior subordinated note agreement was amended to allow Holdings
to issue 13.5% senior subordinated interest notes (the Interest Notes) in lieu
of its July 15, 1991, January 15, 1992 and July 15, 1992 interest payments.
In conjunction with amending the senior subordinated note agreement and in
exchange for the Original Warrant, Holdings issued to the holder of the senior
subordinated notes a warrant to purchase 27,778 shares of Holdings' common
stock at an exercise price of $0.10 per share (Replacement Warrant) for the
Original Warrant. The exercise price of the Replacement Warrant was based on
the estimated fair market value of Holdings' common stock at the date of the
amendment as determined by Holdings' Board of Directors. If exercised, the
related shares would represent 21% of the outstanding shares of common stock
at December 31, 1994. The warrant is fully exercisable, in whole or in part,
and expires on January 15, 2000.
Holdings also had unsecured promissory notes payable, principally to its
shareholders, aggregating $2,250,000 at December 31, 1992 bearing simple
interest at 10% to 12%. The notes were subordinated to obligations outstanding
under the 1992 Credit Agreement with the bank and the amended senior
subordinated note agreement. In accordance with a subordination agreement
dated as of March 31, 1992, the principal and interest on the junior
subordinated notes could not be paid until all obligations outstanding under
the 1992 Credit Agreement and the amended senior subordinated note agreement
were paid in full.
All Senior and Junior subordinated notes payable were paid off with proceeds
from the issuance of the Senior Notes.
11.75% Senior Notes Due 2000
On June 1, 1993, Holdings sold $78,000,000 of 11.75% Senior Notes due 2000
less a discount of $455,000 in a public debt offering. Each of Holdings'
wholly owned subsidiaries guarantee the Senior Notes on a full, unconditional,
and joint and several basis. The Senior Notes are senior obligations of
Holdings and rank pari passu with all unsubordinated indebtedness of Holdings.
Proceeds of the Senior Notes were used for the repayment of all bank debt,
senior subordinated notes payable, and junior subordinated notes payable
outstanding at June 1, 1993. The Senior Notes are redeemable, in whole or in
part, at the option of Holdings, at any time on or after June 1, 1996, at
certain agreed upon redemption prices. In addition, until June 1, 1996, upon
an Initial
F-38
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Public Offering of Holdings' stock, up to 20% of the originally issued
aggregate principal amount of Senior Notes may be redeemed at the option of
Holdings at a certain agreed upon price. The indenture relating to the Senior
Notes (Indenture) contains certain covenants that, among other things, limit
the type and amount of additional indebtedness that may be incurred by
Holdings and certain of its subsidiaries and imposes limitation on
investments, loans, advances, the payment of dividends and the making of
certain other payments, the creation of liens, certain transactions with
affiliates and certain mergers.
Interest, at a rate of 11.75%, is due semiannually on June 1 and December 1.
The interest payments on the Senior Notes are in the amount of $4,582,500. To
date, Holdings has not made the interest payment on the Senior Notes due
December 1, 1994 and is in default with the terms of the Senior Notes
Indenture. Since an event of default under the Indenture has occurred and is
continuing, the holders of at least 25 percent in aggregate principal amount
of the outstanding Senior Notes may, by written notice to Holdings and the
Trustee under the Indenture, and the Trustee upon the written request of such
holders, can declare the principal amount of and accrued interest on all of
the outstanding Senior Notes due and payable immediately. If an event of
default under the Indenture occurs related to the bankruptcy of Holdings or
any Holdings subsidiary of Holdings, then the principal of and accrued
interest on the Senior Notes shall become immediately due and payable. If the
indebtedness under the Senior Notes is accelerated, Holdings would not be able
to pay such amounts. In such event, the Trustee is entitled to pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal of or interest on the Senior Notes or to enforce the performance of
any provision of the Senior Notes or the Indenture. If not accelerated before
such date, principal under the Senior Notes, in its entirety, is due June 1,
2000.
Equipment Contracts Payable
The equipment contracts bear interest at rates ranging from 7% to 14%, are
secured by equipment purchased and are payable in various monthly principal
installments.
Debt Maturities
The aggregate annual maturities of debt as of December 31, 1994, are as
follows:
<TABLE>
<CAPTION>
BANK EQUIPMENT SENIOR
DEBT(A) CONTRACTS NOTES(B) TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1995......................... $ -- $1,708,000 $ -- $ 1,708,000
1996......................... -- 1,399,000 -- 1,399,000
1997......................... -- 797,000 -- 797,000
1998......................... 1,045,000 109,000 -- 1,154,000
1999......................... -- -- -- --
Thereafter................... -- -- 77,618,000 77,618,000
---------- ---------- ----------- -----------
$1,045,000 $4,013,000 $77,618,000 $82,676,000
========== ========== =========== ===========
</TABLE>
- --------
(A) Currently, the New Credit Facility is in default and if the outstanding
principal is not accelerated, then the principal in its entirety is due
June 2, 1998.
(B) Currently, the Senior Notes are in default and if not accelerated, then
the principal in its entirety is due June 1, 2000.
F-39
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SHAREHOLDERS' DEFICIT
On March 31, 1992, in connection with the 1992 Credit Agreement (Note 3)
Holdings issued and sold 3,000,000 shares of Series A preferred stock, par
value $1.00, (the Preferred Stock) for $3,000,000 cash. Each share of the
Preferred Stock is entitled to .005 (five one-thousandths) of one vote. No
dividends may be paid on common stock in any fiscal year unless Holdings has
first paid to the Preferred Stock shareholders a dividend of not less than
$0.06 per share, which is noncumulative. Any additional dividends declared
shall be declared on the common stock only. Upon liquidation, the Preferred
Stock carries a liquidation preference of $1.00 per share, plus an amount
equal to all declared and unpaid dividends thereon. After the payment or
distribution to the Preferred Stock shareholders of the full preferential
amounts, the common shareholders are entitled to all remaining assets of
Holdings to be distributed. Concurrent with the issuance of the Preferred
Stock, Holdings' Board of Directors declared a one-for-ten reverse stock split
of Holdings' stock outstanding on such date. The authorized shares of
Holdings' common stock was changed to 500,000 shares, $.01 par value.
Additionally, Holdings entered into a restricted stock agreement with its
former Chairman and Chief Executive Officer subjecting 25,005 shares of
Holdings' common stock owned by him to forfeiture. The restrictions on 10,002
of such shares were to lapse based on ratable monthly vesting over 36 months.
The restrictions on the remaining 15,003 shares were to lapse ratably each
year if certain earnings levels were achieved for fiscal years 1992, 1993 and
1994. At December 31, 1993, restrictions on 10,839 of the shares had lapsed
and 5,001 shares were forfeited and returned to Holdings. As of December 31,
1994, restrictions on 12,507 of the shares had lapsed and 12,498 were
forfeited and returned to Holdings. On December 31, 1994, AAC purchased all of
the former Chairman's outstanding common and preferred shares in Holdings for
a total consideration of $10.
On December 28, 1993, Holdings entered into a stock purchase agreement with
the former President (Management Participant) whereby the Management
Participant purchased 5,985 shares of Holdings' authorized but unissued common
stock at $.01 per share. One-half of the shares are referred to as Employment
Stock and the remaining one-half of the shares are referred to as Eligible
Time Accelerated Stock (ETA Stock). The shares of common stock subject to this
agreement are held in escrow until such time as the shares vest. The
Employment Stock vests at the rate of 25% on December 31, 1993, 1994, 1995 and
1996. The ETA Stock vests at the rate of 25% on December 31, 1993, 1997, 1998
and 1999, however, the vesting may be accelerated if Holdings achieves certain
performance targets, as determined by Holdings' Board of Directors. As of
December 31, 1994, 1,496 shares of Employment Stock and 748 shares of ETA
Stock had vested.
5. EMPLOYEE BENEFIT PLANS
Holdings has a Section 401(k) employees savings plan (the Savings Plan)
covering substantially all full-time employees upon completion of at least 500
hours of service and six-months of continuous employment. The Savings Plan is
a defined contribution plan and provides for Holdings to make discretionary
contributions as deemed appropriate by the Savings Plan administrative
committee. No contributions were made by Holdings to the Savings Plan during
the years ended December 31, 1992, 1993 or 1994 or the six months ended June
30, 1995.
Holdings also has a group medical and dental insurance plan (the Health
Plan) covering substantially all full time employees (and their eligible
dependents) as defined, who have completed a minimum of three months of
continuous service (12 months of service to qualify for dental benefits).
Holdings is insured for individual and aggregate claims in excess of defined
stop-loss limits and has provided reserves for amounts it believes are
sufficient to cover claims which have been incurred but not reported as of
December 31, 1994 and June 30, 1995.
F-40
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
Obligations Under Capital Leases
Holdings has entered into capital lease obligations in connection with
acquiring certain rental equipment with aggregate costs and accumulated
amortization of $1,463,000 and $230,000 at December 31, 1993, and $1,553,000
and $355,000 at December 31, 1994, respectively. Future minimum lease payments
under the capital leases and the present value of the minimum lease payments
as of December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995............................................................ $482,000
1996............................................................ 251,000
1997............................................................ 23,000
1998............................................................ 7,000
1999............................................................ --
Thereafter...................................................... --
--------
Total minimum future lease payments............................. 763,000
Less amount representing interest............................... 73,000
--------
Present value of net minimum future lease payments.............. $690,000
========
</TABLE>
Obligations Under Operating Leases
At December 31, 1994, Holdings had minimum annual lease commitments for
property and equipment under noncancelable operating leases as follows:
<TABLE>
<S> <C>
1995.......................................................... $ 3,686,000
1996.......................................................... 2,997,000
1997.......................................................... 2,045,000
1998.......................................................... 1,141,000
1999.......................................................... 948,000
Thereafter.................................................... 2,649,000
-----------
$13,466,000
===========
</TABLE>
The property leases require Holdings to pay certain property taxes and
insurance costs. Certain of the real property leases provide for escalation of
future rental payments based upon increases in the consumer price index.
Rental expense under all operating leases totaled $3,631,000, $4,022,000,
$4,380,000, $2,224,000 and $2,110,000 for the years ended December 31, 1992,
1993, 1994, and six months ended June 30, 1994 and 1995, respectively.
Holdings leases all or a portion of one of its California locations from a
partnership that is comprised of certain present and former shareholders and
directors of Holdings and leases property which is part of a second California
location from certain present and former shareholders and directors of
Holdings. The corporate offices in California are leased from a former officer
and director of Holdings. Two locations in Louisiana are leased from a former
officer of Acme Dixie. The leases require monthly lease payments aggregating
approximately $43,000. Total rent expense attributable to these leases and
included in operations was $421,000, $532,000 and $533,000 for the years ended
December 31, 1992, 1993 and 1994, respectively and $231,000 and $231,000 for
the six months ended June 30, 1994 and 1995, respectively.
Purchase Commitments
As of December 31, 1994 and June 30, 1995, Holdings had commitments to
purchase equipment of approximately $2,395,000 and $1,977,000, respectively.
F-41
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Noncompetition Agreements
Holdings in the past has entered into noncompetition and/or consulting
agreements with the former owners of certain businesses it has acquired, some
of which require cash payments in future periods. The agreements are for terms
of two to five years and prohibit the former owners from competing with
Holdings in the business of renting equipment in certain California, Texas and
Louisiana counties. The present values of these future cash payments have been
capitalized and included in other assets (Note 1) with the corresponding
liabilities included in other accrued expenses in the accompanying balance
sheets.
Any breach of the agreements by the former owners terminates Holdings'
obligations. Amounts charged to expense, including amortization expense on
capitalized costs, were approximately $546,000, $376,000, $121,000, $121,000
and $0, for the years ended December 31, 1992, 1993 and 1994, and the six
months ended June 30, 1994 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
In July 1992, Holdings entered into a five-year management agreement
(Management Agreement) with a company owned by certain shareholders of
Holdings (AAC) that is acquiring equipment rental businesses. Under the
Management Agreement, Holdings locates potential acquisition opportunities,
provides administrative assistance in connection with acquisitions and
manages, supervises and provides administrative and accounting support for the
operation of AAC's rental locations. Pursuant to the Management Agreement,
Holdings has agreed, until April 1, 1995, to make available first to such
company any opportunities which come to its attention for acquiring additional
rental locations. During 1992, 1993 and 1994, Holdings assisted AAC in making
six acquisitions. AAC reimburses Holdings for any costs incurred by Holdings
to acquire the companies. Additionally, AAC pays Holdings a management fee
based on a percentage of the acquisition cost for each acquisition and the
performance of the companies acquired. As of December 31, 1993, the
miscellaneous receivable and the management fee receivable were $45,000 and
$146,000, respectively and as of December 31, 1994, the net miscellaneous
payable and the management fee receivable were $117,000 and $255,000,
respectively, and as of June 30, 1995, the net miscellaneous payable and the
management fee receivable were $82,000 and $381,000, respectively. As a result
of the chairman's resignation in June 1994, AAC at its discretion may
terminate the Management Agreement between AAC and Holdings. AAC has not
notified Holdings as to its intentions with respect to the termination or
continuation of the Management Agreement. Total management fee revenue,
included as a reduction in general and administrative expense, was $162,000,
$1,082,000, $1,496,000, $718,000 and $524,000, for the years ended December
31, 1992, 1993 and 1994, and the six months ended June 30, 1994 and 1995,
respectively.
In addition, Holdings and AAC have agreed to rerent equipment to each other
in the event the other party does not have sufficient rental equipment at a
given rental center location to meet a customer's requirements. The party
making such equipment available receives 70% of the gross rental receipts
received by the other party related to such rerental. For the years ended
December 31, 1992, 1993 and 1994 and the six months ended June 30, 1994 and
1995, rerent revenue received by Holdings from AAC was $13,000, $151,000,
$39,000, $6,000 and $16,000, respectively, and rerent expense paid by Holdings
to AAC was $37,000, $111,000, $230,000, $62,000 and $35,000, respectively.
Holdings also leases certain facilities owned by certain of Holdings'
present and former officers, directors and shareholders (Note 6).
F-42
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLAN
In May 1990, Holdings' Board of Directors approved the Acme Holdings Inc.
1990 Stock Option Plan which authorizes the granting of options to various
directors, officers, employees and outside consultants to purchase, within a
period of 10 years from date of grant, up to 7,310 shares of common stock at
an exercise price to be determined at the time of grant by Holdings' Board of
Directors. The exercise price shall be not less than fair market value on the
date of grant for incentive stock options (ISOs), and not less than 85% of the
fair market value on the date of grant for nonstatutory stock options (NSOs).
Any otherwise eligible participant who owns more than 10% of the total
combined voting power of all classes of outstanding stock of Holdings is not
eligible to receive options under the plan unless the exercise price is at
least 110% of the fair market value of such shares on the date of grant and
the options are exercisable for a term of only five years from the date of
grant. Options vest in such increments as determined by Holdings' Board of
Directors.
ISOs to purchase 3,290 shares of common stock at $.10 per share were granted
in March 1992 to replace previously issued and canceled options. In January
1993, 1,097 ISOs to purchase shares of common stock at $2.69 per share were
granted. Such ISOs become exercisable at various dates commencing July 1993.
ISOs covering 1,097 shares are exercisable at December 31, 1994. On March 31,
1992, NSOs to purchase 365 shares of common stock at $27.00 per share were
granted to replace previously issued and canceled options; such exercise price
was based upon isolated negotiations with a single option holder and bore no
relationship to the fair market value of the common stock. The NSOs were fully
exercisable at date of grant. No options were granted during 1994.
9. INCOME TAXES
Effective January 1, 1993, Holdings changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (Statement No. 109). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
As permitted under Statement No. 109, Holdings has elected not to restate
the financial statements of any prior years. There was no effect from this
change on net income for the year ended December 31, 1993 or on the deferred
tax balance at December 31, 1992.
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ -- $ -- $ --
State....................................... 400,000 300,000 111,000
-------- -------- --------
400,000 300,000 111,000
Deferred:
Federal..................................... -- -- --
State....................................... 27,000 (26,000) (50,000)
-------- -------- --------
27,000 (26,000) (50,000)
-------- -------- --------
$427,000 $274,000 $ 61,000
======== ======== ========
</TABLE>
F-43
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994, deferred income taxes reflect the tax effects of temporary
differences between the value of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Holdings' net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1994
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 8,614,000 $ 11,899,000
Alternative minimum tax credit.................. 754,000 754,000
Allowance for doubtful accounts................. 384,000 501,000
Accrued health & general insurance.............. 1,298,000 1,257,000
State taxes, net................................ 297,000 123,000
Other accruals.................................. 1,733,000 1,183,000
----------- ------------
Total deferred tax assets....................... 13,080,000 15,717,000
Valuation allowance for deferred tax assets..... (7,396,000) (11,596,000)
----------- ------------
Net deferred tax assets........................... 5,684,000 4,121,000
Deferred tax liabilities:
Depreciation, tax over book..................... (5,904,000) (4,146,000)
Other accruals.................................. (205,000) (350,000)
----------- ------------
Total deferred tax liabilities.................... (6,109,000) (4,496,000)
----------- ------------
Net deferred tax liabilities...................... $ (425,000) $ (375,000)
=========== ============
</TABLE>
A reconciliation between the provision for income taxes computed by applying
the federal statutory tax rate to loss before taxes for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1992 1993 1994
--------- ----------- -----------
<S> <C> <C> <C>
Federal tax benefit at statutory rate. $(218,000) $(4,686,000) $(2,994,000)
Losses without benefit................ 218,000 4,686,000 2,994,000
State taxes........................... 427,000 274,000 61,000
--------- ----------- -----------
$ 427,000 $ 274,000 $ 61,000
========= =========== ===========
</TABLE>
At December 31, 1994, Holdings has approximately $29,300,000 of net
operating loss carryforwards for federal income tax purposes that expire
$9,500,000 in 2005, $6,000,000 in 2006, $1,700,000 in 2007 and $6,800,000 in
2008 and $5,300,000 in 2009. In addition, Holdings has net operating loss
carryforwards for California income tax purposes of approximately $17,800,000
which are available to offset taxable income starting in 1993 and expire
$4,300,000 in 1996, $5,800,000 in 1997, $3,900,0000 in 1998 and $3,800,000 in
1999. The ultimate realization of the benefit of these loss carryforwards is
dependent on Holdings achieving proper levels of operating profits in the
future.
Holdings also has alternative minimum tax credit carryovers of approximately
$590,000 for federal income tax purposes and $164,000 for California income
tax purposes which are available to offset future regular income tax that is
in excess of the alternative minimum tax in such year. The credits carry over
indefinitely.
Pursuant to the Tax Reform Act of 1986, use of Holdings' net operating loss
carryforwards and other tax attributes may be substantially limited if a
cumulative change in ownership of more than 50% occurs within any three year
period. As of December 31, 1994, a cumulative change of more than 50% occurred
which could significantly impact the future benefit of the federal and state
net operating loss carryforwards under Internal Revenue Service Code Section
382.
10. SUBSEQUENT EVENT
Holdings has decided to relocate its corporate office to Scottsdale, Arizona
during the second and third quarters of 1995.
F-44
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying combined balance sheets of the corporations
and partnerships listed in Note 1 (the Company) as of March 31, 1997 and 1996
and the related combined statements of operations, redeemable stock and other
stockholders' and partners' equity and cash flows for the years then ended.
These combined financial statements are the responsibility of the Company's
management. 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 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
corporations and partnerships listed in Note 1 at March 31, 1997 and 1996, and
the combined results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
May 6, 1997
F-45
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................. $ 1,816,726 $ 7,164,847
Investments, at market value (cost of $2,687,731)..... 2,813,546 --
Accounts receivable, net of allowance for doubtful
accounts of $120,000 at March 31, 1996 and 1997...... 7,482,984 6,993,000
Inventory............................................. 6,843,218 6,663,676
Prepaid expenses and other assets..................... 306,003 217,400
Rental equipment, at cost, net of accumulated
depreciation of $2,086,440 and $1,835,658 at March
31, 1996 and 1997.................................... 1,103,985 1,010,027
Operating property and equipment, at cost, net of
accumulated depreciation............................. 1,350,901 1,377,166
Other assets.......................................... 764,371 716,238
----------- -----------
$22,481,734 $24,142,354
=========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE STOCK, AND OTHER
STOCKHOLDERS' AND PARTNERS' EQUITY
----------------------------------------
<S> <C> <C>
Accounts payable...................................... $ 2,717,936 $ 2,513,777
Payroll and other accrued expenses.................... 1,120,553 1,232,929
Notes payable to stockholders......................... 705,127 705,127
----------- -----------
Total liabilities..................................... 4,543,616 4,451,833
Commitments and contingencies
Class B common stock--redeemable, at liquidation
value................................................ 11,399,437 10,774,506
Other stockholders' and partners' equity:
Unrealized gain on investments available for sale... 125,815 --
Preferred stock, at liquidation value............... 890,800 890,800
Class A common stock................................ 10,000 10,000
Common stock--Bayview............................... 2,500 2,500
Partners' equity.................................... 6,021,363 7,781,958
Retained earnings (deficit)......................... (511,797) 230,757
----------- -----------
Total other stockholders' and partners' equity........ 6,538,681 8,916,015
----------- -----------
$22,481,734 $24,142,354
=========== ===========
</TABLE>
See accompanying notes.
F-46
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues:
Sales of parts, supplies and equipment............. $38,159,436 $41,694,541
Equipment rentals.................................. 6,848,704 7,318,643
----------- -----------
Total revenues....................................... 45,008,140 49,013,184
Cost of revenues:
Cost of sales of parts, supplies and equipment..... 30,377,393 33,306,804
Cost of equipment rentals, excluding equipment
rental depreciation............................... 4,624,537 5,169,571
Depreciation, equipment rentals.................... 528,926 445,504
----------- -----------
Total cost of revenues............................... 35,530,856 38,921,879
----------- -----------
Gross profit......................................... 9,477,284 10,091,305
Selling, general and administrative expenses......... 6,366,204 7,107,647
Depreciation and amortization, excluding equipment
rental depreciation................................. 205,742 164,243
----------- -----------
Operating income..................................... 2,905,338 2,819,415
Other income (expense):
Interest income.................................... 159,477 204,263
Gain on sale of investments........................ -- 251,540
Interest expense................................... (48,661) (67,070)
Other, net......................................... 10,496 (82,379)
----------- -----------
3,026,650 3,125,769
Provision for income taxes........................... 100,000 150,000
----------- -----------
Net income........................................... $ 2,926,650 $ 2,975,769
=========== ===========
</TABLE>
See accompanying notes.
F-47
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF REDEEMABLE STOCK AND OTHER STOCKHOLDERS' AND PARTNERS'
EQUITY
<TABLE>
<CAPTION>
COMTECT, INC. BAYVIEW
------------------------------ -------------
REDEEMABLE
CLASS B CLASS A
COMMON STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------ --------------- -------------- ------------- PARTNERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ----------- ------ -------- ------ ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1995........ 10,000 $11,158,316 8,908 $890,800 10,000 $10,000 2,500 $2,500 $3,889,279
Net income...... -- -- -- -- -- -- -- -- 2,638,684
Change in
liquidation
value of
redeemable
stock........... -- 241,121 -- -- -- -- -- -- --
Unrealized
appreciation on
investments..... -- -- -- -- -- -- -- -- --
Distributions to
stockholders and
partners........ -- -- -- -- -- -- -- -- (506,600)
------ ----------- ----- -------- ------ ------- ----- ------ ----------
Balance at March
31, 1996........ 10,000 11,399,437 8,908 890,800 10,000 10,000 2,500 2,500 6,021,363
Net income...... -- -- -- -- -- -- -- -- 2,657,487
Change in
liquidation
value of
redeemable
stock........... -- (624,931) -- -- -- -- -- -- --
Liquidation of
investment
portfolio....... -- -- -- -- -- -- -- -- --
Distributions to
stockholders and
partners........ -- -- -- -- -- -- -- -- (896,892)
------ ----------- ----- -------- ------ ------- ----- ------ ----------
Balance at March
31, 1997........ 10,000 $10,774,506 8,908 $890,800 10,000 $10,000 2,500 $2,500 $7,781,958
- --------------------------------------------------
====== =========== ===== ======== ====== ======= ===== ====== ==========
<CAPTION>
UNREALIZED TOTAL
GAINS (LOSSES) OTHER
ON INVESTMENTS RETAINED STOCKHOLDERS'
AVAILABLE FOR EARNINGS AND PARTNERS'
SALE (DEFICIT) EQUITY
-------------- ---------- -------------
<S> <C> <C> <C>
Balance at March
31, 1995........ $(159,812) $(159,643) $ 4,473,124
Net income...... -- 287,966 2,926,650
Change in
liquidation
value of
redeemable
stock........... -- (241,121) (241,121)
Unrealized
appreciation on
investments..... 285,627 -- 285,627
Distributions to
stockholders and
partners........ -- (398,999) (905,599)
-------------- ---------- -------------
Balance at March
31, 1996........ 125,815 (511,797) 6,538,681
Net income...... -- 318,282 2,975,769
Change in
liquidation
value of
redeemable
stock........... -- 624,931 624,931
Liquidation of
investment
portfolio....... (125,815) -- (125,815)
Distributions to
stockholders and
partners........ -- (200,659) (1,097,551)
-------------- ---------- -------------
Balance at March
31, 1997........ $ -- $ 230,757 $ 8,916,015
- --------------------------------------------------
============== ========== =============
</TABLE>
See accompanying notes.
F-48
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 2,926,650 $ 2,975,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 734,668 609,747
Gain on sale of investments available for sale.... -- (251,540)
Provision for deferred taxes...................... (105,000) 60,000
Changes in operating assets and liabilities:
Accounts receivable............................. (1,760,654) 489,984
Prepaid expenses and other assets............... (68,793) 76,736
Inventory....................................... (748,832) 179,542
Accounts payable ............................... (159,262) (204,159)
Payroll and other accrued expenses.............. 502,565 112,376
----------- -----------
Net cash provided by operating activities........... 1,321,342 4,048,455
INVESTING ACTIVITIES
Proceeds from the sale of investments available for
sale, net.......................................... 321,927 2,939,271
Acquisition of property and equipment .............. (871,473) (542,054)
----------- -----------
Net cash provided by (used in) investing activities. (549,546) 2,397,217
FINANCING ACTIVITIES
Distributions to stockholders and partners.......... (905,599) (1,097,551)
Principal repayments of notes payable............... (284,873) --
----------- -----------
Net cash used by financing activities............... (1,190,472) (1,097,551)
----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (418,676) 5,348,121
Cash and cash equivalents at beginning of year...... 2,235,402 1,816,726
----------- -----------
Cash and cash equivalents at end of year............ $ 1,816,726 $ 7,164,847
=========== ===========
</TABLE>
See accompanying notes.
F-49
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the accounts of the
following companies (collectively, Industrial Air Tool or IAT):
.Comtect Inc. (Comtect), a Nevada Corporation, and its wholly owned
subsidiaries:
-- IAT interests of Nevada, Inc., a Nevada corporation.
-- RNJB, Inc., a Nevada corporation.
-- CFTSIJC., Inc., a Nevada corporation.
-- Industrial Air Tool Pasadena, Inc., a Texas corporation.
-- Industrial Air Tool Texas City, Inc., a Texas corporation.
-- PST, Inc. of Louisiana, A Louisiana corporation.
-- LRB Supply, Inc., a Texas corporation.
.GT Financial Ltd., a Texas limited partnership
.Shield Pt., Ltd. (Shield), a Texas limited partnership
.Bayview Interests, Inc. (Bayview), a Nevada Corporation
Each of these companies and partnerships are owned by substantially the same
shareholders and partners. All material intercompany accounts and transactions
have been eliminated.
Comtect sells maintenance, repair, and operations (MRO) equipment and
supplies, and rents equipment to customers throughout the world from its
locations in Texas and Louisiana. Comtect grants credit to customers, the
majority of whom are in the petrochemical or construction industries. GT
Financial purchases certain accounts receivable from Comtect. Shield owns land
and buildings which are leased to Comtect. Bayview is a domestic international
sales corporation which has received a commission of 4 percent (to a maximum
commission of $400,000) on all export sales.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of parts, supplies and equipment are recorded at the
time of delivery to or pick-up by the customer. Equipment rental revenue is
recorded as earned under the operating method.
Cash and Cash Equivalents.
IAT considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
F-50
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Credit Policy
IAT extends credit to its customers based on evaluations of their financial
condition. Collateral generally is not required. IAT maintains reserves which
it believes are adequate for potential credit losses.
Inventories
Inventories consist principally of equipment, parts, and supplies. All
inventories are valued at the lower of cost or market using the specific
identification last-in, first-out (LIFO) method of accounting, which
approximates the first-in, first-out method of accounting.
Depreciation and Amortization
Rental equipment and operating property and equipment are stated at cost and
are depreciated using the straight-line method over the following estimated
useful lives:
<TABLE>
<S> <C>
Rental equipment............................................... 5-7 years
Operating property and equipment............................... 5 years
Buildings and leasehold improvements........................... 28-40 years
</TABLE>
All rental equipment costing more than $500 and greater than one year useful
life is capitalized at the date of purchase.
Income Taxes
Comtect 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 effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured based on the likelihood of realization of the related tax benefits in
the future.
GT Financial Ltd. and Shield are Texas limited liability partnerships, and,
accordingly, taxes related to their income are the responsibility of the
individual partners.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense was $46,057
and $88,912 for the years ended March 31, 1996 and 1997, respectively.
F-51
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Land and building........................................ $1,424,593 $1,424,593
Vehicles, machinery and equipment........................ 618,069 607,631
Office equipment......................................... 272,747 298,585
---------- ----------
Total................................................ 2,315,409 2,330,809
Less accumulated depreciation............................ 964,508 953,643
---------- ----------
$1,350,901 $1,377,166
========== ==========
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
Notes payable at March 31, 1996 and 1997 are payable by GT Financial Ltd. to
two shareholders with interest at 10 percent, and due on demand. No interest
was paid in the years ended March 31, 1996 and 1997.
4. EMPLOYEE BENEFIT PLANS
IAT maintains the ERISA qualified IAT Interests, Inc. Profit Sharing Plan
(the Plan) covering substantially all employees who complete 1,000 hours of
service annually. The Plan allows IAT to make discretionary contributions.
Contributions are allocated to employee accounts based upon individual wages
as compared to total IAT wages. Employees are not permitted or required to
make contributions to the Plan. Vesting of an employee's interest in the Plan
occurs over a seven year period. Contributions to the Plan were $543,065 and
$617,824 for the years ended March 31, 1996 and 1997, respectively.
5. REDEEMABLE STOCK AND OTHER STOCKHOLDERS' EQUITY
Comtect has 20,000 shares of preferred stock authorized, $10 par value, with
8,908 shares issued and outstanding at March 31, 1996 and 1997. The preferred
stock is nonvoting and is entitled to receive, when and as declared by the
board of directors, a noncumulative dividend of $9.00 per share. The preferred
stock has a liquidation preference of $100 per share plus any declared and
unpaid dividends.
Comtect has 20,000 shares of Class A voting common stock authorized, $1.00
par value, with 10,000 shares issued and outstanding at March 31, 1996 and
1997. Comtect also has 20,000 shares of Class B nonvoting common stock, $1.00
par value, with 10,000 shares issued and outstanding at March 31,1997. The
Class B common stock is subordinate to the preferred stock and Class A common
stock with respect to dividends and upon liquidation.
Bayview has 5,000 shares of common stock authorized, $1.00 par value, with
2,500 shares issued and outstanding at March 31, 1996 and 1997.
Pursuant to a buy-sell agreement dated March 31, 1992, Comtect has agreed
with the holders of it's Class B common stock to purchase such shares upon the
shareholder's termination of employment, death, disability, or at the
shareholder's option, at its estimated fair value at the date of purchase, as
defined in the agreement. The shareholders have agreed not to sell their
shares except to Comtect.
F-52
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Environmental
IAT and its operations are subject to a variety of federal, state and local
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 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 related costs of
investigation and property damage. IAT incurs ongoing expenses associated with
the performance of appropriate remediation at certain of its locations. IAT
does not believe that such remediation will have a material adverse effect on
IAT's combined financial position, results of operations or cash flows.
Legal Proceedings
IAT is party to various litigation matters, in most cases involving ordinary
and routine claims incidental to the business of IAT. The ultimate legal and
financial liability of IAT with respect to such pending litigation cannot be
estimated with certainty, but IAT believes, based on its examination of such
matters, that such ultimate liability will not have a material adverse effect
on the business, or the combined financial position, results of operations or
cash flows of IAT.
7. INCOME TAXES
Income tax expense differs from the amount computed by applying the
statutory federal income tax to the income before income taxes due to the
effect of state taxes and the portion of IAT's income which is attributable to
limited partnerships, which are not subject to income taxes.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Nondeductible reserves and accruals................... $156,000 $131,000
Uniform capitalization adjustment..................... 90,000 86,000
Depreciation and other................................ 104,000 73,000
-------- --------
Total deferred tax assets........................... $350,000 $290,000
======== ========
</TABLE>
The tax provision is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------------
1996 1997
--------- --------
<S> <C> <C>
Federal:
Current.............................................. $ 135,000 $ 30,000
Deferred............................................. (105,000) 60,000
--------- --------
30,000 90,000
State:
Current.............................................. 70,000 60,000
Deferred............................................. -- --
--------- --------
70,000 60,000
--------- --------
Total.............................................. $ 100,000 $150,000
========= ========
</TABLE>
F-53
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SIGNIFICANT CUSTOMERS
A single customer represented 10% and 12% of IAT's revenues for the years
ended March 31, 1996 and 1997, respectively.
Export sales, primarily to offshore petrochemical operators, totaled
$10,801,000 and $13,107,000 during the years ended March 31, 1996 and 1997,
respectively.
A significant portion of the Company's revenues are generated based on
manufacturers' distribution agreements. The loss of any such distributorships
could have a material adverse effect on the Company's business. Sales of one
manufacturer's products under a distribution arrangement represented 21% and
25% of revenues in the years ended March 31, 1996 and 1997, respectively.
9. SUBSEQUENT EVENTS
Pursuant to a Purchase Agreement signed March 14, 1997, all of the
outstanding common and preferred stock of Comtect was purchased on April 25,
1997 by Rental Service Corporation (RSC), effective March 1, 1997, in exchange
for $32.6 million in cash and 189,189 shares of RSC Common Stock. Up to an
additional 108,108 shares of RSC Common Stock may be paid to the sellers over
a three year period if certain performance objectives are met. Under the terms
of the Purchase Agreement all previously factored accounts receivable sold to
GT Financial Ltd. were repurchased by Comtect, and all real estate owned by
Shield and leased to Comtect was purchased by Comtect, effective March 31,
1997, and Bayview ceased its affiliation with Comtect. The transaction closed
on April 25, 1997, and IAT's balance sheet was consolidated with RSC's under
the purchase method of accounting as of that date. Pursuant to the acquisition
agreement, RSC assumed effective control of IAT's operations on March 1, 1997
and has included IAT's revenues of $4,322,000 and costs and expenses of
$3,848,000 from such date in its consolidated statements of operations for the
three months ended March 31, 1997, net of related imputed purchase price
adjustments of $48,000.
F-54
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Brute Equipment Co.
d/b/a Foxx Hy-Reach, Inc.
Moline, Illinois
We have audited the accompanying balance sheets of Brute Equipment Co. d/b/a
Foxx Hy-Reach, Inc. as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. 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 Brute Equipment Co. d/b/a
Foxx Hy-Reach, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Moline, Illinois
April 26, 1997
F-55
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 4)
---------------
Cash...................................... $ 27,250 $ 3,350 $ 3,350
Accounts receivables, less allowance for
doubtful accounts December 31, 1995
$20,000; December 31, 1996 $40,475;
March 31, 1997 $40,475................... 2,002,199 2,649,607 2,453,143
Parts and supplies inventories............ 142,796 405,161 404,783
Other receivables and prepaid expense..... 42,737 23,986 51,397
Investment, life insurance................ 205,034 230,399 236,740
Rental equipment, net of accumulated
depreciation December 31, 1995
$3,826,500; December 31, 1996 $5,098,656;
March 31, 1997 $5,368,193................ 11,277,363 14,226,511 13,841,221
Operating equipment and leasehold
improvements, net of accumulated
depreciation December 31, 1995 $625,695;
December 31, 1996 $718,709; March 31,
1997
$717,093 (Note 3)........................ 590,759 492,441 421,874
----------- ----------- -----------
$14,288,138 $18,031,455 $17,412,508
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable.......................... $ 68,850 $ 560,202 $ 235,905
Accrued expenses.......................... 260,084 338,251 321,961
Litigation judgment liability (Note 9).... -- 2,320,000 2,320,000
Notes payable, including notes to related
parties December 31, 1995 $1,567,635;
December 31, 1996 $579,355; March 31,
1997 $551,839 (Note 4)................... 4,426,776 3,991,157 2,420,408
----------- ----------- -----------
Total liabilities..................... 4,755,710 7,209,610 5,298,274
----------- ----------- -----------
Commitments (Notes 5, 6 and 11)
Stockholders' Equity:
Common stock, no par value; authorized
100,000 shares issued 1,000 shares, at
amounts paid in........................ 100,000 100,000 100,000
Retained earnings....................... 9,432,428 10,721,845 12,014,234
----------- ----------- -----------
9,532,428 10,821,845 12,114,234
----------- ----------- -----------
$14,288,138 $18,031,455 $17,412,508
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-56
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Equipment rentals.............. $ 9,465,624 $11,842,440 $2,473,235 $2,856,078
Sales of parts, supplies and
equipment..................... 7,774,425 7,976,069 1,961,169 2,241,285
----------- ----------- ---------- ----------
17,240,049 19,818,509 4,434,404 5,097,363
----------- ----------- ---------- ----------
Cost of revenues:
Cost of equipment rentals,
excluding equipment rental
depreciation.................. 3,969,880 4,228,171 951,111 1,007,432
Depreciation, equipment
rentals....................... 1,940,332 2,718,397 593,398 781,806
Cost of sales of parts,
supplies and equipment........ 5,250,625 5,308,453 1,351,574 1,482,261
----------- ----------- ---------- ----------
Total cost of revenues....... 11,160,837 12,255,021 2,896,083 3,271,499
----------- ----------- ---------- ----------
Gross profit................. 6,079,212 7,563,488 1,538,321 1,825,864
Selling, general and
administrative expense........ 3,107,090 3,461,510 352,700 417,299
Depreciation, excluding
equipment rental depreciation. 225,877 257,723 63,718 51,840
Litigation judgment expense
(Note 9)...................... -- 2,320,000 -- --
----------- ----------- ---------- ----------
Operating income............. 2,746,245 1,524,255 1,121,903 1,356,725
Interest expense, including
amounts paid to related parties
December 31, 1995 $57,045;
December 31, 1996 $73,840;
March 31, 1996 $27,246
March 31, 1997 $11,260.......... 141,539 234,838 68,079 64,336
----------- ----------- ---------- ----------
Net income................... $ 2,604,706 $ 1,289,417 $1,053,824 $1,292,389
=========== =========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-57
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
-------- -----------
<S> <C> <C>
Balance, December 31, 1994................................ $100,000 $ 6,827,722
Net income.............................................. -- 2,604,706
-------- -----------
Balance, December 31, 1995................................ 100,000 9,432,428
Net income.............................................. -- 1,289,417
-------- -----------
Balance, December 31, 1996................................ 100,000 10,721,845
Net income (unaudited).................................. -- 1,292,389
-------- -----------
Balance, March 31, 1997 (unaudited)....................... $100,000 $12,014,234
======== ===========
</TABLE>
See Notes to Financial Statements.
F-58
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------------
1995 1996 1996 1997
------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities:
Net income............. $ 2,604,706 $ 1,289,417 $ 1,053,824 $ 1,292,389
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation......... 2,166,209 2,976,120 657,116 833,646
Gain on sale of
rental equipment ... (1,866,525) (2,019,108) (457,612) (535,731)
Changes in operating
assets and
liabilities:
Accounts
receivables ...... (543,772) (647,408) 255,106 196,464
Parts and supplies
inventories....... (22,620) (262,365) 394 378
Other receivables
and prepaid
expense........... (20,702) 18,751 (502) (27,411)
Accounts payable
and accrued
expenses.......... 26,902 569,519 (86,334) (340,587)
Litigation judgment
liability......... -- 2,320,000 -- --
------------ ------------ ----------- -----------
Net cash provided
by operating
activities...... 2,344,198 4,244,926 1,421,992 1,419,148
------------ ------------ ----------- -----------
Investing Activities:
Proceeds from sale of
equipment............. 7,225,096 7,350,903 1,831,976 2,076,763
Purchase of equipment.. (11,520,436) (11,158,745) (1,520,970) (1,918,821)
Purchase of investment
in life insurance..... (25,365) (25,365) (6,341) (6,341)
------------ ------------ ----------- -----------
Net cash provided
by (used in)
investing
activities...... (4,320,705) (3,833,207) 304,665 151,601
------------ ------------ ----------- -----------
Financing Activities:
Borrowings from
stockholders.......... 1,833,024 -- -- --
Payments to
stockholders.......... (1,122,509) (988,280) (251,444) (27,516)
Net borrowings
(payments) from note
payable............... 1,266,392 (947,339) (1,475,213) (1,543,233)
Proceeds from long-term
obligations........... -- 1,500,000 -- --
------------ ------------ ----------- -----------
Net cash provided
by (used in)
financing
activities...... 1,976,907 (435,619) (1,726,657) (1,570,749)
------------ ------------ ----------- -----------
Net increase
(decrease) in
cash............ 400 (23,900) -- --
Cash balance, beginning
of period............... 26,850 27,250 27,250 3,350
------------ ------------ ----------- -----------
Cash balance, end of
period.................. $ 27,250 $ 3,350 $ 27,250 $ 3,350
============ ============ =========== ===========
Supplemental Disclosure
of Cash Flow
Information,
Cash paid for interest. $ 145,501 $ 215,184 $ 53,885 $ 61,477
</TABLE>
See Notes to Financial Statements.
F-59
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of presentation: Brute Equipment Co. was incorporated in the state of
Iowa in May 1984 and qualified to do business under the assumed name of Foxx
Hy-Reach, Inc. in the same month. During 1986, the Company, with the consent
of its stockholders, elected to be taxed as an S-Corporation. The Company's
operations consist principally of the short-term rental and the sale of
equipment to the construction industry primarily in the midwest 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 sheets are
presented on an unclassified basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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.
Certain amounts for 1995 have been reclassified to conform with the
classifications used in 1996, with no effect on net income or stockholders'
equity.
Revenue recognition: Equipment rental revenue is recorded as earned under
the operating method. Equipment rentals in the statements of operations
include revenues 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 to or pick-up by the customer.
Credit policy: Substantially all 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, although in many cases, mechanics' liens are filed to protect the
Company's interests. The Company maintains reserves it believes are adequate
for potential credit losses.
Parts and supplies inventories: Inventories are stated at the lower of cost
(first-in, first-out method) or market.
Equipment and leasehold improvements: Equipment and leasehold improvements
are stated at cost. Depreciation is computed by the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Rental equipment..................................................... 6-7
Office and computer equipment........................................ 5-7
Transportation equipment............................................. 3-5
Leasehold improvements............................................... 10
</TABLE>
Advertising costs: Advertising costs are expensed as incurred and totaled
$35,320 and $36,101 for the years ended December 31, 1995 and 1996,
respectively, and $10,030 and $12,217 for the three-months ended March 31,
1996 and 1997 (unaudited), respectively.
Concentrations of credit risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of accounts receivable which is limited due to the large number of
customers.
Fair value of financial instruments: The carrying amount of cash, accounts
receivables, litigation judgment liability and accounts payable approximates
fair value because of the short maturity of these instruments. The
F-60
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
carrying amount of notes payable which carry current interest rates and have
short maturities approximates fair value.
NOTE 2. UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited condensed financial
information of the Company contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly the Company's financial
position as of March 31, 1997, and the results of its operations and its cash
flows for the three-months ended March 31, 1996 and 1997. These results are
not necessarily indicative of the results to be expected for the full fiscal
year.
NOTE 3. OPERATING EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Operating equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment......... $1,086,270 $1,003,294 $ 922,770
Leasehold improvements.................... 73,494 73,494 73,494
Furniture, fixtures and computer
equipment................................ 56,690 134,362 142,703
---------- ---------- ----------
1,216,454 1,211,150 1,138,967
Less accumulated depreciation and
amortization............................. 625,695 718,709 717,093
---------- ---------- ----------
$ 590,759 $ 492,441 $ 421,874
========== ========== ==========
</TABLE>
NOTE 4. PLEDGED ASSETS AND NOTES PAYABLE
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Revolving credit agreement with a bank, $2,000,000,
($3,000,000 as of December 31, 1995) interest at 3/8%
under the bank's prime rate, (8.5% as of December 31,
1996), due June 30, 1997, collateralized by
substantially all assets of the Company and the
personal guarantees of the officer-stockholders and
the spouse of one of the officer-stockholders. ...... $2,859,141 $1,911,802
Note payable, bank, due in annual installments of
$300,000 plus interest at 7.84%, due April 1999,
collateralized by substantially all assets of the
Company and the personal guarantees of the officer-
stockholders and the spouse of one of the officer-
stockholders. ....................................... -- 1,500,000
Note payable, officer-stockholders, due on demand,
unsecured. The interest rate in effect as of December
31, 1995 and 1996 was 7% and 8%, respectively. ...... 1,567,635 579,355
---------- ----------
$4,426,776 $3,991,157
========== ==========
</TABLE>
F-61
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also has an unused $1,500,000 line-of-credit agreement with a
bank that pays interest at 3/8% under the bank's prime rate (8.5% as of
December 31, 1996), due April 30, 1997, collateralized by substantially all
assets of the Company and the personal guarantees of the officer-stockholders
and the spouse of one of the officer-stockholders.
NOTE 5. STOCKHOLDERS' AGREEMENT
The stockholders of the Company have entered into an agreement which places
restrictions on the transfer of their stock during their lifetime. The
agreement also contains provisions for the mandatory purchase of shares, by
the surviving stockholder, upon the death or disability of a stockholder under
the terms and conditions set forth in the agreement.
NOTE 6. LEASE COMMITMENTS AND RENTAL EXPENSE
The Company leases its Morton, Illinois facility from an officer-
stockholder. The agreement expires July 24, 1997 and requires monthly rentals
of $2,500 plus the payment of all property taxes, utilities, insurance and
maintenance on the property.
The Company leases its Moline, Illinois facility from an officer-
stockholder. The agreement expires June 30, 1997 and requires monthly rentals
of $5,500 plus the payment of all property taxes, utilities, insurance and
maintenance on the property.
The Company leases a facility in Des Moines, Iowa. The agreement expires May
14, 2000 and requires monthly rentals of $3,500 plus the payment of all
property taxes, utilities, insurance and maintenance on the property.
The Company also leases a facility in Cedar Rapids, Iowa. The agreement
expires May 31, 1998 and requires monthly rentals of $3,000 plus the payment
of all property taxes, utilities, insurance and maintenance on the property.
The total rental expense for the years ended December 31, 1995 and 1996 was
$165,400 and $179,600, respectively, and $45,600 and $44,700 for the three-
months ended March 31, 1996 and 1997 (unaudited), respectively. Of the total
rent expense, $96,000 was paid to an officer-stockholder for each of the years
ended December 31, 1995 and 1996, respectively, and $24,000 for each of the
three-months ended March 31, 1996 and 1997 (unaudited).
The total minimum rental commitment under these leases as of December 31,
1996 is $242,500 which is due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997........................................................ $126,000
1998........................................................ 57,000
1999........................................................ 42,000
2000........................................................ 17,500
--------
$242,500
========
</TABLE>
F-62
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. DISCRETIONARY BONUSES AND MANAGEMENT FEE
The Company pays discretionary bonuses to its officers and key employees.
The amount of these bonuses totaled $1,198,500 and $1,107,500 for the years
ended December 31, 1995 and 1996, respectively. There were no discretionary
bonuses paid to officers or key employees during each of the three-months
ended March 31, 1996 and 1997 (unaudited).
The Company purchases management services from Knox Rental Stores, Inc. The
principal stockholder of Knox Rental Stores, Inc. is also a stockholder of
Brute Equipment Co. The amount of these management services purchased totaled
$1,000,000 for each of the years ended December 31, 1995 and 1996.
NOTE 8. EMPLOYEE BENEFITS AND RETIREMENT PLANS
The Company has a group health insurance plan for all of its employees. The
plan qualifies as a "cafeteria plan" under Section 125 of the Internal Revenue
Code of 1986. The Company has elected to self-insure claims ranging from $100
to $500 whereby the Company pays 80% of all claims within this range. Expenses
relating to the plan totaled $10,345 and $9,346 for the years ended December
31, 1995 and 1996, respectively, and $2,050 and $2,320 for the three-months
ended March 31, 1996 and 1997 (unaudited), respectively.
Effective January 1, 1995, the Company established a 401(k) retirement plan.
Employees are eligible to participate in the Plan after completing one year of
full-time service and attaining age 21. Eligible employees are allowed to
defer up to 15% of their salary. The Company makes matching contributions of
25% of the employee's contribution with a maximum Company contribution of 6%
of eligible employee wages. The employee vests in the employer matching
contribution at a rate of 20% per year after two years of service. Employees
are 100% vested in the employer contribution after six years of service. The
Company's contributions to the Plan for the years ended December 31, 1995 and
1996 was $19,734 and $29,534, respectively, and $1,336 and $1,045 for the
three-months ended March 31, 1996 and 1997 (unaudited), respectively.
NOTE 9. LITIGATION JUDGMENT LIABILITY
In November 1996, a $3,200,000 judgment was awarded by a jury to a
construction worker injured while using equipment owned by the Company. The
Company has insurance coverage for $1,000,000 of this liability and may also
have a claim against its insurance provider for the remaining $2,200,000, plus
accrued interest.
NOTE 10. INCOME TAXES
The Company, with the consent of its stockholders has elected to be taxed
under sections of the federal and state income tax laws as an S-Corporation.
This election provides, that in lieu of corporate income taxes, the
stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. Therefore, these financial
statements do not include any provision for corporate income taxes.
F-63
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net book value of the Company's assets and liabilities exceeded their tax
basis by $2,800,837 and $1,561,420 as of December 31, 1995 and 1996,
respectively. The differences between net book value and tax basis as of
December 31, 1995 and 1996, by major asset and liability, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
NET BOOK NET BOOK
VALUE TAX BASIS VALUE TAX BASIS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Trade receivables........... $ 2,002,199 $ 2,022,199 $ 2,737,045 $ 2,757,045
Rental equipment............ 11,277,363 8,475,684 14,226,511 10,311,157
Operating equipment and
leasehold improvements..... 590,759 571,601 492,441 506,375
----------- ----------- ----------- -----------
13,870,321 11,069,484 17,455,997 13,574,577
Litigation judgment
liability.................. -- -- 2,320,000 --
----------- ----------- ----------- -----------
$13,870,321 $11,069,484 $15,135,997 $13,574,577
=========== =========== =========== ===========
</TABLE>
NOTE 11. SUBSEQUENT EVENT
On April 25, 1997 the Company agreed to sell substantially all of its
operating assets to Rental Service Corporation at an amount greater than their
net book value. The closing of this transaction is expected to occur on or
before June 30, 1997 and is subject to a number of closing conditions.
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying combined balance sheets as of October 31,
1997 and 1996, of Rent-It-Center, Inc. and Affiliates listed in Note 1, and
the related combined statements of operations, stockholders' and members'
equity (deficit) and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of
the companies' management. 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 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 at October
31, 1997 and 1996, of Rent-It-Center, Inc. and Affiliates listed in Note 1,
and the combined results of their operations and their cash flows for each of
the three years in the period ended October 31, 1997 in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Phoenix, Arizona
November 7, 1997
F-65
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ -- $ 283,407
Accounts receivable, net of allowances for doubtful
accounts of $96,000 and $192,000 at October 31, 1996 and
1997, respectively...................................... 4,854,397 5,409,613
Parts and supplies inventories........................... 2,013,637 2,993,454
Prepaid and recoverable income taxes..................... 208,668 243,284
Other receivables and prepaid expenses................... 385,177 138,917
Deferred income taxes.................................... 98,991 467,432
Rental equipment, principally machinery, at cost, net of
accumulated depreciation of $13,526,000 and $17,849,000
at October 31, 1996 and 1997, respectively.............. 37,134,177 33,752,745
Operating property and equipment, at cost, net........... 3,755,028 4,908,510
Intangible assets, net of accumulated amortization of
$79,000 and $203,000 at October 31, 1996 and 1997,
respectively............................................ 1,561,279 1,437,954
Cash surrender value of life insurance policies.......... 161,013 --
----------- -----------
Total assets......................................... $50,172,367 $49,635,316
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' EQUITY
-------------------------------------------------
<S> <C> <C>
Bank overdraft........................................... $ 43,263 $ --
Accounts payable......................................... 2,854,990 3,064,990
Payroll and other accrued expenses....................... 1,904,166 1,279,896
Bank debt and long-term obligations...................... 21,182,250 16,729,243
Deferred income taxes.................................... 3,215,192 4,944,750
----------- -----------
Total liabilities.................................... 29,199,861 26,018,879
----------- -----------
Commitments and contingencies
Stockholders' and members' equity:
Common stock........................................... 11,600 11,600
Retained earnings...................................... 20,377,616 22,460,867
Members' equity........................................ 583,290 1,143,970
----------- -----------
20,972,506 23,616,437
----------- -----------
Total liabilities and stockholders' and members'
equity.............................................. $50,172,367 $49,635,316
=========== ===========
</TABLE>
See accompanying notes.
F-66
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Equipment rentals..................... $21,225,254 $25,279,134 $34,791,441
Sales of parts, supplies and new
equipment............................ 9,117,503 10,518,131 12,411,690
Sales of used equipment............... 1,852,560 1,253,608 2,593,140
----------- ----------- -----------
Total revenue....................... 32,195,317 37,050,873 49,796,271
Cost of revenue:
Cost of equipment rentals, excluding
equipment depreciation............... 8,411,128 10,039,913 16,194,742
Rental equipment depreciation......... 3,147,577 4,426,614 6,364,659
Cost of sales of parts, supplies and
new equipment........................ 8,268,688 9,607,343 11,873,647
Cost of sales of used equipment....... 1,030,779 629,056 1,924,962
----------- ----------- -----------
Total cost of revenue............... 20,858,172 24,702,926 36,358,010
----------- ----------- -----------
Gross profit........................ 11,337,145 12,347,947 13,438,261
Selling, general and administrative
expenses............................. 4,557,859 5,149,382 7,058,017
Operating property and equipment
depreciation and amortization........ 356,917 503,245 889,215
Amortization of intangibles........... 21,793 30,301 123,325
----------- ----------- -----------
Operating income.................... 6,400,576 6,665,019 5,367,704
Other income (expense):
Charitable contributions.............. (306,222) (311,970) (6,996)
Interest income....................... 51,362 35,855 30,900
Interest expense...................... (316,368) (588,880) (1,599,573)
----------- ----------- -----------
Income before income taxes.......... 5,829,348 5,800,024 3,792,035
Provision for income taxes............ 2,017,136 1,985,530 1,328,504
----------- ----------- -----------
Net income.......................... $ 3,812,212 $ 3,814,494 $ 2,463,531
=========== =========== ===========
</TABLE>
See accompanying notes.
F-67
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
RENT-IT-CENTER, INC.
--------------------------
LANOHA LEASING
LIMITED LIABILITY
COMPANY, D/B/A
COMMON STOCK, CENTER RENTAL AND
$1 PAR VALUE, SALES-- CENTER RENTAL AND
50,000 SHARES KANSAS CITY, SALES--OMAHA, ZUNI RENTAL
AUTHORIZED L.L.C. L.L.C. ENTERPRISES, L.L.C.
-------------- ----------------- ----------------- -------------------
RETAINED MEMBERS' EQUITY MEMBERS' EQUITY MEMBERS' EQUITY
SHARES AMOUNT EARNINGS (DEFICIT) (DEFICIT) (DEFICIT) TOTALS
------ ------- ----------- ----------------- ----------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at November 1,
1994................... 11,600 $11,600 $13,699,475 $(81,323) $(144,752) $ -- $13,485,000
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Net income............. -- -- 3,360,550 332,137 119,525 -- 3,812,212
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1995................... 11,600 11,600 16,990,425 250,814 (25,227) -- 17,227,612
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Net income (loss)...... -- -- 3,456,791 160,798 225,178 (28,273) 3,814,494
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1996................... 11,600 11,600 20,377,616 411,612 199,951 (28,273) 20,972,506
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Capital contribution... -- -- -- -- -- 250,000 250,000
Net income (loss)...... -- -- 2,152,851 (83,678) 335,538 58,820 2,463,531
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1997................... 11,600 $11,600 $22,460,867 $327,934 $ 535,489 $280,547 $23,616,437
====== ======= =========== ======== ========= ======== ===========
</TABLE>
See accompanying notes.
F-68
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Operating activities
Net income........................... $ 3,812,212 $ 3,814,494 $ 2,463,531
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provisions for (reductions in)
allowances for losses on accounts
receivable........................ 6,000 (12,832) 96,332
Provision for inventory
obsolescence...................... -- -- 156,182
Depreciation and amortization...... 3,526,287 4,960,160 7,377,199
Gain on sales of used equipment.... (821,781) (624,552) (668,178)
Deferred income tax expense........ 226,336 1,104,508 1,361,117
Changes in operating assets and
liabilities, net of the effect of
a business acquisition:
Accounts receivable.............. (269,520) (211,783) (651,548)
Parts and supplies inventories... (170,870) (340,376) (1,135,999)
Prepaid and recoverable income
taxes........................... (150,286) (58,382) (34,616)
Other receivables and prepaid
expenses........................ (63,726) (12,893) 246,260
Accounts payable................. 623,131 550,700 210,000
Payroll and other accrued
expenses........................ 469,401 223,242 (624,270)
Accrued income taxes............. (59,695) -- --
----------- ------------ -----------
Net cash provided by operating
activities.................... 7,127,489 9,392,286 8,796,010
Investing activities
Acquisition of rental operations, net
of cash acquired.................... -- (12,945,607) --
Purchases of rental equipment and
operating property and equipment.... (8,497,199) (15,053,391) (6,950,886)
Proceeds from sales of used
equipment........................... 1,852,560 1,253,608 2,593,140
Decrease (increase) in cash surrender
value of life insurance policies.... (49,524) (52,432) 161,013
----------- ------------ -----------
Net cash used in investing
activities.................... (6,694,163) (26,797,822) (4,196,733)
Financing activities
Principal borrowings under long-term
debt arrangements................... $ 650,000 $ 22,953,961 $ 2,175,000
Principal payments on long-term debt. (1,796,800) (5,313,841) (6,628,007)
Increase (decrease) in bank
overdraft........................... 208,247 (164,984) (43,263)
Capital contribution................. -- -- 250,000
Cash dividends paid.................. (69,600) (69,600) (69,600)
----------- ------------ -----------
Net cash provided by (used in)
financing activities.......... (1,008,153) 17,405,536 (4,315,870)
----------- ------------ -----------
Net increase (decrease) in
cash.......................... (574,827) -- 283,407
Cash at beginning of year.............. 574,827 -- --
----------- ------------ -----------
Cash at end of year.................... $ -- $ -- $ 283,407
=========== ============ ===========
Supplemental cash flow information:
Cash paid for interest............... $ 316,368 $ 482,569 $ 1,664,418
=========== ============ ===========
Cash paid for income taxes........... $ 2,000,781 $ 939,404 $ 2,003
=========== ============ ===========
</TABLE>
See accompanying notes.
F-69
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Rent-It-Center, Inc. and Affiliates d/b/a Center Rental and Sales
(hereinafter collectively referred to as "Center") operate in a single
industry segment: the short-term rental of equipment, including ancillary
sales of parts, supplies and rental equipment, through a network of fourteen
rental center locations in Colorado, Kansas, Missouri, Nebraska, New Mexico
and Texas.
Basis of Presentation
The accompanying combined financial statements include the accounts of Rent-
It-Center, Inc., a Colorado corporation authorized to do business in Colorado
and Wyoming, and the following Affiliates: Lanoha Leasing Limited Liability
Company, d/b/a Center Rental and Sales--Kansas City, L.L.C. ("Lanoha
Leasing"), a Wyoming limited liability company authorized to do business in
Kansas and Missouri, Center Rental and Sales--Omaha, L.L.C. ("Center Rental"),
a Colorado limited liability company authorized to do business in Nebraska and
Iowa and, effective October 7, 1996, Zuni Rental Enterprises, L.L.C. ("Zuni
Rental"), a Colorado limited liability company authorized to do business in
Texas and New Mexico. The four entities are controlled by one family and
managed by a common executive group. All material inter-affiliate accounts and
transactions have been eliminated.
The operating agreements for the limited liability companies generally limit
each member's personal liability for any debts or losses of the company to the
member's corresponding capital contributions. The limited liability companies
have only one class of members' interest with equivalent rights, preferences
and privileges for all members; however, under certain circumstances, the net
losses of the companies are not shared in proportion to the members' capital
sharing ratio. The following table summarizes certain information regarding
each of the limited liability companies, including the maximum allowable term
of the company pursuant to its underlying operating agreement.
<TABLE>
<CAPTION>
MANDATORY
MEMBERS' CAPITAL OPERATING AGREEMENT
CONTRIBUTIONS DISSOLUTION DATE
---------------- -------------------
<S> <C> <C>
Lanoha Leasing......................... $ 10,000 October 30, 2021
Center Rental.......................... 10,000 February 4, 2024
Zuni Rental............................ 250,000 September 20, 2026
</TABLE>
The nature of Center'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 give no effect to the
proposed transaction described in Note 9 herein.
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.
F-70
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the combined statements of operations includes revenues
earned on equipment rentals and rental equipment delivery fees. Revenue from
the sale of parts, supplies and new equipment, which includes fuel sales, is
recorded at the time of delivery or pick-up by the customer.
Credit Policy
A significant portion of Center's business is on a credit basis. Center
extends credit to its commercial customers based on evaluations of their
financial condition and their ability to pay. Generally, no collateral is
required. Center has diversified its customer base by operating rental
locations in six states. Center maintains reserves it believes adequate for
potential credit losses.
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, commodity-type
supplies and small to medium-sized equipment for sale. All inventories are
valued at the lower of cost or market, with cost determined by the weighted
average method of inventory costing.
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
using the straight-line method over the estimated useful lives of the
underlying assets. Leasehold improvements are amortized using the straight-
line method over the lesser of the term of the related lease or the estimated
useful lives of the assets. For financial statement purposes Center utilizes
the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................... 5 to 7 years
Vehicles, machinery and equipment.............................. 5 years
Leasehold improvements......................................... 5 to 15 years
</TABLE>
Rental equipment is depreciated to a salvage value of approximately 30-35%
of cost. Center expenses repairs and maintenance as incurred and all
acquisitions less than $1,000.
Intangible Assets
Goodwill is recorded at cost and amortized using the straight-line method
over 15 years. The recoverability of goodwill, which had a net book value of
approximately $1,421,000 at October 31, 1997, is analyzed annually based on
actual and projected levels of profitability and cash flows of the locations
acquired on an undiscounted basis.
Organizational costs are recorded at cost and amortized over a five year
period commencing with the opening of the related rental facility.
Income Taxes
Center 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 effect 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.
F-71
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Lanoha Leasing, Center Rental, and Zuni Rental are treated as if they are
partnerships and, accordingly, the members of such companies recognize the
companies' net income or loss on their personal income tax returns in
proportion to their ownership interests therein.
Advertising
Costs of advertising, including radio, print and sales catalogue
expenditures, are expensed as incurred. Advertising expenses were
approximately $272,000, $336,000 and $570,000 for the years ended October 31,
1995, 1996 and 1997, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject Center to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
Center maintains cash with various financial institutions located throughout
the country in order to limit exposure to any one institution; however, Center
occasionally maintains funds on deposit with banks which exceed the available
federally insured limits. Center performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in
Center's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number and geographic diversity of Center's customer
base. Additionally, at October 31, 1996, approximately $830,000 of Center's
accounts receivable were subject to full recourse against the seller of the
rental business operations described in Note 6.
Fair Values of Financial Instruments
The carrying amounts reported in the combined balance sheets 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 the balance sheet date and approximates the
carrying value of such debt because the underlying instruments are at variable
rates which are repriced frequently or are at rates which reasonably
approximate Center's current rate of borrowing for similar secured and
unsecured financings.
Cash Surrender Value of Life Insurance Policies
Prior to October 31, 1997, Center maintained three split-dollar life
insurance policies on the combined group's chief executive officer. Center was
neither the owner nor the beneficiary of such policies; however, the chief
executive officer and Center had a verbal agreement whereby Center would be
reimbursed the lesser of the policies' cash surrender values or the cumulative
premiums paid by Center. In connection with such agreement, the chief
executive officer liquidated Center's interests in the life insurance policies
in October 1997 with a cash payment of approximately $215,000.
F-72
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. PARTS AND SUPPLIES INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Parts for resale................................... $ 1,329,060 $ 2,335,510
Parts and supplies for internal consumption........ 684,577 657,944
----------- -----------
$ 2,013,637 $ 2,993,454
=========== ===========
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consisted of the following:
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Vehicles, machinery and equipment.................. $ 4,665,594 $ 5,827,410
Leasehold improvements............................. 506,016 1,024,213
Other.............................................. 152,709 173,398
----------- -----------
5,324,319 7,025,021
Less accumulated depreciation and amortization..... 1,569,291 2,116,511
----------- -----------
$ 3,755,028 $ 4,908,510
=========== ===========
4. BANK DEBT AND LONG-TERM OBLIGATIONS
Bank debt and long-term obligations consisted of the following:
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Revolving line of credit........................... $15,153,957 $ 6,375,000
8.0% unsecured bank loans, principal and interest
due on December 31, 1997.......................... -- 6,225,000
9.3% secured bank loan, dated November 8, 1995,
principal and interest payable monthly, maturing
November 8, 2000.................................. 2,549,672 2,012,051
8.8% secured bank loan, dated June 18, 1996,
principal and interest payable monthly, maturing
June 18, 2001..................................... 2,361,933 1,933,359
Various secured equipment notes payable at interest
rates not exceeding 7.9%, maturing between
November 1996 and October 1998.................... 916,688 183,833
Note payable to a family member of a principal
stockholder/member with interest at 9.0%.......... 200,000 --
----------- -----------
$21,182,250 $16,729,243
=========== ===========
</TABLE>
F-73
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Interest paid on the note payable to a family member of a principal
stockholder/member for the years ended October 31, 1995, 1996 and 1997 was
approximately $18,000, $18,000 and $15,000, respectively.
Principal maturities of long-term debt for the years ending October 31 are
as follows:
<TABLE>
<S> <C>
1998........................................................... $ 7,467,280
1999........................................................... 1,159,513
2000........................................................... 1,769,891
2001........................................................... 6,332,559
-----------
Total........................................................ $16,729,243
===========
</TABLE>
Revolving Line of Credit and Unsecured Bank Loans
On September 26, 1996, Rent-It-Center, Inc. entered into an unsecured
revolving line of credit agreement with its principal bank in the amount of
$17.0 million to be used to acquire the net assets of the equipment rental
operations described in Note 6 and for working capital purposes. Effective
October 27, 1997, the revolving line of credit agreement was restructured
insofar as the then outstanding balance was converted to an unsecured line of
credit agreement with a maximum borrowing of $7.5 million by Rent-It Center,
Inc. and individual 8.0% unsecured term loans with each of the three limited
liability companies aggregating $7.0 million. At October 31, 1997, Center had
$6,375,000 and $6,225,000 outstanding under the revolving line of credit
agreement and the unsecured term loans, respectively. Accordingly, as of such
date, $1,125,000 remains available under the revolving line of credit
agreement. Effective October 31, 1997, certain stockholders/members of Center
assumed primary responsibility for the unsecured bank term loans held by the
Affiliates of Rent-It-Center, Inc.
The revolving line of credit, which expires on October 1, 2001, will be
permanently reduced to $7.0 million on or before October 1, 2000.
Additionally, excess cash flow, as defined in the line of credit agreement,
can accelerate the annual principal reduction. Furthermore, the bank, at its
sole discretion, can unilaterally demand repayment of the entire balance
outstanding under the line of credit agreement at any time; however, the bank
has not currently expressed any intent to subjectively accelerate repayment.
The line of credit terms provide for a variable rate of interest equal to
the bank's prime lending rate less one half of one percent (effective rates of
7.8% and 8.0% at October 31, 1996 and 1997, respectively). Through October 1,
2001, Rent-It-Center, Inc. has the option to permanently set the interest rate
on all or a portion of the outstanding principal balance at its discretion,
subject to the terms and conditions of the underlying loan agreement. Interest
is generally payable monthly.
Secured Bank and Other Borrowings
Lanoha Leasing maintains two long-term loans, which are secured by a first
security interest in the accounts receivable, inventories, equipment and
general intangible assets owned by such entity (aggregate net book value of
those assets were approximately $5.1 million at October 31, 1997). The total
outstanding balance of such secured loans at October 31, 1997 was $3,945,410.
The bank may accelerate payments of amounts due thereunder if the bank deems
itself insecure for any reason whatsoever; however, the bank has not currently
expressed any intent to subjectively accelerate repayment. Additionally, both
secured loans include partial and full prepayment penalty provisions that
range from 1/4% to 1/2% of the principal balance subject to prepayment
(partial prepayments impacted if they exceed $150,000). The prepayment
penalties are wholly eliminated in the fifth year of each loan term.
Zuni Rental also maintains various secured equipment notes payable, which
are collateralized by assets with a net book value of approximately $300,000
at October 31, 1997.
F-74
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Loan Covenants
Center's various debt agreements have financial covenants for Center and, in
certain instances, individual members of the combined group which cover
tangible net worth, leverage ratios, cash flow ratios and debt coverage
ratios, most of which are measurable at quarterly and annual intervals. The
debt agreements also contain covenants and provisions that restrict, among
other things, Center's or individual members of the combined group's ability
to i) incur additional indebtedness, ii) incur liens or encumbrances on its
property and equipment, iii) make certain investments, loans or guarantees
other than in the normal course of business, iv) declare or pay dividends from
Rent-It Center, Inc. in excess of $500,000 per annum, v) engage in certain
sales of assets, vi) merge, consolidate with or acquire other business
entities, and vii) fundamentally alter the underlying nature or scope of the
existing business. Additionally, the debt agreements require Center to
maintain its material cash accounts, including its cash concentration account,
at the lending bank. Substantially all of the debt agreements contain cross
default provisions. As of October 31, 1997, Center and the individual members
of the combined group are in compliance with all financial and operational
covenants of its debt agreements.
5. INCOME TAXES
Rent-It Center, Inc. is subject to federal and certain state income taxes.
The income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................ $1,548,305 $ 791,131 $ (32,613)
State.................................. 242,495 89,891 --
---------- ---------- ----------
1,790,800 881,022 (32,613)
Deferred:
Federal................................ 195,952 951,269 1,145,838
State.................................. 30,384 153,239 215,279
---------- ---------- ----------
226,336 1,104,508 1,361,117
---------- ---------- ----------
$2,017,136 $1,985,530 $1,328,504
========== ========== ==========
</TABLE>
The income tax expense differs from amounts currently payable because
certain revenue and expenses are reported in the statements of income in
periods that differ from those in which they are subject to taxation.
Reconciliations between the statutory federal income tax rate of 34% and
Center's effective tax rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory income taxes........ $1,981,978 $1,972,008 $1,289,292
Earnings of Rent-It-Center, Inc.
Affiliates taxed to individual
members.............................. (153,565) (121,619) (105,631)
State income taxes, net of federal
benefit.............................. 180,100 160,466 142,084
Other................................. 8,623 (25,325) 2,759
---------- ---------- ----------
$2,017,136 $1,985,530 $1,328,504
========== ========== ==========
</TABLE>
F-75
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Center's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts.................... $ 33,750 $ 57,563
Inventory obsolescence reserves..................... -- 58,568
Inventory overhead capitalization................... 11,989 17,300
Vacation accrual.................................... 53,252 78,110
Alternative minimum tax credit carryforward......... -- 253,472
Other............................................... -- 2,419
---------- ----------
98,991 467,432
---------- ----------
Deferred tax liabilities:
Rental equipment and operating property and
equipment, net..................................... 3,015,192 4,744,750
Other............................................... 200,000 200,000
---------- ----------
3,215,192 4,944,750
---------- ----------
$3,116,201 $4,477,318
========== ==========
</TABLE>
Rent-It-Center, Inc. has an alternative minimum tax credit carryover of
approximately $253,000 for federal income tax purposes which is available to
offset future regular income tax that is in excess of the alternative minimum
tax in such year. If the transaction discussed in Note 9 occurs, the
utilization of these alternative minimum tax credits will be subject to
restrictions in accordance with Internal Revenue Service Code section 383 and
the ultimate utilization is further limited based on the profitability of
Rent-It-Center, Inc.; however, the carryforward period for an alternative
minimum tax credit carryover is unlimited.
At October 31, 1997, the aggregate reported bases for financial statement
purposes of Rent-It Center Inc.'s nontaxable affiliates (i.e., the limited
liability companies) exceed such entities corresponding bases for income tax
purposes by approximately $3.8 million. Such net difference is primarily
attributable to accelerated income tax depreciation and amortization.
6. BUSINESS COMBINATION
On October 7, 1996, Rent-It-Center, Inc. acquired all the operating assets
of three New Mexico and two Texas rental locations for approximately $12.9
million plus assumed liabilities of approximately $911,000. Rent-It-Center,
Inc. retained the acquired rental equipment and transferred all the other
acquired net assets to Zuni Rental. The acquired rental equipment is leased to
Zuni Rental. The transaction was financed through Center's revolving line of
credit agreement.
This acquisition has been accounted for as a purchase and, accordingly, the
acquired tangible and identifiable intangible assets and liabilities have been
recorded at their estimated fair values at the date of acquisition with any
excess purchase price reflected as goodwill in the accompanying combined
financial statements. The operations of the acquired business is included in
the combined statements of operations from the date of acquisition.
F-76
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the net assets acquired, liabilities assumed
and cash purchase price for the acquisition:
<TABLE>
<S> <C>
Assets acquired............................................... $12,324,726
Goodwill...................................................... 1,531,500
Less: liabilities assumed..................................... (910,619)
-----------
Cash purchase price........................................... $12,945,607
===========
</TABLE>
The following table sets forth the unaudited pro forma combined results of
operations for the years ended October 31, 1995 and 1996 as if the above
acquisition was consummated at the beginning of each fiscal year:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-----------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total revenue...................................... $43,603,000 $45,802,000
Net income......................................... 5,650,000 4,210,000
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
Center leases certain operating premises and equipment under noncancellable
operating leases. Substantially all of the property leases require Center to
pay maintenance, insurance, taxes and certain other expenses in addition to
the stated rentals. Certain of the real property leases provide for escalation
of future rental payments based upon increases in the consumer price index.
Rental expense under such noncancellable operating leases totaled $251,000,
$326,000, and $713,000 for the years ended October 31, 1995, 1996 and 1997,
respectively. Future minimum lease payments, by the year ended October 31 and
in the aggregate, for noncancellable operating leases with initial or
remaining terms of one year or more are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 743,959
1999............................................................ 668,039
2000............................................................ 621,999
2001............................................................ 577,666
2002............................................................ 76,500
Thereafter...................................................... 291,000
----------
$2,979,163
==========
</TABLE>
Additionally, Center leases certain real property from entities which are
partially or wholly-owned by stockholders, members and/or officers of Center.
Such noncancellable leases, which have various expiration dates through
January 2002, require future minimum lease payments for the years ending
October 31 and in the aggregate as follows:
<TABLE>
<S> <C>
1998............................................................ $ 720,000
1999............................................................ 720,000
2000............................................................ 720,000
2001............................................................ 720,000
2002............................................................ 420,000
----------
$3,300,000
==========
</TABLE>
F-77
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense under the related party real property leases for the years
ended October 31, 1995, 1996 and 1997 was approximately $506,000, $436,000 and
$688,000, respectively. Additionally, pursuant to the terms and conditions of
such leases, Center is responsible for the insurance premiums, real property
taxes and certain other costs associated directly or indirectly with the
underlying real property.
Purchase Obligations
At October 31, 1997, Center was obligated under noncancellable purchase
commitments to purchase approximately $1.0 million of rental equipment and
inventories.
Legal Matters
Center is party to legal proceedings and potential claims arising in the
ordinary course of its business. The ultimate legal and financial liability of
Center with respect to such ongoing litigation cannot be estimated with any
certainty but, in the opinion of management, Center has adequate legal
defenses, reserves or insurance coverage with respect to those matters so that
the ultimate resolution will not have a material adverse effect on Center's
combined financial position, results of operations or cash flows.
Environmental Matters
Center and its operations are subject to a variety of environmental federal,
state and local 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 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 related costs of
investigation and property damage. Center believes it is substantially in
compliance with the aforementioned environmental laws and regulations. The
landlord at certain of the related party lease locations has agreed to assume
responsibility for the removal of underground fuel tanks at such locations and
related remediation costs, if any.
8. EMPLOYEE BENEFIT PLAN
Center has a 401(k) savings and retirement plan covering substantially all
employees who have completed one year of service and attained the age of 18.
The plan is a defined contribution plan and provides for Center to make
contributions of 50% of a participant's elective salary deferral, up to 2% of
each participant's total compensation, plus additional amounts at the option
of the plan sponsor's Board of Directors. Center's matching contributions are
funded on a current basis. Center's matching contributions, including
discretionary contributions, for the years ended October 31, 1995, 1996 and
1997 were $161,000, $183,000 and $122,000, respectively.
9. BUSINESS COMBINATION
On October 6, 1997, Center reached a definitive agreement to sell, effective
November 1, 1997, all of the outstanding capital stock of Rent-It-Center, Inc.
and substantially all of the assets of the Affiliates for approximately $100.9
million in cash, 482,315 shares of common stock (of which 64,544 shares will
be issued over seven years, subject to earlier issuance over three years if
certain performance objectives are achieved) of Rental Service Corporation
("RSC") and the assumption of Center's debt. The transaction is anticipated to
close by December 2, 1997. Pursuant to the acquisition agreements, RSC assumed
effective control of Center's operations on November 1, 1997.
F-78
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors of
JDW Enterprises, Inc. d.b.a. Valley Rentals
Gilbert, Arizona
We have audited the accompanying balance sheet of JDW Enterprises, Inc.
d.b.a. Valley Rentals ("Valley") as of December 31, 1996, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of
Valley'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 our 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 JDW Enterprises, Inc.
d.b.a. Valley Rentals as of December 31, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
WEINTRAUB & MORRISON, P.C.
Tempe, Arizona
February 25, 1997
F-79
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets: (Note 1 (a))
Cash on hand...................................... $ 3,600 $ 4,227
Cash in bank (Note 2)............................. 27,703 --
Accounts receivable (Notes 1 (c), 3 and 7)........ 8,003,236 8,917,102
Inventory (Notes 1 (d) and 4)..................... 2,049,601 3,060,291
Prepaid expenses.................................. 605,987 594,661
------------ ------------
Total current assets............................ 10,690,127 12,576,281
------------ ------------
Property and equipment: (Notes 1 (e) and 5)
Land.............................................. 1,434,102 1,434,102
Land improvements................................. 614,241 634,712
Buildings......................................... 3,933,038 4,023,176
Leasehold improvements............................ 12,889 29,493
Rental equipment.................................. 40,953,242 48,587,631
Shop equipment.................................... 380,268 443,414
Trucks and trailers............................... 2,731,449 2,751,446
Office equipment.................................. 1,039,712 1,414,667
Small tools....................................... 174,250 174,250
Signs............................................. 23,432 26,742
Construction in progress.......................... 22,555 61,673
------------ ------------
51,319,178 59,581,306
Less: accumulated depreciation and amortization.... (13,510,813) (17,836,393)
------------ ------------
Net property and equipment......................... 37,808,365 41,744,913
------------ ------------
Other assets:
Goodwill (Note 6) (net of accumulated
amortization of $23,333 and $38,333 at December
31, 1996 and September 30, 1997, respectively)... 76,667 61,667
Other assets...................................... -- 691,941
------------ ------------
Total other assets.............................. 76,667 753,608
------------ ------------
$ 48,575,159 $ 55,074,802
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities: (Note 1 (a))
Bank overdrafts................................... $ -- $ 123,181
Accounts payable.................................. 2,212,778 1,863,760
Note payable, bank (Note 9)....................... 3,348,081 3,917,992
Current portion of long-term debt................. 9,043,776 7,902,076
Accrued salaries and wages........................ 283,738 103,738
Accrued property taxes............................ 124,243 275,579
Accrued sales taxes............................... 512,178 549,055
Other accrued liabilities......................... 40,439 28,375
------------ ------------
Total current liabilities....................... 15,565,233 14,763,756
------------ ------------
Long-term debt and obligations under capital lease:
(Notes 5 and 7)...................................
Notes payable..................................... 29,028,832 34,320,993
Obligations under capital lease................... 1,583,097 1,117,529
Related party loans............................... 3,529,778 3,430,459
Less current portion above........................ (9,043,776) (7,902,076)
------------ ------------
Total long-term debt............................ 25,097,931 30,966,905
------------ ------------
Total liabilities.................................. 40,663,164 45,730,661
------------ ------------
Commitments and contingencies (Note 8)
Stockholder's equity:
Common stock, no par value
Authorized shares--1,000,000; Issued and
outstanding shares--600,000..................... 600,000 600,000
Retained earnings.................................. 7,311,995 8,744,141
------------ ------------
Total stockholders' equity......................... 7,911,995 9,344,141
------------ ------------
$ 48,575,159 $ 55,074,802
============ ============
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-80
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental revenue and retail sales (Notes
1 (b) and 7)......................... $30,731,628 $22,357,673 $24,566,437
Sale of used equipment................ 1,979,675 1,446,907 2,720,586
----------- ----------- -----------
32,711,303 23,804,580 27,287,023
Cost of sales:
Rental and retail (Notes 1 (b) and 7). 3,044,070 1,671,550 2,058,180
Used equipment........................ 1,309,521 888,448 1,728,991
----------- ----------- -----------
4,353,591 2,559,998 3,787,171
----------- ----------- -----------
Gross profit........................ 28,357,712 21,244,582 23,499,852
Operating expenses: (Note 1 (b))
Delivery expenses..................... 2,406,107 1,767,755 1,825,126
Counter and customer service expenses. 2,132,250 1,578,096 1,610,255
Equipment repair expenses............. 6,756,069 5,283,984 6,387,120
Sales expenses........................ 1,633,419 1,207,218 1,169,455
Administrative expenses............... 3,650,842 2,712,810 3,174,648
Depreciation and amortization (Note 1
(e))................................. 6,777,558 5,041,592 5,557,993
----------- ----------- -----------
Total operating expenses............ 23,356,245 17,591,455 19,724,597
----------- ----------- -----------
Income from operations.................. 5,001,467 3,653,127 3,775,255
Other income (expense):
Interest income....................... 98,848 68,466 134,847
Other income.......................... 56,791 52,015 39,398
Interest expense...................... (3,007,051) (2,251,131) (2,324,416)
Related party interest expense (Note
7)................................... (340,563) (276,250) (192,938)
----------- ----------- -----------
Income before income taxes.......... 1,809,492 1,246,227 1,432,146
Provision for income taxes (Note 1 (f)). -- -- --
----------- ----------- -----------
Net income.......................... $ 1,809,492 $ 1,246,227 $ 1,432,146
=========== =========== ===========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-81
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------
NUMBER
OF STATED RETAINED
SHARES VALUE EARNINGS TOTAL
------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1996........... 600,000 $600,000 $5,652,503 $6,252,503
Net income.......................... -- -- 1,809,492 1,809,492
Dividends paid...................... -- -- (150,000) (150,000)
------- -------- ---------- ----------
Balances at December 31, 1996......... 600,000 600,000 7,311,995 7,911,995
Net income (unaudited).............. -- -- 1,432,146 1,432,146
------- -------- ---------- ----------
Balances at September 30, 1997
(unaudited).......................... 600,000 $600,000 $8,744,141 $9,344,141
======= ======== ========== ==========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-82
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1996 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Cash received from customers....... $ 30,830,982 $ 21,565,155 $ 25,086,555
Cash paid to suppliers and
employees......................... (20,760,732) (14,977,685) (16,883,991)
Interest paid...................... (3,347,614) (2,527,381) (2,517,354)
Interest received.................. 98,848 68,466 39,398
------------ ------------ ------------
Net cash provided by operating
activities........................ 6,821,484 4,128,555 5,724,608
INVESTING ACTIVITIES
Capital expenditures............... (9,799,349) (9,614,467) (11,208,526)
------------ ------------ ------------
Net cash used in investing
activities........................ (9,799,349) (9,614,467) (11,208,526)
FINANCING ACTIVITIES
Net borrowings on line of credit... 1,961,996 -- --
Proceeds from long-term debt....... 11,285,987 11,267,280 13,340,212
Principal payments on long-term
debt.............................. (10,142,559) (7,166,551) (8,006,551)
Dividends paid..................... (150,000) -- --
------------ ------------ ------------
Net cash provided by financing
activities........................ 2,955,424 4,100,729 5,333,661
------------ ------------ ------------
Net decrease in cash and cash
equivalents......................... (22,441) (1,385,183) (150,257)
Cash and cash equivalents, beginning
of period........................... 53,744 53,744 31,303
------------ ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 31,303 $ (1,331,439) $ (118,954)
============ ============ ============
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-83
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CASH FLOWS--(CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Net income............................ $ 1,809,492 $ 1,246,227 $ 1,432,146
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization....... 6,777,558 5,041,592 5,557,993
Cost of equipment sold.............. 1,309,521 888,448 1,728,991
Change in assets and liabilities:
(Increase) in accounts receivable. (1,937,112) (1,802,781) (1,594,481)
(Increase) decrease in inventory.. (358,945) (196,405) (1,010,689)
(Increase) in prepaid expenses.... (169,343) -- --
(Decrease) increase in accounts
payable, trade................... (205,152) (809,857) (349,024)
Increase (decrease) in accrued
salaries and wages............... 57,462 -- --
(Decrease) increase in accrued
property taxes .................. (160,705) -- --
Increase in accrued sales taxes... 82,606 -- --
(Decrease) increase in other
accrued liabilities.............. (383,898) (238,669) (40,328)
----------- ----------- -----------
Net cash provided by operating
activities........................... $ 6,821,484 $ 4,128,555 $ 5,724,608
=========== =========== ===========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-84
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
(THE INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE
NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED.)
1. SIGNIFICANT ACCOUNTING POLICIES
a. Valley's activities and operating cycle. Valley is engaged in the equipment
rental and retailing industries in the states of Arizona and New Mexico.
Assets and liabilities are classified as current and non-current based on a
one year operating cycle.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
b. Revenue and cost recognition. The accompanying financial statements are
prepared on the accrual basis of accounting.
Revenues are recognized when earned. Costs of good sold and operating costs
are charged to expense as incurred.
c. Accounts receivable. Valley provides for potentially uncollectible accounts
receivable by use of the allowance method. The allowance is provided based
upon a review of the individual accounts outstanding, and prior history of
uncollectible accounts receivable. As of December 31, 1996 and September
30, 1997, an allowance has been provided for potentially uncollectible
accounts receivable.
d. Inventory. Inventory quantities and valuations are determined by using the
first in first out method. Inventory is stated at the lower of cost or
market. Certain used equipment is carried in inventory at net book value
(original cost less accumulated depreciation) because it has been removed
from normal rental operations and is being held for sale.
e. Property and equipment and depreciation. Property and equipment are carried
at cost. When retired or otherwise disposed of, the related carrying value
and accumulated depreciation are cleared from the respective accounts and
the net difference less any amount realized from disposition is reflected
in earnings.
Maintenance and repairs, including the replacement of minor items, are
expensed as incurred, and major additions to property and equipment are
capitalized.
Depreciation is computed primarily by the straight-line method with
estimated salvage values over the following useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Land................................................................ --
Land improvements................................................... 15
Buildings........................................................... 7-31.5
Rental equipment.................................................... 3-5
Shop................................................................ 5
Trucks and trailers................................................. 3-5
Office equipment.................................................... 5-7
Small tools......................................................... 5
Signs............................................................... 10
Leasehold improvements.............................................. 31.5
</TABLE>
F-85
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
f. Income taxes. No provision for income taxes is reflected in the
accompanying statements because Valley, with the consent of its
stockholders, filed an election with the Internal Revenue Service to be
treated as an S Corporation. Accordingly, all attributes of taxable income,
credits and special deductions are passed directly to the stockholders for
inclusion on their individual income tax returns.
g. Pension plan. Valley sponsors an I.R.C. Section 401 (k) plan that covers
employees that have completed one year of service and have reached twenty
one years of age. Contributions to the plan are made monthly. Valley
matches 25% of the employee contribution and the employee vests
immediately. For the year ended December 31, 1996 and the nine months ended
September 30, 1996 and 1997, Valley's matching contributions to the plan
were $71,431, $52,895 and $57,480, respectively.
h. Cash equivalents. For purposes of the statement of cash flows, the company
considers all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
i. Advertising Costs. Advertising costs are charged to expense when incurred.
Included in sales expenses for the year ended December 31, 1996 and the
nine months ended Setpember 30, 1996 and 1997 were advertising costs of
$331,374, $263,773 and $154,717, respectively.
j. Interim Financial Statements. The accompanying balance sheet at September
30, 1997 and the statements of operations and cash flows for the nine month
periods ended September 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. CONCENTRATION OF CREDIT RISK
Valley, in the ordinary course of business, maintains bank balances in
excess of Federal Deposit Insurance Corporation Insurance Limits.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable............................. $8,071,200 $9,430,998
Less: allowance for doubtful accounts........... (67,964) (513,896)
---------- ----------
$8,003,236 $8,917,102
========== ==========
</TABLE>
F-86
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORY
At December 31, 1996 and September 30, 1997, inventory categories and
amounts were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Shop and yard inventory......................... $1,158,479 $1,733,813
Merchandise for resale.......................... 564,897 1,036,264
Used equipment for sale......................... 282,218 237,482
Fuel and oil.................................... 44,007 52,732
---------- ----------
$2,049,601 $3,060,291
========== ==========
</TABLE>
5. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASE
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
NOTES PAYABLE
Notes payable to Wells Fargo Bank, collateralized
by rental equipment and personal guarantees of the
stockholders, principal is due in monthly
installments of $43,750 and 2.0% of the
outstanding balance (minimum $184,000) through
May, 2001. The notes bear interest at prime plus
.125% (8.375% at December 31, 1996), interest is
payable monthly. ................................. $12,237,645 $ --
Notes payable to Wells Fargo Bank, collateralized
by land and buildings, principal and interest due
in monthly installments of $9,755 and $25,146
through July, 2016. The notes bear interest from
8.375% to 9.25%. ................................. 3,895,667 3,790,840
Notes payable to various equipment companies and
individuals, collateralized by the equipment
purchased, principal and interest due in monthly
installments from $192 to $25,824, through
September, 2002. The notes bear interest from 4.9%
to 11.125%. ...................................... 12,895,520 30,530,153
----------- ----------
Subtotal, notes payable............................ 29,028,832 34,320,993
OBLIGATIONS UNDER CAPITAL LEASE
Capital leases payable, secured by the equipment
leased bear interest from 5.91% to 23.85% and are
payable in monthly installments from $454 to
$20,790 through May, 2000. ....................... 1,583,097 1,117,529
RELATED PARTY LOANS
Notes payable to Danny L. and Mary J. Evans are
subordinated to Wells Fargo Bank, interest is due
quarterly and principal is due on demand. The
notes and interest may not be paid without
obtaining the approval of Wells Fargo Bank. The
notes bear interest at 8.75%. .................... 2,090,000 2,090,000
Notes payable to stockholders are subordinated to
Wells Fargo Bank, interest is due quarterly and
principal is due on demand. The notes and interest
may not be paid without obtaining the approval of
Wells Fargo Bank. The notes bear interest at
8.75%. ........................................... 850,000 850,000
</TABLE>
F-87
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Notes payable to stockholders, collateralized by
rental equipment purchased, principal and
interest due in monthly installments of $7,315
through November, 2000. The notes bear interest
at 7.9%. ........................................ 589,778 490,459
----------- -----------
Subtotal, related party loans..................... 3,529,778 3,430,459
----------- -----------
Total debt........................................ 34,141,707 38,868,981
Less current portion.............................. (9,043,776) (7,902,076)
----------- -----------
$25,097,931 $30,966,905
=========== ===========
The aggregate annual maturities on long-term debt
as of December 31, 1996 are as follows:
1997.......................................... $ 9,043,776
1998.......................................... 8,366,671
1999.......................................... 8,807,972
2000.......................................... 3,449,096
2001.......................................... 1,213,070
Thereafter.................................... 3,261,122
-----------
$34,141,707
===========
Minimum future lease payments, by year and in the
aggregate, under capital leases as of December
31, 1996 are as follows:
1997.......................................... $ 822,447
1998.......................................... 627,415
1999.......................................... 283,893
2000 ......................................... 7,511
-----------
Total minimum future lease payments............... 1,741,266
Less amount representing interest................. (145,475)
-----------
1,595,791
Less amount representing sales tax................ (12,694)
-----------
Present value of net minimum future lease
payments......................................... $ 1,583,097
===========
</TABLE>
Amortization on the assets collateralizing the capital leases is included in
the depreciation and amortization expense.
6. GOODWILL
Goodwill represents the aggregate excess of the cost of companies acquired
over the fair value of their net assets at dates of acquisition and is being
amortized on the straight line method over a five year period. Amortization
expense charged to operations for the year ended December 31, 1996 and the
nine months ended September 30, 1996 and 1997 was $20,000, $15,000, and
$15,000, respectively.
F-88
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
Accounts receivable
Included in accounts receivable is $86,388 and $0 at December 31, 1996 and
September 30, 1997, respectively, due from J.H. Kelly, Inc., a corporation
controlled by a 50% stockholder of Valley. In addition, accounts receivable at
December 31, 1996 and September 30, 1997 include $35,874 due from a 25%
stockholder of Valley.
Notes payable, related party
At December 31, 1996 and September 30, 1997, Valley has notes payable to
Danny L. and Mary J. Evans in the amount of $2,090,000. The notes are
subordinated to Wells Fargo Bank and bear interest at 8.75%.
At December 31, 1996 and September 30, 1997, Valley has notes payable to its
stockholders in the amount of $850,000. The notes are subordinated to Wells
Fargo Bank and bear interest at 8.75%.
Valley purchased rental equipment in the amount of $589,778, $0 and $0 from
two of Valley's stockholders during the year ended December 31, 1996 and the
nine months ended September 30, 1996 and 1997, respectively. The stockholder
notes resulting from this transaction bear interest at 7.9% and total $589,778
and $490,459 at December 31, 1996 and September 30, 1997, respectively .
Rental revenue and retail sales
Valley rents and sells equipment to J.H. Kelly, Inc. For the year ended
December 31, 1996 and the nine months ended September 30, 1996 and 1997,
Valley recognized revenues of $48,864, $4,053 and $13,178, respectively, from
J.H. Kelly, Inc.
Interest expense
Interest expense paid on the stockholder notes and to J.H. Kelly, Inc.
amounted to $340,563, $276,250, and $192,938, respectively, for the year ended
December 31, 1996 and the nine months ended September 30, 1996 and 1997.
8. COMMITMENTS AND CONTINGENCIES
Valley is currently leasing various facilities and equipment under operating
leases expiring through the year 2001.
Future minimum lease payments as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
Years ended December 31,
1997.......................................................... $1,445,991
1998.......................................................... 1,415,991
1999.......................................................... 1,347,029
2000.......................................................... 1,066,670
2001 ......................................................... 254,714
----------
$5,530,395
==========
</TABLE>
9. NOTE PAYABLE, BANK
Note payable, bank in the amounts of $3,348,081 at December 31, 1996 and
$3,917,992 at September 30, 1997 are the balances owed on a $4,000,000
revolving line of credit with Wells Fargo Bank. The note is secured by
accounts receivable, inventory and the personal guarantees of the
stockholders. The line of credit bears interest at the prime lending rate
(8.25% at December 31, 1996 and 8.5% at September 30, 1997).
F-89
<PAGE>
Every rental location has on-line
access to centralized systems which
provide real-time transaction
processing, extensive fleet
management tools and daily financial
management reports. These systems
also allow an employee at any
location to identify and reserve a [Photo of employee using the
specific piece of equipment anywhere Company's advanced information
in a region and schedule delivery to systems to assist customer]
a customer's job site.
Depending upon market needs, RSC
offers value-added services to its
customers such as radio-dispatched
transportation fleet and 24 hours-a-
day, seven days-a-week support
[Photo of employee delivering rental services, including on-site
equipment] maintenance and repair.
The Company's information systems
track each individual rental asset
and automatically schedule [Photo of employee performing
preventative maintenance. As a rental equipment maintenance]
result, the Company is able to
enhance the reliability and extend
the useful life of its rental
equipment fleet.
<PAGE>
[LOGO OF RENTAL SERVICE CORPORATION]
<PAGE>
PROSPECTUS
4,000,000 Shares
[LOGO OF RENTAL SERVICE CORPORATION]
COMMON STOCK
----------------
OF THE 4,000,000 SHARES OF COMMON STOCK BEING OFFERED HEREBY, 800,000 SHARES
ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE
INTERNATIONAL UNDERWRITERS AND 3,200,000 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE
"UNDERWRITERS." ALL OF THE SHARES OF COMMON STOCK BEING OFFERED HEREBY
ARE BEING SOLD BY THE COMPANY. THE COMMON STOCK IS TRADED ON THE NEW
YORK STOCK EXCHANGE UNDER THE SYMBOL "RSV." ON DECEMBER 16, 1997, THE
LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK
EXCHANGE WAS $24 13/16 PER SHARE.
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PRICE $24 A SHARE
----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
----------- -------------- -----------
<S> <C> <C> <C>
Per Share............................... $24.00 $1.14 $22.86
Total(3)................................ $96,000,000 $4,560,000 $91,440,000
</TABLE>
- --------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at
$1,000,000.
(3) The Company and certain Selling Stockholders have granted the U.S.
Underwriters an option, exercisable within 30 days of the date hereof,
to purchase up to an aggregate of 600,000 additional Shares at the
price to public less underwriting discounts and commissions for the
purpose of covering overallotments, if any. If the U.S. Underwriters
exercise such option in full, the total price to public, underwriting
discounts and commissions, proceeds to Company and proceeds to Selling
Stockholders will be $110,400,000, $5,244,000, $101,517,237 and
$3,638,763, respectively. The Company will not receive any proceeds
from the sale of Shares by the Selling Stockholders. See "Principal and
Selling Stockholders" and "Underwriters."
----------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about December 22, 1997 at the
office of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment
therefor in immediately available funds.
----------------
MORGAN STANLEY DEAN WITTER WILLIAM BLAIR & COMPANY
December 16, 1997
