<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 1997
--------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-21237
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RENTAL SERVICE CORPORATION
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 33-0569350
- -------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
14505 N. HAYDEN RD., SUITE 322, SCOTTSDALE, ARIZONA 85260
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(Address of Principal Executive Offices) (Zip Code)
(602) 905-3300
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 11,571,777 shares of common
stock, $.01 par value, outstanding at May 11, 1997.
<PAGE>
RENTAL SERVICE CORPORATION
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
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<S> <C>
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 1997 and December 31, 1996...............................1
Consolidated Statements of Operations
Three months ended March 31, 1997 and 1996.........................2
Consolidated Statements of Cash Flows
Three months ended March 31, 1997 and 1996.........................3
Notes to Consolidated Financial Statements - March 31, 1997..........4
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................8
PART II OTHER INFORMATION
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ITEM 1. Legal Proceedings....................................................12
ITEM 4. Submission of Matters to a Vote of Security Holders..................12
ITEM 5. Other Information....................................................12
ITEM 6. Exhibits and Reports on Form 8-K.....................................13
SIGNATURES.............................................................................15
</TABLE>
(i)
<PAGE>
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
RENTAL SERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
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(Unaudited)
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 1,578,000 $ 1,452,000
Accounts receivable, net 22,844,000 20,856,000
Other receivables and prepaid expense 2,850,000 3,170,000
Income tax receivable 1,524,000 1,563,000
Parts and supplies inventories, net 10,515,000 10,099,000
Deferred taxes 8,645,000 8,645,000
Rental equipment, principally machinery, at cost, net 155,395,000 116,921,000
Operating property and equipment, at cost, net 20,764,000 20,043,000
Intangible assets, net 41,048,000 34,801,000
Other assets, primarily deferred financing costs, net 2,380,000 1,383,000
------------ ------------
$267,543,000 $218,933,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable $ 33,265,000 $ 20,302,000
Payroll and other accrued expenses 21,389,000 21,540,000
Accrued interest payable 742,000 514,000
Income taxes payable 939,000 48,000
Deferred taxes 12,863,000 12,863,000
Bank debt and long term obligations 101,569,000 68,526,000
Obligations under capital leases 55,000 68,000
------------ ------------
Total liabilities 170,822,000 123,861,000
Stockholders' equity:
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 - 11,376,378 at
March 31, 1997 and December 31, 1996 114,000 114,000
Additional paid-in capital 93,917,000 93,917,000
Retained earnings 2,690,000 1,041,000
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Total stockholders' equity 96,721,000 95,072,000
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$267,543,000 $218,933,000
============ ============
</TABLE>
See accompanying notes.
1
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
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<S> <C> <C>
Revenues:
Equipment rentals $27,527,000 $19,656,000
Sales of parts, supplies and equipment 13,782,000 7,541,000
----------- -----------
Total revenues 41,309,000 27,197,000
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation 14,316,000 12,449,000
Depreciation, equipment rentals 6,306,000 3,633,000
Cost of sales of parts, supplies and
equipment 9,709,000 5,067,000
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Total cost of revenues 30,331,000 21,149,000
------------ -----------
Gross profit 10,978,000 6,048,000
Selling, general and administrative expense 3,784,000 2,734,000
Depreciation and amortization, excluding
equipment rental depreciation 1,068,000 571,000
Amortization of intangibles 624,000 561,000
------------ -----------
Operating income 5,502,000 2,182,000
Interest expense, net 1,597,000 1,639,000
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Income before income taxes and
extraordinary item 3,905,000 543,000
Provision for income taxes 1,722,000 213,000
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Income before extraordinary item 2,183,000 330,000
Extraordinary item, loss on extinguishment
of debt less applicable income tax benefit
of $386,000 in 1997 534,000 -
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Net income 1,649,000 330,000
Redeemable preferred stock accretion - 554,000
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Net income (loss) available to common
stockholders $ 1,649,000 $ (224,000)
============ ===========
Earnings (loss) per common and common
equivalent share:
Income before extraordinary item $ .19 $ (.04)
Extraordinary item (.05) -
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Net income (loss) $ .14 $ (.04)
============ ===========
Weighted average common and common
equivalent shares 11,493,273 5,506,756
============ ===========
</TABLE>
See accompanying notes.
2
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RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,649,000 $ 330,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,998,000 4,765,000
Extraordinary item 534,000 -
Interest paid in kind - 576,000
Provision for losses on accounts receivable 446,000 330,000
Gain on sale of rental equipment (1,766,000) (1,179,000)
Changes in operating assets and liabilities, net of effect of business
acquisitions:
Accounts receivable (1,677,000) 233,000
Other receivables and prepaid expense 341,000 (2,435,000)
Income tax receivable 39,000 -
Intangible assets and other assets 68,000 (778,000)
Parts and supplies inventories 88,000 (344,000)
Accounts payable 12,963,000 8,323,000
Payroll and other accrued expenses (1,485,000) (82,000)
Accrued interest payable 227,000 (4,000)
Income taxes payable 891,000 94,000
Deferred taxes, net - 1,000
----------------- ---------------
Net cash provided by operating activities 20,316,000 9,830,000
INVESTING ACTIVITIES
Acquisitions of rental operations, net of cash acquired (12,015,000) (11,997,000)
Cash purchases of rental equipment and operating property and
equipment (44,119,000) (18,933,000)
Proceeds from sale of used equipment 4,617,000 2,703,000
Additions to assets held for sale - (1,442,000)
----------------- ---------------
Net cash used in investing activities (51,517,000) (29,669,000)
FINANCING ACTIVITIES
Proceeds from bank debt 71,400,000 55,154,000
Payments on bank debt (38,262,000) (49,815,000)
Payments of debt issuance costs (1,702,000) -
Payments on long term obligations (95,000) (100,000)
Payments on capital lease obligations (14,000) (264,000)
Proceeds from issuance of preferred stock - 7,500,000
Proceeds from issuance of common stock, net of issuance costs - 7,387,000
----------------- ---------------
Net cash provided by financing activities 31,327,000 19,862,000
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Net increase in cash and cash equivalents 126,000 23,000
Cash and cash equivalents at beginning of period 1,452,000 1,455,000
----------------- ---------------
Cash and cash equivalents at end of period $ 1,578,000 $ 1,478,000
----------------- ---------------
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,369,000 $ 1,068,000
Cash paid for income taxes $ 67,000 $ 53,000
</TABLE>
See accompanying notes.
3
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Rental
Service Corporation (RSC or Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the three month period ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards 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 quarterly periods
ended March 31, 1997 and 1996.
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. 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 and cash purchase price for these
acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996
--------------------------------------
(UNAUDITED)
<S> <C> <C>
Assets acquired $ 6,551,000 $10,524,000
Goodwill and covenants not to compete 6,798,000 2,894,000
Less: liabilities assumed (1,334,000) (1,421,000)
--------------------------------------
Cash purchase price $12,015,000 $11,997,000
======================================
Number of acquisitions 5 3
</TABLE>
4
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(Unaudited)
The following table sets forth the unaudited pro forma results of
operations for each period in which acquisitions occurred and for the
immediately preceding period as if the above acquisitions were consummated at
the beginning of the immediately preceding period:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
1997 1996
---------------------------------
(UNAUDITED)
<S> <C> <C>
Total revenues $50,619,000 $45,287,000
Income before extraordinary item 2,024,000 443,000
Net income 1,490,000 443,000
Earnings per common and common equivalent
share:
Income before extraordinary item .17 (.02)
Net income .13 (.02)
</TABLE>
Effective March 1, 1997, the Company reached a definitive agreement to
acquire 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 a leading "on-site" small tool provider, rental management company
and maintenance, repair and operations (MRO) supplier and operates a total of
four locations in Texas and Louisiana. The transaction closed on April 25, 1997,
and IAT's balance sheet will be consolidated with the Company's under the
purchase method of accounting as of that date. This acquisition is anticipated
to result in approximately $23.0 million in goodwill, which will be 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 each period presented.
3. BANK DEBT AND LONG TERM OBLIGATIONS
Bank debt and long-term obligations consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------------------------------
<S> <C> <C>
(UNAUDITED)
Revolving Line of Credit (Revolver) $101,005,000 $67,867,000
Notes payable 301,000 306,000
Equipment contracts payable 263,000 353,000
---------------------------------
$101,569,000 $68,526,000
=================================
</TABLE>
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 extend the maturity date to January 31, 2002. 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. 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 obligation of the lender 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,
5
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(Unaudited)
the Company's subsidiaries ability 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 to RSC. As of
March 31, 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 0.5% of the unused commitment, excluding the face amount of all
outstanding and undrawn letters of credit, is also payable monthly in arrears.
In connection with the 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 accompanying
consolidated statements of operations.
4. PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
Stock Option Plan
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. On February 26, 1997,
425,150 options were granted under the 1996 Plan at an exercise price of $20.25
per share. These options vest in equal installments over a four year period from
the date of grant. At March 31, 1997, 575,050 shares of common stock were
available for future Awards under the 1996 Plan.
5. SUBSEQUENT EVENTS
On April 25, 1997, the Company reached a definitive agreement to
acquire 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 will be 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. The purchase price
is subject to adjustment based on levels of accounts receivable, inventory and
equipment. 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. The transaction is anticipated to close by June 30, 1997, and
will be recorded under the purchase method of accounting. The closing is subject
to a number of closing conditions, including early termination or expiration of
the waiting period under the Hart-Scott-Rodino Act.
On April 26, 1997, the Company reached a definitive agreement to
acquire substantially all of the assets of Central States Equipment, Inc. and
Equipment Lessors, Inc. (collectively, Central) for $18.0 million in cash and
204,867 shares of RSC common stock, of which 102,435 shares will be paid to the
sellers over a five year period,
6
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
(Unaudited)
and may be accelerated to three years if certain performance objectives are
met. The purchase price is subject to adjustment based on levels of accounts
receivable, inventory and equipment. 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. The transaction is anticipated to
close by June 30, 1997, and will be recorded under the purchase method of
accounting. The closing is subject to a number of closing conditions, including
early termination or expiration of the waiting period under the Hart-Scott-
Rodino Act.
On April 28, 1997, 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 is expected to commence on July 1,
1997.
On April 28, 1997, 173,500 options were granted under the 1996 Plan at
an exercise price of $18.00 per share. These options vest in equal installments
over a four year period from the date of grant.
On April 30, 1997, the Company received a commitment letter, subject
to completion of its secondary offering, to increase the availability under the
Revolver to $300.0 million, decrease the interest rate margins by 0.25% and
reduce the unused line fee to 0.25% of the unused commitment.
On May 9, 1997, the Company filed a registration statement for a
secondary offering of 4,000,000 shares of common stock. Of the 4,000,000 shares,
3,000,000 will be sold by the Company, with the remainder to be sold by certain
selling stockholders. This registration statement is subject to completion or
amendment, until such time that it becomes effective.
7
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues. Total revenues for the three months ended March 31, 1997 increased
51.9% to $41.3 million from $27.2 million in the same period in 1996. This
increase was primarily due to the inclusion of revenues from acquisitions of
14 businesses (consisting of 28 locations) and the opening of 15 start-up
locations subsequent to March 31, 1996. Equipment rental revenues increased
40.0% to $27.5 million from $19.7 million due to a larger rental fleet as a
result of acquisitions, the partial period impact of $44.1 million in capital
expenditures during the first three months of 1997 and the full period impact
of $86.8 million in capital expenditures in 1996. Sales of parts, supplies and
equipment increased 82.8% to $13.8 million from $7.5 million due primarily to
the increased number of rental locations selling these items and the
acquisition of IAT, effective in the Company's results of operations from
March 1, 1997.
Gross Profit. Gross profit for the three months ended March 31, 1997
increased to $11.0 million, or 26.6% of total revenues, from $6.0 million, or
22.2% of total revenues, in the same period in 1996. Gross margins on
equipment rentals increased to 25.1% of equipment rental revenues from 18.2%
for the three months ended March 31, 1996 primarily due to the impact of the
43 locations added since March 31, 1996 and the absence of start-up locations
during the three months ended March 31, 1997. Gross margin on sales of parts,
supplies and equipment decreased to 29.6% of sales from 32.8%, 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
equipment sales. The Company believes that the gross margin on sales of parts,
supplies and equipment will likely continue to decline due to the full period
impact of IAT's product sales, which generally have lower gross margins than
the parts, supplies and equipment sold by the Company prior to the acquisition
of IAT.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended March 31, 1997 was $3.8
million, or 9.2% of total revenues, compared to $2.7 million, or 10.1% of
total revenues, in the same period in 1996. This percentage decrease is a
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 three months ended March 31, 1997 was $1.1 million, or 2.6 % of total
revenues, compared to $571,000, or 2.1% of total revenues, for 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.
Amortization of Intangibles. Amortization of intangibles for the three
months ended March 31, 1997 was $624,000, or 1.5% of total revenues, compared
to $561,000, or 2.0% of total revenues, for the same period in 1996. This
increase is due to additional goodwill and covenants not-to-compete associated
with acquisitions since March 31, 1996.
Provision for Income Taxes. Provision for income taxes was $1.7 million for
the three months ended March 31, 1997 compared to $213,000 in the same period
in 1996. The Company's effective tax rate was 44.1% for the three months
ending March 31, 1997, compared to 39.2% 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 Items. In connection with the implementation of the amended
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.
8
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
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 $1.6 million at March 31, 1997 and $1.5 million at December 31,
1996.
During the three months ended March 31, 1997, the Company's operating
activities provided net cash flow of $20.3 million, as compared to $9.8
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, increased
depreciation and amortization, higher average accounts payable and decreased
levels of other receivables and prepaid expense.
Net cash used in investing activities was $51.5 million in the three months
ended March 31, 1997, compared to $29.7 million in the same period for the
prior year. The increase was primarily attributable to a higher combined level
of capital expenditures and acquisitions. Acquisition spending totaled $12.0
million in the three months ended March 31, 1997 and 1996. In addition, the
Company had capital expenditures of $44.1 million and $18.9 million in the
three months ended March 31, 1997 and 1996, respectively. Capital expenditures
were primarily for purchases of rental equipment. Included in investing
activities were proceeds from the sale of equipment, which were $4.6 million
for the three months ended March 31, 1997, compared to $2.7 million for the
same period in the prior year. This increase was primarily the result of a
larger fleet resulting from acquisitions and capital expenditures.
Net cash provided by financing activities was $31.3 million for the three
months ended March 31, 1997, compared to $19.9 million in the same period for
the prior year. The net cash provided by financing activities was primarily
due to borrowings under the Revolver.
The Company's principal source of liquidity is the Revolver, which consists
of a revolving line of credit and availability of letters of credit, which
combined initially could not exceed $125.0 million. 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. The amended Revolver increased the allowed 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). In connection with the implementation of the
amended Revolver, the Company recorded an extraordinary loss on extinguishment
of debt of $920,000, net of income taxes of $386,000, in the first quarter of
1997 associated with the write-off of unamortized debt issuance costs.
The amended 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 total amount of credit available under
the amended 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 (at the lower of net book value or market) of eligible
rental equipment. The amended Revolver expires January 31, 2002. The
obligation of the lender 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 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 to
RSC. As of March 31, 1997, the Company was in compliance with all covenants of
the Revolver, and substantially all of the Company's net consolidated assets
were restricted under the terms of the Revolver.
9
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
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 0.5% of the unused commitment, excluding the
face amount of all outstanding and undrawn letters of credit, is also payable
monthly in arrears.
At May 11, 1997, the principal amount outstanding under the Revolver was
$148.9 million, the interest rate on such borrowings was 7.8%, and an
additional $21.2 million was available to the Company under the Revolver.
On April 30, 1997, the Company received a commitment letter, subject to
completion of its secondary offering, to increase the availability under the
Revolver to $300.0 million, decrease the interest rate margins by 0.25% and
reduce the unused line fee to 0.25% of the unused commitment.
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 six acquisitions of rental equipment businesses with an aggregate of
12 locations in Arkansas, Georgia, Louisiana and Texas. 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. The
Company must be able to open start-up locations and make the capital
expenditures necessary to acquire and maintain its rental fleet. At March 31,
1997, the Company was obligated, under noncancellable purchase commitments, to
purchase $17.8 million of rental equipment. Such purchases are expected to be
financed with cash flows from operations and through borrowings under the
Revolver.
On April 25, 1997, the Company reached a definitive agreement to acquire
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 will be 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. The purchase
price is subject to adjustment based on levels of accounts receivable,
inventory and equipment. 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. The transaction is anticipated to close
by June 30, 1997, and will be recorded under the purchase method of
accounting. The closing is subject to a number of closing conditions,
including early termination or expiration of the waiting period under the
Hart-Scott-Rodino Act.
On April 26, 1997, the Company reached a definitive agreement to acquire
substantially all of the assets of Central States Equipment, Inc. and
Equipment Lessors, Inc. (collectively, Central) for $18.0 million in cash and
204,867 shares of RSC common stock, of which 102,435 shares will be paid to
the sellers over a five year period, and may be accelerated to three years if
certain performance objectives are met. The purchase price is subject to
adjustment based on levels of accounts receivable, inventory and equipment.
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. The transaction is anticipated to close by June 30, 1997, and will
be recorded under the purchase method of accounting. The closing is subject to
a number of closing conditions, including early termination or expiration of
the waiting period under the Hart-Scott-Rodino Act.
10
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
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 operations and capital liquidity
requirements for the next 12 months. However, if significant acquisition
opportunities arise, the Company may 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 May 9, 1997, the Company filed a registration statement for a secondary
offering of 4,000,000 shares of common stock. Of the 4,000,000 shares,
3,000,000 will be sold by the Company, with the remainder to be sold by
certain selling stockholders. Proceeds from this secondary offering are
expected be used to reduce the Company's indebtedness under the Revolver in
order to provide borrowing availability for general corporate purposes,
including acquisitions. This registration statement is subject to completion
or amendment, until such time that it becomes effective.
11
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
PART II. OTHER INFORMATION
---------------------------
Item 1. 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 financial condition of the
Company.
The Company previously received a letter from an attorney representing a
minor injured in June 1996 while accompanying an adult using a piece of
equipment rented from the Company. The accident also resulted in the
death of the adult. The estate of the deceased filed a lawsuit against
the Company. The Company also received a letter from an attorney
representing another individual with respect to an action for damages
arising out of the same incident. During the first quarter, these
matters were settled within the limits of the Company's general
liability insurance policy.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's stockholders were asked to approve, through a written
consent dated January 10, 1997, 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.
The 1996 Plan was approved based on the stockholder votes set forth
below:
<TABLE>
<S> <C>
Number of votes for: 6,824,193
Number of votes against: 1,653,418
Number of votes abstaining: 174,370
</TABLE>
Item 5. Other Information
As noted in a Current Report on Form 8-K, dated April 14, 1997, the
Company has promoted Douglas A. Waugaman to Senior Vice President of
Operations (effective April 14, 1997). Mr. Waugaman was most recently
the Company's Vice President and Chief Financial Officer. Additionally,
Robert M. Wilson and Bruce A. Lisanti have joined the Company as Senior
Vice President and Chief Financial Officer (effective April 14, 1997)
and as Senior Vice President of Marketing (effective April 21, 1997),
respectively.
12
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
EXHIBIT NUMBER DESCRIPTION
-------------- -------------------------------------------------------------------------
* 10.1 First Amendment to the Amended and Restated Credit Agreement, dated as of January
31, 1997.
# 10.2 The 1996 Equity Participation Plan of Rental
Service Corporation.
T 10.3 Form of Incentive Stock Option Agreement for Employees.
T 10.4 Form of Non-Qualified Stock Option Agreement for Directors.
+ 10.5 Employee Qualified Stock Purchase Plan of Rental Service Corporation.
I 10.6 Stock Purchase Agreement by and among Andy G. Gessner; Larry R. Bush; Stacy K.
Bush; Larry R. Bush, Trustee of the Stacy K. Bush Trust and Roy B. Bush as "Sellers,"
Acme Dixie, Inc. as "Buyer", Rental Service Corporation as "Parent" and Comtect, Inc.
and Comtect, Inc.'s Subsidiaries being IAT Interests of Nevada, Inc.; RNJB, Inc.;
CFTSIJC, Inc.; Industrial Air Tool Pasadena, Inc.; Industrial Air Tool Texas City, Inc.;
PST, Inc. of Louisiana and LRB Supply, Inc. as the "Company", dated March 14, 1997.
I 10.7 Asset Purchase Agreement by and among Brute Equipment Co. d/b/a "Foxx Hy-Reach
Company" as "Seller," Rental Service Corporation, Walker Jones Equipment Company
as "Buyer" and Thomas H. Foster, dated April 25, 1997.
I 10.8 Asset Purchase Agreement by and among Central States Equipment, Inc. and
Equipment Lessors, Inc. as "Sellers," Walker Jones Equipment Company as "Buyer"
and the stockholders of Sellers, dated April 26, 1997.
T 10.9 Letter Agreement dated April 30, 1997, between the Company's subsidiaries and BT
Commercial Corporation relating to a proposed amendment to the Amended and
Restated Credit Agreement.
11.1 Statement re: computation of earnings per share.
T 21.1 Subsidiaries of Rental Service Corporation.
27.1 Financial Data Schedule
--------------------
</TABLE>
* Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 31, 1997, and incorporated herein by reference.
# Filed as an exhibit to the Company's Registration Statement on Form
S-8 (Registration No. 333-22403), and incorporated herein by reference.
T Filed as an exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 333-26753), and incorporated herein by reference.
+ Filed with the Company's Proxy Statement on Schedule 14A filed
March 26, 1997, and incorporated herein by reference.
I Filed as an exhibit to the Company's Current Report on Form 8-K
dated April 14, 1997, and incorporated herein by reference.
13
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
(b) Reports on Form 8-K
1) The Company filed a Current Report on Form 8-K, dated January 31,
1997, announcing an amendment to the Revolver increasing the
availability to $200.0 million and stockholder approval of the 1996
Equity Participation Plan of Rental Service Corporation.
2) The Company filed a Current Report on Form 8-K dated March 14, 1997
announcing the signing of a definitive agreement, effective March
1, 1997, to acquire all of the outstanding stock of Comtect, Inc.
and subsidiaries d/b/a Industrial Air Tool. This 8-K also announced
the acquisition of United Rentals & Sales and the opening of the
Company's 100th location.
14
<PAGE>
RENTAL SERVICE CORPORATION
MARCH 31, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<CAPTION>
RENTAL SERVICE CORPORATION
--------------------------------
(Registrant)
<S> <C>
Date: May 14, 1997 By: /s/ Martin R. Reid
---------------------- --------------------------------
Martin R. Reid
Chairman
Chief Executive Officer
Date: May 14, 1997 By: /s/ Douglas A. Waugaman
---------------------- --------------------------------
Douglas A. Waugaman
Senior Vice President of Operations
Date: May 14, 1997 By: /s/ Robert M. Wilson
---------------------- --------------------------------
Robert M. Wilson
Senior Vice President
Chief Financial Officer
</TABLE>
15
<PAGE>
Exhibit 11.1
Rental Service Corporation
Statement re: Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
------------- --------------
<S> <C> <C>
Weighted average common shares
outstanding 11,376,378 5,279,114
Net effect of dilutive common stock
options - based on the treasury stock
method using the average market price 116,895 -
Net effect of common stock, common
stock options and warrants issued at
less that IPO price within twelve
months, based on the treasury stock
method:
Common stock - 19,708
Options - 147,113
Warrants - 60,821
---------- ----------
11,493,273 5,506,756
========== ==========
Income before extraordinary item $2,183,000 $ 330,000
Preferred stock accretion - (554,000)
---------- ----------
$2,183,000 $ (224,000)
========== ==========
Net income $1,649,000 $ 330,000
Preferred stock accretion - (554,000)
---------- ----------
$1,649,000 $ (224,000)
========== ==========
Per share amount:
Income (loss) before extraordinary item $ .19 $ (.04)
Extraordinary item (.05) -
---------- ----------
Net income (loss) $ .14 $ (.04)
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF RENTAL SERVICE CORPORATION AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,578,000
<SECURITIES> 0
<RECEIVABLES> 25,655,000
<ALLOWANCES> 2,811,000
<INVENTORY> 10,515,000
<CURRENT-ASSETS> 0
<PP&E> 211,094,000
<DEPRECIATION> 34,935,000
<TOTAL-ASSETS> 267,543,000
<CURRENT-LIABILITIES> 56,335,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 267,543,000
<SALES> 27,527,000
<TOTAL-REVENUES> 41,309,000
<CGS> 20,622,000
<TOTAL-COSTS> 30,331,000
<OTHER-EXPENSES> 5,476,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,597,000
<INCOME-PRETAX> 3,905,000
<INCOME-TAX> 1,722,000
<INCOME-CONTINUING> 2,183,000
<DISCONTINUED> 0
<EXTRAORDINARY> 534,000
<CHANGES> 0
<NET-INCOME> 1,649,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
