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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
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[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
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
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(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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$.01 PAR VALUE
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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $137,104,000, based on the last reported sales
price of the registrant's Common Stock, $.01 par value, as reported on the
Nasdaq National Market on March 7, 1997.
The number of outstanding shares of the registrant's Common Stock, $.01 par
value, as of March 7, 1997 was 11,376,378.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the Company's
Annual Meeting of Stockholders scheduled to be held on April 28, 1997 have been
incorporated by reference into Part III of this Report.
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RENTAL SERVICE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
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ITEM 1. Business......................................................................................... 1
ITEM 2. Properties....................................................................................... 8
ITEM 3. Legal Proceedings................................................................................ 8
ITEM 4. Submission of Matters to a Vote of Security Holders.............................................. 9
PART II
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ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............................ 9
ITEM 6. Selected Financial Data..........................................................................10
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............11
ITEM 8. Financial Statements and Supplementary Data......................................................17
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.............17
PART III
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ITEM 10. Directors and Executive Officers of the Registrant..............................................17
ITEM 11. Executive Compensation..........................................................................17
ITEM 12. Security Ownership of Certain Beneficial Owners and Management..................................17
ITEM 13. Certain Relationships and Related Transactions..................................................17
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................18
</TABLE>
(i)
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PART I
ITEM 1. BUSINESS
GENERAL
Rental Service Corporation ("RSC" or the "Company"), a leading equipment
rental company, 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 parts, supplies 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 22 businesses comprised of 74 locations and has opened
32 start-up locations through December 31, 1996. 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.
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 estimates increased to $15
billion in 1995.
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.
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by 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 that small- to medium-sized
markets provide an extensive selection of acquisition candidates and start-up
locations and permit broader geographic and customer diversification. Through
its geographic diversification, the Company believes that it can more
effectively manage economic fluctuations than single-location businesses by
transferring equipment to regions with higher demand. The Company believes that
future acquisitions and start-up locations will provide opportunities to achieve
greater geographic and customer diversification.
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 50 miles away, which
draw on this equipment pool to serve local customers' needs. The hub locations
provide full-service maintenance and repair operations for the satellite
locations. The Company believes that this strategy increases fleet
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utilization and allows RSC to bring the benefits of a large, high-quality and
diversified rental equipment fleet to markets with smaller populations.
Advanced Information Systems. The Company has made investments in its state-
of-the-art management information systems in order to improve asset utilization
and financial performance. Every rental location has on-line access to
centralized computer systems which provide real-time transaction processing,
extensive fleet management tools and daily 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.
Decentralized Management. Under the Company's decentralized management
structure, RSC's region managers, who currently average over 20 years of rental
experience, are responsible for management, customer service, marketing
strategies and business growth in their regions. Each region manager is
compensated through a stock option program and cash bonus plan tied directly to
his 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 used rental equipment sale prices.
Customer Service. The Company believes that 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
parts, supplies 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 that 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, which provides formal
training to all Company employees relating to customer service, strategy,
finance, information systems, fleet management, safety and risk management and
human resources.
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 also seeks to
increase revenues across its locations through fleet expansion, improved asset
utilization and targeted marketing efforts. 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 25 demographic
characteristics found in the Company's most successful geographic markets.
Acquisition of Equipment Rental Businesses. RSC's acquisition efforts focus on
acquiring stable, respected businesses in markets that the Company believes
offer the opportunity for additional growth in rental equipment demand. The
Company primarily targets acquisitions of equipment rental 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. After completing an acquisition, the Company 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 assuring consistent, high-quality service to the
acquired business' customers.
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 maximizes 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.
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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 expand its rental equipment fleet through
capital expenditures made to replace assets in, and increase the breadth and
depth of, its existing fleet. In addition, RSC's information systems have
enhanced asset utilization by providing the data necessary to improve asset
deployment based upon such factors as price realization, time utilization and
individual asset return on investment. Through its recently-introduced 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 will locate equipment at a customer's
facility and assume 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 improve asset utilization
rates resulting from the sole-source arrangement with the customer.
PRODUCTS
The Company believes that it offers 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 40,000 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 the 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, Honda,
Multiquip, Norton, Terramite and Wacker.
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, to determine the optimal timing for the sale and replacement of
a piece of equipment given, among other things, original purchase price,
maintenance expense, rental demand and prices in the used rental equipment
market. In addition, the Company markets its used rental equipment via the
Internet.
FLEET MANAGEMENT
Using the Company's computer system, an employee at any location can locate a
specific piece of equipment throughout the region and determine whether it is 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 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 which 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.
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INFORMATION SYSTEMS
Each rental location is networked with a commonly configured hardware and
software 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 IBM 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.
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.
SALES AND MARKETING
The Company markets its products and services through a sales force consisting
of both field-based commissioned and store-based salespeople. The 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 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 to meet their rental needs.
Through its national accounts program, the Company has begun to target large
petrochemical, industrial and commercial customers in order to develop national
relationships and increase awareness of its IPM program.
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 has created 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."
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 and BET Plant Services
U.S.A.); regional competitors which operate in one or two states; small,
independent businesses with one or two rental locations; and equipment vendors
and dealers who both sell and rent equipment directly to customers. Some of the
Company's competitors have greater financial resources, are more geographically
diverse and have greater name recognition than the Company. 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. In addition, such competitors may
also compete with the Company for start-up locations, thereby limiting the
number of attractive locations for expansion.
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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 that it competes in the markets it serves primarily on the
basis of responsive customer service and a broad selection of high-quality
rental equipment. Relative to smaller companies with only one or two rental
locations, the Company believes that national operators such as RSC benefit from
several competitive advantages, including sophisticated management information
systems, volume purchasing, professional management, 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 that 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 the performance of
appropriate remediation at certain of its locations. The Company does not
believe that 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 that it currently conducts its
operations in material compliance with all applicable laws and regulations.
Compliance by the Company with applicable environmental laws has not had a
material adverse effect on the Company's financial condition or competitive
position to date.
TRADE NAMES
The Company currently does business under the name Rental Service
Corporation(SM). The Company believes that this brand name identity enables it
to more effectively target national accounts. In addition, 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 March 7, 1997, the Company employed 959 people. None of these employees is
represented by a union or a collective bargaining agreement. The Company
considers its labor relations to be good.
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BUSINESS RISKS
The following factors should be considered in addition to the other
information contained in this report or incorporated herein by reference in
evaluating the Company and its business.
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. The Company's future growth will be dependent upon a number of factors
including, among others, the Company's ability to identify acceptable
acquisition candidates and suitable 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 and obtain financing to
support expansion. There can be no assurance that the Company will successfully
expand or that any expansion will result in profitability. The failure to
effectively identify, evaluate and integrate acquired businesses and start-up
locations could adversely affect the Company's operating results, possibly
causing adverse effects on the market price of the Common Stock. In addition,
the results achieved to date by the Company may not be indicative of its
prospects or ability to penetrate new markets, many of which may have different
competitive conditions and demographic characteristics than the Company's
current markets.
In connection with prospective acquisitions and start-up locations, the
Company anticipates experiencing growth in 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 the operating
complexity of the Company and the level of responsibility for both existing and
new management personnel. To manage this expected growth, the Company intends to
invest further 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 or 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.
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 and BET
Plant Services U.S.A.); regional competitors which operate in one or two states;
small, independent businesses with one or two rental locations; and equipment
vendors and dealers who both sell and rent equipment directly to customers. Some
of the Company's 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. 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. In addition, such competitors may also compete with the
Company for start-up locations, thereby limiting the number of attractive
locations for expansion.
General Economic Conditions. The Company believes that the equipment rental
industry is sensitive to economic and competitive conditions, including
national, regional and local slowdowns in construction, industrial and/or
petrochemical activity. While RSC operates in nine states, the Company's
operating results may be adversely affected by events or conditions in a
particular region, 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, while simultaneously resulting in higher interest payments by the
Company under its variable rate credit facilities. There can be no assurance
that economic slowdowns or adverse economic or competitive conditions will not
have a material adverse effect on the Company's operating results and financial
condition.
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 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. The
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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. 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 market
price of the Common Stock. 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.
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. 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 the
performance of appropriate remediation at certain of its locations. 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.
Dependence on Additional Capital for Future Growth. Expansion of the Company
through acquisitions, start-up locations and internal growth will require
significant capital expenditures. The Company must continue to reinvest in
ongoing capital expenditures to maintain the age and 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
may in the future issue additional equity securities (which could result in
dilution to existing stockholders) 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 have a material adverse effect on the Company's operating results and
financial condition.
Liability and Insurance. The Company's business exposes it to possible claims
for personal injury or death resulting from the use of equipment rented or sold
by the Company and from injuries caused in motor vehicle accidents in which
Company delivery and service personnel are involved. The Company carries
comprehensive insurance subject to a deductible. 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.
Forward-Looking Statements and Associated Risks. Forward-looking statements in
this report, 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 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. Readers are cautioned not to place undue reliance on these forward-
looking statements, which speak only as of their dates. These
7
<PAGE>
forward-looking statements are based largely on the Company's current
expectations and are subject to a number of risks and uncertainties, including
without limitation, those described elsewhere in this "Business Risks"
discussion and other risks and uncertainties indicated from time to time in the
Company's filings with the Securities and Exchange Commission. Actual results
could differ materially from these forward-looking statements. In addition,
important factors to consider in evaluating such forward-looking statements
include changes in external market factors, changes in the Company's business
strategy or an inability to execute its strategy due to changes in its industry
or the economy generally, the emergence of new or growing competitors and
various other competitive factors. In light of these risks and uncertainties,
there can be no assurance that the forward-looking statements contained in this
report will in fact occur.
ITEM 2. PROPERTIES
At December 31, 1996, the Company operated 94 rental locations in the
following nine states: Alabama (11), Arkansas (6), Florida (17), Georgia (16),
Louisiana (5), Mississippi (11), South Carolina (4), Tennessee (5) and Texas
(19).
The following table shows the increase in number of RSC locations since the
Company's formation in 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1992 (1) 1993 1994 1995 1996
-------- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Beginning locations.................. -- 11 21 25 50
Locations acquired.................. 11 11 1 26 25
Locations opened.................... -- -- 3 10 19
Locations closed or sold(2)......... -- (1) -- (2) --
Ending locations held for sale(2)... -- -- -- (9) --
------- ---- ---- ---- ----
Ending locations..................... 11 21 25 50 94
======= ==== ==== ==== ====
</TABLE>
__________
(1) 1992 information reflects the period from July 17, 1992 (inception) through
December 31, 1992.
(2) In connection with the acquisition of Acme Holdings Inc. ("Holdings") on
September 12, 1995, the Company decided to sell, close or dispose of
Holdings' California rental locations. During 1996, the Company sold or
closed all such locations, which were previously included in "assets held
for sale" in the Company's Consolidated Financial Statements.
The Company's rental locations are generally situated in industrial,
commercial or mixed-use zones. The buildings range from approximately 1,500 to
15,000 square feet, consisting of a customer showroom, an equipment service area
and storage facilities, and are located on parcels of one to four acres of land.
Five 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.
ITEM 3. 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 has 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 has filed a lawsuit against the Company. The Company
has also received a letter from an attorney representing another individual with
respect to an action for damages arising out of
8
<PAGE>
the same incident. The Company cannot predict whether this accident will result
in the filing of further lawsuits against the Company or the ultimate outcome of
any such lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
RSC's Common Stock is quoted on the Nasdaq National Market under the symbol
"RSVC." Prior to the Company's initial public offering on September 18, 1996,
there had been no public trading market for the Company's Common Stock. The
following table sets forth for each period indicated, the high and low last
reported sales prices for the Company's Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Price
-----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR-ENDED DECEMBER 31, 1996
Third quarter...............................23 1/4 21 1/2
Fourth quarter..............................28 1/2 20 3/8
</TABLE>
As of March 7, 1997, there were approximately 31 holders of record of the
Company's Common Stock. Based on the broker searches conducted for the annual
meeting of stockholders, the Company believes that the number of beneficial
owners approximates 2,500, because a large portion of the Common Stock is held
of record in "street name" for the benefit of individual investors. 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 its revolving credit
facility ("Revolver") 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
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources."
9
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA (1)
(IN THOUSANDS, EXCEPT SELECTED OPERATING DATA AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
7/17/92
(INCEPTION)
THROUGH
12/31/92 1993 1994 1995 1996
---------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Equipment rentals....................... $ 2,145 $ 17,238 $27,775 $ 47,170 $ 94,218
Sales of parts, supplies and equipment.. 2,042 8,394 14,040 18,747 34,136
------- --------- ------- -------- --------
Total revenues........................... 4,187 25,632 41,815 65,917 128,354
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation.......... 1,153 11,405 16,284 27,854 55,202
Depreciation, equipment rentals......... 245 2,161 4,020 7,691 17,840
Cost of sales of parts, supplies and
equipment.............................. 1,898 5,959 10,298 12,617 24,070
------- --------- ------- -------- --------
Total cost of revenues................... 3,296 19,525 30,602 48,162 97,112
------- --------- ------- -------- --------
Gross profit............................. 891 6,107 11,213 17,755 31,242
Selling, general and administrative
expense................................. 341 2,683 4,747 6,421 12,254
Depreciation and amortization,
excluding equipment rental
depreciation............................ 11 211 504 1,186 2,835
Amortization of intangibles(2)........... 321 2,635 2,078 718 2,379
------- --------- ------- -------- --------
Operating income......................... 218 578 3,884 9,430 13,774
Interest expense, net.................... 77 407 731 3,314 7,063
------- --------- ------- -------- --------
Income before income taxes and
extraordinary items..................... 141 171 3,153 6,116 6,711
Provision for income taxes............... 81 465 1,177 2,401 2,722
------- --------- ------- -------- --------
Income (loss) before extraordinary
items................................... 60 (294) 1,976 3,715 3,989
Extraordinary items(3)................... -- -- -- 478 1,269
------- --------- ------- -------- --------
Net income (loss)........................ 60 (294) 1,976 3,237 2,720
Redeemable preferred stock accretion..... 133 1,013 1,646 1,717 1,643
------- --------- ------- -------- --------
Net income (loss) available to common
stockholders............................ $ (73) $ (1,307) $ 330 $ 1,520 $ 1,077
======= ========= ======= ======== ========
Income (loss) before extraordinary
items per common share:................. $ (.01) $ (.23) $ .06 $ .39
Extraordinary items per common share..... -- -- -- (.09) (.18)
------- --------- ------- -------- --------
Net income (loss) per common share....... $(.01) $(.23) $.06 $.30 $.15
======= ========= ======= ======== ========
Weighted average common shares(4)........ 5,590 5,632 5,428 5,088 7,218
DECEMBER 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
------- --------- ------- -------- --------
SELECTED OPERATING DATA:
Number of locations...................... 11 21 25 50 94
BALANCE SHEET DATA:
Net book value of rental equipment...... $ 8,591 $ 16,223 $24,138 $ 52,818 $116,921
Total assets............................. 18,360 35,877 48,098 137,832 218,933
Total debt (including capital leases).... 5,024 4,411 12,752 68,555 68,594
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
</TABLE>
(1) Acquisitions are reflected from the date of acquisition in the historical
operating results of the Company and the assets and liabilities relating to
acquisitions are included in the balance sheets of the Company since that
time.
(2) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(3) The Company's 1996 extraordinary item represents the loss on extinguishment
of debt related to the implementation of the amendment to the Company's
Revolver in September 1996 and the repayment of the note payable to bank
("Bank Note") and repurchase of the related warrants in September 1996. The
Company's 1995 extraordinary item represents the loss on extinguishment of
debt related to the $30.0 million revolving credit facility paid off on
September 12, 1995.
(4) See Note 1 to the Company's Consolidated Financial Statements.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its formation in 1992, the Company has acquired 22 businesses comprised
of 74 locations and has opened 32 start-up locations through December 31, 1996.
The Company has also focused 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's total revenues have increased from $41.8
million in the year ended December 31, 1994 to $128.4 million in the year ended
December 31, 1996. During the same period, the Company's operating margin has
increased from 9.3% to 10.7%.
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 the Company's 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. Any such 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, its
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 letters of intent or
binding acquisition agreements. There can be no assurance, however, that such
letters of intent or discussions will result in any particular transaction being
consummated.
In connection with the acquisition of Holdings on September 12, 1995, the
Company decided to sell, close or dispose of the Holdings' 11 rental locations
in California, as they did not meet the Company's financial performance
criteria. During 1996, the Company sold or closed all such locations, which were
previously included in "assets held for sale" in the Company's Consolidated
Financial Statements.
The Company continually reinvests 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, the Company's capital expenditures
aggregated $17.0 million, $23.6 million and $86.8 million, respectively. The
Company depreciates rental equipment over periods ranging from three to seven
years, which has resulted in equipment rental depreciation of $4.0 million, $7.7
million and $17.8 million for the years ended December 31, 1994, 1995 and 1996,
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.
On September 18, 1996, the Company completed an initial public offering of
6,325,000 shares of its common stock. Of the 6,325,000 shares sold, the Company
sold 6,027,813, with the remainder offered by certain selling stockholders.
Proceeds to the Company, net of underwriting discounts, were $89.7 million. The
Company utilized these proceeds to redeem all outstanding shares of its
preferred stock, repay the Bank Note and repurchase the related warrants, and
reduce its outstanding obligations under the Revolver.
11
<PAGE>
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 Holdings (consisting of 11 locations), the full period impact of
ten start-up locations opened in 1995 and the inclusion of revenues from eleven
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 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 equipment increased 82.1% to $34.1 million for the year ended
December 31, 1996 from $18.7 million for the year ended December 31, 1995 due
primarily to the increased number of rental locations selling these items.
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 six months of operation resulting in lower rental gross
profit margins. Gross margin on sales of parts, supplies and equipment decreased
to 29.5% of sales from 32.7% in 1995, due primarily to a change in the product
mix of parts, supplies and equipment sales.
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 same period in
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
million to repay the Bank Note and $37.7 million to reduce its indebtedness
under the Revolver. Prior to the initial public offering, the amounts
outstanding under the Bank Note and the Revolver were at higher levels, thereby
increasing the Company's outstanding debt.
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
$2,453,000, which has been classified as an extraordinary item, net of income
taxes of $964,000. Additionally, in
12
<PAGE>
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 extraordinary item, net of income
taxes of $142,000. In 1995, the Company paid off the borrowings under the 1993
revolving credit agreement 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 Holdings
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 equipment increased
33.5% to $18.7 million for the year ended December 31, 1995 from $14.0 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. The acquisition
of Holdings accounted for $1.7 million, or approximately 36.2%, of the increase.
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. In
addition, gross margin was negatively impacted by a decrease in the utilization
rate to 77% from 79% for the year ended December 31, 1994 resulting primarily
from the acquisition of Holdings, which had a lower utilization rate than the
Company, and the opening of start-up locations in the second half 1995. Gross
margin on sales of parts, supplies and equipment increased to 32.7% of sales in
1995 from 26.7% in 1994 due to a favorable product mix among parts, supplies and
equipment sales.
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 Company's revolving
credit facility.
Provision for Income Taxes. Provision for income taxes was $2.4 million for
fiscal 1995, as compared to $1.2 million for 1994. The Company's effective tax
rate was 39.3% for 1995, as compared to 37.3% for 1994.
13
<PAGE>
Extraordinary Item. In 1995, the Company paid off the borrowings under the
1993 revolving credit agreement 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
In September 1996, the Company received proceeds of $89.7 million, net of
underwriting discounts, from the sale of 6,027,813 shares of common stock in an
initial public offering. Through the application of these proceeds, the Company
has improved its liquidity and capital resources through the repurchase of a
portion of its secured debt, as well as the related interest and debt
obligations, and the redemption of its preferred stock. Specifically, the
Company used these proceeds as follows: (i) to redeem all of the outstanding
shares of its redeemable preferred stock for $37.9 million; (ii) to repay the
Bank Note and repurchase the related warrants, which entitled the bank to
purchase 87,120 shares of the Company's Common Stock, for $13 million; and (iii)
to reduce indebtedness under its Revolver through repayments of $37.7 million.
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
$1.5 million at December 31, 1996 and 1995.
During the year ended December 31, 1996, the Company's operating activities
provided net cash flow of $23.5 million, as compared to $12.5 million for the
prior year. The principal causes for the variation in cash flow between the
periods were increased depreciation and amortization and higher average accounts
payable.
Net cash used in investing activities was $84.7 million for the year ended
December 31, 1996, as compared to $61.6 million for the prior year. The increase
was primarily attributable to a higher combined level of capital expenditures
and acquisitions. Acquisition spending totaled $27.3 million and $42.1 million
in the years ended December 31, 1996 and 1995, respectively. In addition, the
Company had capital expenditures of $86.8 million and $23.6 million in the years
ended December 31, 1996 and 1995, respectively. Capital expenditures were
primarily for purchases of rental equipment. Net cash provided by operating
activities excluded proceeds from the sale of equipment, which were $12.7
million for the year ended December 31, 1996, compared to $4.1 million for the
prior year. This increase was primarily the result of a larger fleet resulting
from acquisitions and fleet investments made for start-up locations. In 1996,
net cash provided by operating activities excluded proceeds from assets held for
sale of $16.7 million.
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.
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
could not exceed $125.0 million. 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 total amount of
credit available under the Revolver was limited to a borrowing base equal to the
sum of (i) 85% of eligible accounts receivable and (ii) 75% of the value (at the
lower of net book value or market) of eligible rental equipment. The Revolver
was to expire on September 24, 2001. The obligation of the lender to make
initial 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.
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
14
<PAGE>
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. As of December 31, 1996, 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.
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. In addition, the amended
Revolver modifies certain covenants, including the restrictions on investments,
capital expenditures and acquisitions. Specifically, the amended Revolver
increased the allowed investments and capital expenditures to $90.0 million in
1997, $105.0 million in 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 anticipates recording 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.
At March 7, 1997, the principal amount outstanding under the Revolver was
$86.6 million, the interest rate on such borrowings was 7.6%, and an additional
$72.2 million was available to the Company under the Revolver.
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 three acquisitions of rental equipment businesses with an aggregate of
four locations in Arkansas, Georgia 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.
The Company believes that cash flow from operations, together with
availability under the amended 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 incurrence of additional
indebtedness or 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.
REDEEMABLE PREFERRED STOCK AND ACCRETION
Since July 1992, the Company had 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 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.
15
<PAGE>
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 the performance of appropriate
remediation at certain of its locations. The Company has accrued $763,000 at
December 31, 1996, related to the removal of underground tanks and remediation
expenses. The Company believes that the impact of the cost of such remediation
on cash flows will not be material since the Revolver and cash flows from
operations provide sufficient availability to pay these costs.
ASSETS HELD FOR SALE
In connection with the acquisition of Holdings, the Company decided to sell,
close or dispose of Holdings' 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.
COMMITMENTS TO PURCHASE EQUIPMENT
At December 31, 1996, the Company was obligated, under noncanellable purchase
commitments, to purchase $28.1 million of rental equipment. Such purchases are
expected to be financed with cash flows from operations and through borrowings
under the Revolver.
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 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 Holdings. 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 Holdings.
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. $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 Holdings. 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.
16
<PAGE>
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
Holdings will be 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are set
forth as indicated in Item 14, "Exhibits, Financial Statement Schedules and
Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item shall be included in the definitive Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders. The required information
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item shall be included in the definitive Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders. The required information
is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item shall be included in the definitive Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders. The required information
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item shall be included in the definitive Proxy Statement
for the Company's 1997 Annual Meeting of Stockholders. The required information
is hereby incorporated by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors...................... F-1
Consolidated Balance Sheets -
December 31, 1995 and 1996......................... F-2
Consolidated Statements of Operations -
Years ended December 31, 1994, 1995 and 1996....... F-3
Consolidated Statements of Redeemable Preferred
Stock and Common Stockholders' Equity (Deficit) -
Years ended December 31, 1994, 1995 and 1996....... F-4
Consolidated Statements of Cash Flows -
Years ended December 31, 1994, 1995 and 1996....... F-5
Notes to Consolidated Financial Statements........... F-6
(2) FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors on Financial
Statement Schedules................................. S-1
Schedule I - Condensed Financial Information
of Registrant........................................ S-2
Schedule II - Valuation and Qualifying Accounts...... S-6
Other schedules are omitted because of the absence of
conditions under which they are required or because the
required information is included in the Consolidated
Financial Statements or Notes thereto.
(3) INFORMATION WITH RESPECT TO THIS ITEM IS CONTAINED IN
ITEM 14(c) HEREOF AND IS INCORPORATED HEREIN BY REFERENCE.
(b) REPORTS ON FORM 8-K
None.
(c) EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------
<S> <C>
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2 Form of Amended and Restated Bylaws of the Company.
*10.1 Credit Agreement among Acme Alabama, Inc., Acme Dixie Inc.,
Acme Duval Inc., Acme Rents, Inc., The Air & Pump Company
and Walker Jones Equipment, Inc., as Borrowers, Acme
Acquisition Corp. and Acme Holdings Inc., as Parent
Guarantors, each of the financial institutions initially a
signatory thereto, together with those assignees pursuant to
Section 12.8 thereof, as Lenders, Bankers Trust Company, as
Issuing Bank, and BT Commercial Corporation, as Agent, dated
as of September 12, 1995.
*10.2 First Amendment to Credit Agreement dated as of September 26,
1995.
*10.3 Second Amendment and Consent to Credit Agreement dated as of
December 21, 1995.
*10.4 Stock Purchase Agreement dated as of July 25, 1995, between
Acme Acquisition Holdings Corp. and Martin R. Reid.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------
<S> <C>
*10.5 Stock Purchase and Severance Agreement dated as of July 25,
1995, between Acme Acquisition Holdings Corp. and Douglas
A. Waugaman.
*10.6 Stock Purchase and Severance Agreement dated as of October 4,
1995 between Rental Service Corporation and Douglas A.
Waugaman.
*10.7 Corporate Development and Administrative Services Agreement
dated as of July 17, 1992 between Brentwood Buyout Partners,
L.P., a Delaware limited partnership, and Acme Acquisition
Corp.
*10.8 Amendment to Corporate Development and Administrative
Services Agreement effective October 31, 1993.
*10.9 Preferred Stock and Common Stock Purchase Agreement dated
as of January 4, 1996 by and between Nassau Capital Partners
L.P. and NAS Partners I L.L.C., and Rental Service
Corporation.
*10.10 Letter Agreement dated June 7, 1996 between Nassau Capital
Partners L.P. and NAS Partners I L.L.C., and Rental Service
Corporation.
*10.11 Stockholders' Agreement dated as of January 4, 1996 by and
among the parties listed on the signature page thereto and
Rental Service Corporation.
*10.12 Lease dated August 24, 1990 by and between Ira N.
Mendelsohn, as lessor, and Acme Holdings Inc., as lessee,
concerning the real property located at 17871 Mitchell Drive,
Irvine, California.
*10.13 Lease dated March 19, 1992 by and between Ira N. Mendelsohn,
Pamela M. Mendelsohn and Trill Corp., as lessor, and Acme
Rents, Inc., as lessee, concerning the real property located
at Lots 22-30, Block 14, Tract 2600, Long Beach, California.
*10.14 Lease dated May 31, 1989 by and between ARI Real Estate
Partnership, as lessor, and Acme Rents, Inc., as lessee,
concerning the real property located at 326 Mira Loma Avenue,
Glendale, California, as amended by an Amendment to Lease
dated December 10, 1991.
*10.15 Stock Option Plan for Key Employees.
*10.16 Form of Incentive Stock Option Agreement for Directors.
*10.17 Form of Incentive Stock Option Agreement for Region Managers.
*10.18 Form of Amended Incentive Stock Option Agreement for Region
Managers.
*10.19 Form of Amended Incentive Stock Option Agreement for
Corporate Office Personnel.
*10.20 Form of Incentive Stock Option Agreement for Other
Corporate and District Personnel.
*10.21 Form of Indemnification Agreement.
*10.22 Termination Agreement dated July 22, 1996, between Rental
Service Corporation and Brentwood Buyout Partners, L.P.
providing for termination of the Corporate Development and
Administrative Services Agreement.
*10.23 Letter Agreement dated July 1, 1996, between the Company's
subsidiaries and BT Commercial Corporation relating to a
proposed amendment and restatement of the Credit Agreement.
*10.24 Letter Agreement dated June 1, 1996 between Rental Service
Corporation and David G. Ledlow.
*10.25 Form of Amendment to Amended Incentive Stock Option
Agreement for Region Managers.
*10.26 Form of Amendment to Amended Incentive Stock Option
Agreement for Region Managers.
*10.27 Form of Amendment to Amended Incentive Stock Option
Agreement for Region Managers.
*10.28 Form of Amendment to Amended Incentive Stock Option
Agreement for Corporate Office Personnel.
+10.29 Amended and Restated Credit Agreement, dated as of
September 24, 1996.
#10.30 First Amendment to the Amended and Restated Credit
Agreement, dated as of January 31, 1997.
++10.31 The 1996 Equity Participation Plan of Rental Service
Corporation.
11.1 Statement re: computation of per share earnings.
*21.1 Subsidiaries of Rental Service Corporation.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
</TABLE>
- --------------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-05949), and incorporated herein by reference.
19
<PAGE>
+ Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
three months ended September 30, 1996, and incorporated herein by reference.
# 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.
(d) NONE ARE REQUIRED TO BE FILED WITH THIS REPORT.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RENTAL SERVICE CORPORATION
By: /s/ Douglas A. Waugaman
--------------------------------------------
Douglas A. Waugaman
Vice President, Chief Financial
Officer, Secretary and Treasurer
Date: March 12, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------- ------------------------------- --------------
<S> <C> <C>
/s/ Martin R. Reid Chairman of the Board and March 12, 1997
- ----------------------------- Chief Executive Officer
Martin R. Reid (Principal Executive Officer)
/s/ Douglas A. Waugaman Vice President, Chief Financial March 12, 1997
- ----------------------------- Officer, Secretary and
Douglas A. Waugaman Treasurer (Principal Financial
and Accounting Officer)
/s/ William M. Barnum, Jr. Director March 12, 1997
- -----------------------------
William M. Barnum, Jr.
/s/ James R. Buch Director March 12, 1997
- -----------------------------
James R. Buch
/s/ Christopher A. Laurence Director March 12, 1997
- -----------------------------
Christopher A. Laurence
/s/ Eric L. Mattson Director March 12, 1997
- -----------------------------
Eric L. Mattson
/s/ Britton H. Murdoch Director March 12, 1997
- -----------------------------
Britton H. Murdoch
/s/ John G. Quigley Director March 12, 1997
-----------------------------
John G. Quigley
/s/ Frederick J. Warren Director March 12, 1997
- ------------------------------
Frederick J. Warren
</TABLE>
21
<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.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 28, 1997
F-1
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents................. $ 1,455,000 $ 1,452,000
Accounts receivable, net of allowance
for doubtful accounts of $1,791,000 and
$2,165,000 at December 31, 1995 and
1996, respectively....................... 14,427,000 20,856,000
Other receivables and prepaid expense..... 2,178,000 3,170,000
Income tax receivable..................... -- 1,563,000
Parts and supplies inventories, net of
reserve for obsolescence of $603,000 and
$782,000 at December 31, 1995 and 1996,
respectively............................. 5,997,000 10,099,000
Assets held for sale (Note 2)............. 16,054,000 --
Deferred taxes (Note 10).................. 7,310,000 8,645,000
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 (Notes 5 and 8)............. 52,818,000 116,921,000
Operating property and equipment, at
cost, net (Note 3)....................... 10,629,000 20,043,000
Intangible assets, net (Note 4)........... 24,154,000 34,801,000
Other assets, primarily deferred
financing costs, net..................... 2,810,000 1,383,000
------------ ------------
$137,832,000 $218,933,000
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND COMMON STOCKHOLDERS' EQUITY
-------------------------------
Accounts payable.......................... $ 10,185,000 $ 20,302,000
Payroll and other accrued expenses........ 19,839,000 21,540,000
Accrued interest payable.................. 771,000 514,000
Income taxes payable (Note 10)............ 220,000 48,000
Deferred taxes (Note 10).................. 9,815,000 12,863,000
Bank debt and long term obligations
(Note 5)................................. 67,910,000 68,526,000
Obligations under capital leases (Note
8)....................................... 645,000 68,000
------------ ------------
Total liabilities......................... 109,385,000 123,861,000
Commitments and contingencies (Notes 5
and 8)
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............. 28,401,000 --
Common stockholders' equity (Note 6):
Preferred stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--none
at December 31, 1995 and 1996,
respectively........................... -- --
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........ 42,000 114,000
Additional paid-in capital.............. 40,000 93,917,000
Retained earnings (deficit)............. (36,000) 1,041,000
------------ ------------
Total common stockholders' equity......... 46,000 95,072,000
------------ ------------
$137,832,000 $218,933,000
============ ============
See accompanying notes.
</TABLE>
F-2
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1994 1995 1996
----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Equipment rentals...................... $27,775,000 $47,170,000 $ 94,218,000
Sales of parts, supplies and equipment. 14,040,000 18,747,000 34,136,000
----------- ----------- ------------
Total revenues.......................... 41,815,000 65,917,000 128,354,000
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation......... 16,284,000 27,854,000 55,202,000
Depreciation, equipment rentals........ 4,020,000 7,691,000 17,840,000
Cost of sales of parts, supplies and
equipment............................. 10,298,000 12,617,000 24,070,000
----------- ----------- ------------
Total cost of revenues.................. 30,602,000 48,162,000 97,112,000
----------- ----------- ------------
Gross profit............................ 11,213,000 17,755,000 31,242,000
Selling, general and administrative
expense................................ 4,747,000 6,421,000 12,254,000
Depreciation and amortization, excluding
equipment rental depreciation.......... 504,000 1,186,000 2,835,000
Amortization of intangibles............. 2,078,000 718,000 2,379,000
----------- ----------- ------------
Operating income........................ 3,884,000 9,430,000 13,774,000
Interest expense, net................... 731,000 3,314,000 7,063,000
----------- ----------- ------------
Income before income taxes and
extraordinary items.................... 3,153,000 6,116,000 6,711,000
Provision for income taxes (Note 10).... 1,177,000 2,401,000 2,722,000
----------- ----------- ------------
Income before extraordinary items....... 1,976,000 3,715,000 3,989,000
Extraordinary items, loss on
extinguishment of debt less applicable
income tax benefit of $305,000 and
$822,000 in 1995 and 1996,
respectively (Note 5).................. -- 478,000 1,269,000
----------- ----------- ------------
Net income.............................. 1,976,000 3,237,000 2,720,000
Redeemable preferred stock accretion.... 1,646,000 1,717,000 1,643,000
----------- ----------- ------------
Net income available to common
stockholders........................... $ 330,000 $ 1,520,000 $ 1,077,000
=========== =========== ============
Earnings per common and common
equivalent share:
Income before extraordinary items...... $.06 $.39 $.33
Extraordinary items.................... -- (.09) (.18)
----------- ----------- ------------
Net income............................. $.06 $.30 $.15
=========== =========== ============
Weighted average common and common
equivalent shares...................... 5,427,728 5,087,790 7,218,041
=========== =========== ============
</TABLE>
See accompanying notes.
F-3
<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............. -- $ -- $ --
======== ============ ===========
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------------------------
ADDITIONAL RETAINED
PAID-IN EARNINGS
COMMON STOCK CAPITAL (DEFICIT) TOTAL
--------------------------------------- ----------- ----------- -----------
TREASURY
SHARES AMOUNT STOCK
---------- -------- ---------
<S> <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
========== ======== ========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 1,976,000 $ 3,237,000 $ 2,720,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 6,602,000 9,595,000 23,054,000
Extraordinary item.......................................... -- 478,000 1,269,000
Interest paid in kind....................................... -- 710,000 1,706,000
Provision for losses on accounts receivable................. 621,000 1,040,000 1,692,000
Gain on sale of rental equipment............................ (920,000) (1,948,000) (3,729,000)
Changes in operating assets and liabilities, net of effect
of business acquisitions:
Accounts receivable....................................... (2,834,000) (3,346,000) (5,725,000)
Other receivables and prepaid expenses.................... 200,000 (1,182,000) (1,703,000)
Income tax receivable..................................... -- -- (1,563,000)
Intangible assets and other assets........................ (192,000) 1,351,000 379,000
Parts and supplies inventories............................ (469,000) (1,403,000) (2,444,000)
Accounts payable.......................................... 1,599,000 1,866,000 10,077,000
Payroll and other accrued expenses and related party
payables................................................. 410,000 (1,000,000) (3,523,000)
Accrued interest payable.................................. (18,000) 737,000 (257,000)
Assets held for sale...................................... -- 2,652,000 --
Income taxes payable...................................... 211,000 (375,000) (172,000)
Deferred taxes, net....................................... 223,000 132,000 1,713,000
------------ ------------ -------------
Net cash provided by operating activities..................... 7,409,000 12,544,000 23,494,000
INVESTING ACTIVITIES
Acquisitions of rental operations, net of cash acquired....... (20,000) (42,057,000) (27,270,000)
Cash purchases of rental equipment and operating property and
equipment.................................................... (17,043,000) (23,632,000) (86,842,000)
Proceeds from sale of used equipment.......................... 3,240,000 4,126,000 12,695,000
Proceeds from assets held for sale............................ -- -- 16,668,000
------------ ------------ -------------
Net cash used in investing activities......................... (13,823,000) (61,563,000) (84,749,000)
FINANCING ACTIVITIES
Proceeds from bank debt....................................... 20,557,000 114,826,000 225,335,000
Payments on bank debt......................................... (11,125,000) (69,108,000) (213,511,000)
Payments of debt issuance costs............................... (400,000) (2,024,000) (984,000)
Proceeds from long term obligations........................... -- 10,000,000 --
Payment on long term obligations.............................. (894,000) (3,597,000) (12,916,000)
Payment on capital lease obligations.......................... (197,000) (276,000) (577,000)
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
Repurchase of preferred stock................................. -- -- (37,874,000)
Proceeds from issuance common stock, net of issuance costs.... -- -- 95,223,000
Proceeds from exercise of stock options....................... -- -- 1,000
Repurchase of common stock warrants........................... -- -- (945,000)
------------ ------------ -------------
Net cash provided by financing activities..................... 6,500,000 49,821,000 61,252,000
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents.......... 86,000 802,000 (3,000)
Cash and cash equivalents at beginning of year................ 567,000 653,000 1,455,000
------------ ------------ -------------
Cash and cash equivalents at end of year...................... $ 653,000 $ 1,455,000 $ 1,452,000
============ ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest........................................ $ 749,000 $ 1,863,000 $ 5,614,000
Cash paid for income taxes.................................... $ 777,000 $ 1,545,000 $ 1,850,000
</TABLE>
See accompanying notes.
F-5
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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 center locations in Texas, Louisiana, Mississippi, Florida,
Alabama, Tennessee, Georgia, Arkansas and South Carolina. 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 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 nine states, primarily in the Southeast. 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-6
<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 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 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 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.
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 and $1,050,000 in advertising costs during the years ended
December 31, 1994, 1995 and 1996, 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.
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.
F-7
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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.
Earnings Per Share and Supplemental Earnings Per Share
Earnings 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 at the initial public
offering 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 share issuances, respectively.
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.
F-8
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table sets forth, for the periods indicated, the net assets
acquired, liabilities assumed and cash purchase price for these acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1995 1996
-------- ------------ -----------
<S> <C> <C> <C>
Assets acquired......................... $113,000 $ 50,109,000 $20,316,000
Goodwill and covenants not to compete... (91,000) 19,513,000 12,221,000
Less: liabilities assumed............... (2,000) (27,565,000) (5,267,000)
-------- ------------ -----------
Cash purchase price..................... $ 20,000 $ 42,057,000 $27,270,000
======== ============ ===========
Number of acquisitions.................. 1 5 11
</TABLE>
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 above acquisitions were consummated at the beginning of the
immediately preceding year:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1994 1995 1996
------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Total revenues.......................... $85,712,000 $118,954,000 $137,342,000
Income (loss) before non-recurring and
extraordinary items.................... (2,451,000) 1,660,000 3,903,000
Net income (loss)....................... (2,451,000) 47,030,000 (a) 2,634,000
Earnings (loss) per common and common
stock equivalent share:
Income (loss) before non-recurring and
extraordinary items................. (.76) (.01) .31
Net income (loss)..................... (.76) 8.15 (a) .14
</TABLE>
(a) Net income in 1995 includes non-recurring and extraordinary items related to
Holdings' 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. (Holdings) (renamed as RSC Holdings,
Inc.) and its subsidiaries. Holdings 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, Holdings 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 Holdings which had an aggregate principal
balance at that time of approximately $78,000,000. Additionally, the Company
paid Holdings' debtor-in-possession facility of approximately $3,795,000 and
assumed the remaining liabilities of Holdings in exchange for full releases from
substantially all of Holdings' note holders.
In connection with the acquisition of Holdings, the Company decided to sell,
close or dispose of Holdings' 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
F-9
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
$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.
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Vehicles, machinery and equipment..... $ 7,010,000 $14,638,000
Leasehold improvements................ 1,284,000 2,695,000
Furniture, fixtures and computer
equipment............................ 2,663,000 5,385,000
Land and building..................... 1,634,000 1,828,000
----------- -----------
Total................................. 12,591,000 24,546,000
Less: accumulated depreciation and
amortization......................... 1,962,000 4,503,000
----------- -----------
$10,629,000 $20,043,000
=========== ===========
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31
-------------------------
1995 1996
----------- -----------
Covenants not to compete.............. $ 141,000 $ 2,281,000
Goodwill.............................. 24,685,000 34,766,000
----------- -----------
Total................................. 24,826,000 37,047,000
Less: accumulated amortization........ 672,000 2,246,000
----------- -----------
$24,154,000 $34,801,000
=========== ===========
</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.
F-10
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. BANK DEBT AND LONG TERM OBLIGATIONS
Bank debt and long term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
$125,000,000 Revolving Line of Credit
(Revolver) with a bank, interest, at
the prime rate plus 1%, due monthly,
or Eurodollar rate plus 2.5%, due on
demand, at the Company's option,
principal due September 24, 2001.
The interest rate in effect at
December 31, 1995 and 1996 was 8.9%
and 8.3%, respectively............... $56,042,000 $67,867,000
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
Equipment contracts payable, interest
at 7-11%, payable in various monthly
installments through 1998,
collateralized by equipment.......... 765,000 353,000
----------- -----------
$67,910,000 $68,526,000
=========== ===========
</TABLE>
The Company's subsidiaries entered into the amended and restated Revolver on
September 24, 1996, which consists of a revolving line of credit and
availability of letters of credit, which combined may not exceed $125,000,000.
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 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) 75% of the value
(lower of net book value or market) of eligible rental equipment. The Revolver
expires on September 24, 2001. The obligation of the lender to make initial
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.
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.
The amounts outstanding under the Revolver at December 31, 1995 and 1996 were
$56,042,000 and $67,867,000, respectively, with approximately $6,815,000 and
$28,888,000, respectively, available based on the borrowing base. Outstanding
letters of credit totaled $212,000 and $0 at December 31, 1995 and 1996,
respectively. As of December 31, 1996, the Company was in compliance with all
covenants of the Revolver. At December 31, 1995 and 1996, substantially all of
the net consolidated assets of the Company were restricted under the terms of
the Revolver.
F-11
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective January 31, 1997, the Company amended the Revolver to, among other
things, increase the availability to $200,000,000, 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. (See Note 12.)
The Company utilized proceeds from its initial public offering to reduce the
outstanding amounts under the Revolver by $37.7 million. In connection with the
implementation of the amended Revolver, 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.
In 1995, the Company paid off the borrowings under the 1993 Credit Agreement
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.
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.
The aggregate annual maturities of bank debt and long term obligations as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
EQUIPMENT
REVOLVER NOTES 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.
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.
F-12
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, there were 144,787 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 Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), 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 a Stock
Option 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 which 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.
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 adopted a new stock option plan
authorizing the issuance of options for one million shares of the Company's
common stock, of which 425,150 options were granted on February 26, 1997. (See
Note 12.)
Pro forma information regarding net income and earnings per share is
required by SFAS 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
F-13
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of 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 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 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.
A summary of the Company's stock option activity, and related information,
for the years ended December 31, 1995 and 1996 follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------------
WEIGHTED
SHARES EXERCISE AVERAGE
AVAILABLE NUMBER PRICE EXERCISE PRICE
FOR OPTIONS OF SHARES PER SHARE PER SHARE
------------ ---------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 -- -- $ -- $ --
Authorized Shares.............. 324,000 -- -- --
1995 Grants.................... (129,690) 129,690 .01 .01
-------- ------- --------
Balance at December 31, 1995 194,310 129,690 .01 .01
1996 Grants (209,190) 209,190 7.03 - 21.00 17.12
1996 Exercises................. -- (34,290) .01 .01
1996 Forfeitures............... 16,740 (16,740) .01 .01
1996 Cancellations............. -- (12,510) .01 .01
-------- ------- --------
Balance at December 31, 1996 1,860 275,340 .01 - 21.00 $ 13.01
======== ======= ========
</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.
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
500 hours of service and six months of continuous employment.
F-14
<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, the Company made discretionary contributions totaling $0, $0 and $150,000,
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>
<CAPTION>
<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 and $3,081,000
for the years ended December 31, 1994, 1995 and 1996, 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>
<CAPTION>
<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, the Company was obligated, under noncancellable
purchase commitments, to purchase $28,145,000 of rental 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 general and
vehicle policy includes an annual aggregate liability limit of $2,000,000 and a
per occurrence liability limit of $1,000,000.
F-15
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 and
$763,000 at December 31, 1995 and 1996, 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 Holdings, which also operated an equipment rental
business. Under the Management Agreement, Holdings 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, Holdings agreed, until April 1, 1995, to make
available first to the Company any opportunities which came to its attention for
acquiring additional rental center locations. The Company reimbursed Holdings
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 Holdings agreed to rerent 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 rerental. During the years ended December 31, 1994 and 1995,
rerent revenue received by the Company from Holdings was $230,000 and $72,000,
respectively, and rerent expense paid by the Company to Holdings was $39,000,
and $27,000, respectively. The agreement terminated on September 12, 1995.
During 1994 and 1995, certain expenses incurred by Holdings were paid by
the Company and vice versa.
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 totaled $0, $663,000 and $388,000,
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 totaled
$235,000, $235,000 and $235,000, respectively, and are included in general and
administrative expense. The Company's obligation to pay
F-16
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 Holdings for $10 from a former
officer of RSC Acquisition. This equated to a voting interest of 34.2% in
Holdings at December 31, 1994. These shares of Holdings were canceled September
12, 1995 as part of Holdings' 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 item... -- 305,000 822,000
---------- ---------- ----------
$1,177,000 $2,401,000 $2,722,000
========== ========== ==========
</TABLE>
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>
F-17
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 Holdings. 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 Holdings.
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 Holdings. 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.
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
Holdings will be accounted for as a reduction of the purchase price in the
periods they are realized.
F-18
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER YEAR
-------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues:
1996.................................. $27,197 $31,267 $34,631 $35,259 $128,354
1995.................................. 11,583 12,952 16,461 24,921 65,917
Gross profit:
1996.................................. 6,048 7,758 8,318 9,118 31,242
1995.................................. 3,240 3,644 4,234 6,637 17,755
Income before extraordinary items:
1996.................................. 330 897 952 1,810 3,989
1995.................................. 899 1,019 1,021 776 3,715
Net income (loss):
1996.................................. 330 897 (317) 1,810 2,720
1995.................................. 899 1,019 543 776 3,237
Earnings (loss) per common and common
equivalent share:
1996
----
Income (loss) before extraordinary (.04) .06 .07 .16 .33
items.................................. -- -- (.20) -- (.18)
Extraordinary items.....................
------- ------- ------- ------- --------
Net income (loss)....................... (.04) .06 (.13) .16 .15
1995
----
Income before extraordinary items....... .09 .12 .11 .07 .39
Extraordinary items..................... -- -- (.09) -- (.09)
------- ------- ------- ------- --------
Net income.............................. .09 .12 .02 .07 .30
</TABLE>
12. SUBSEQUENT EVENTS
Effective January 31, 1997, the Company amended the Revolver to, among
other things, increase the availability to $200,000,000, 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. In addition, the
amended Revolver modifies certain covenants, including the restrictions on
investments, capital expenditures and acquisitions. In connection with the
implementation of the amended Revolver, the Company anticipates recording 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.
On February 5, 1997, the Company's stockholders approved the 1996 Equity
Participation Plan of Rental Service Corporation (1996 Plan) through written
consent. The 1996 Plan authorizes the issuance of not more than one million
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. 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.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Directors
Rental Service Corporation
We have audited the consolidated financial statements of Rental Service
Corporation (the "Company") as of December 31, 1995 and 1996, and for each of
the three years in the period ended December 31, 1996, and have issued our
report thereon dated February 28, 1997, included elsewhere in this Form 10-K.
Our audits also included the financial statement schedules listed in Item 14(a).
These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 28, 1997
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENTAL SERVICE CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
------------ -----------
<S> <C> <C>
ASSETS
------
Cash.................................... $ 5,000 $ 5,000
Investment in and net amounts due from
wholly owned subsidiaries.............. 39,152,000 95,075,000
----------- -----------
$39,157,000 $95,080,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses... $ -- $ 8,000
Note payable to bank.................... 10,710,000 --
Redeemable preferred stock.............. 28,401,000 --
Common stockholders' equity:
Common stock........................... 42,000 114,000
Additional paid-in capital............. 40,000 93,917,000
Retained earnings (deficit)............ (36,000) 1,041,000
----------- -----------
Total common stockholders' equity....... 46,000 95,072,000
----------- -----------
$39,157,000 $95,080,000
=========== ===========
</TABLE>
See accompanying notes.
S-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENTAL SERVICE CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Costs and expenses:
General and administrative expenses.... $ 93,000 $ -- $ --
Interest expense (income).............. 28,000 (7,000) 3,000
---------- ---------- ----------
Income (loss) before equity in income
of subsidiaries and extraordinary
item.................................. (121,000) 7,000 (3,000)
Equity in income of subsidiaries........ 2,097,000 3,230,000 2,503,000
---------- ---------- ----------
Income before extraordinary item........ 1,976,000 3,237,000 2,500,000
Extraordinary item, gain on
extinguishment of debt less applicable
income taxes of $142,000 in 1996 -- -- 220,000
---------- ---------- ----------
Net income.............................. $1,976,000 $3,237,000 $2,720,000
========== ========== ==========
</TABLE>
See accompanying notes.
S-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENTAL SERVICE CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 1,976,000 $ 3,237,000 $ 2,720,000
Equity in income of subsidiaries........ (2,097,000) (3,230,000) (2,503,000)
Extraordinary item...................... -- -- (220,000)
Change in accounts payable and accrued
expenses............................... 109,000 (109,000) 8,000
Net cash provided by (used in) ----------- ----------- ------------
operating activities................... (12,000) (102,000) 5,000
FINANCING ACTIVITIES
Proceeds from sale of preferred stock... 259,000 -- 7,500,000
Repurchase of preferred stock........... -- -- (37,874,000)
Proceeds from notes payable............. -- 10,000,000 --
Payments on notes payable............... -- -- (12,055,000)
Proceeds from sale of common stock...... -- -- 95,223,000
Proceeds from exercise of stock options. -- -- 1,000
Repurchase of common stock warrants..... -- -- (945,000)
Loans to subsidiaries................... (247,000) (9,893,000) (51,855,000)
----------- ----------- ------------
Net cash provided by (used in)
financing activities................... 12,000 107,000 (5,000)
----------- ----------- ------------
Increase in cash........................ $ -- $ 5,000 $ --
=========== =========== ============
</TABLE>
See accompanying notes.
S-4
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENTAL SERVICE CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. 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. were exchanged for the same number, class and par value of
shares of RSC. RSC Acquisition Corp. was formed in July 1992.
Rental Service Corporation's investment in subsidiaries is stated at cost
plus equity in undistributed earnings of subsidiaries since the date of
acquisition. The Company's share of net income of its unconsolidated
subsidiaries is included in consolidated income using the equity method. The
parent company-only financial statements should be read in conjunction with the
Company's consolidated financial statements.
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year financial statement presentation.
2. LONG-TERM DEBT
The note payable to Bank was collateralized by the common stock of RSC
Holdings, Inc. and RSC Acquisition Corp. The note payable agreement includes
certain limitations and restrictions of payments and investments.
On September 24, 1996, the Company repaid the note payable to Bank and
repurchased the related warrants for $13 million, utilizing proceeds from its
initial public offering. This redemption 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 condensed statements of operations.
The Company has guaranteed its subsidiaries $125,000,000 revolving line of
credit with a bank, of which $56,042,000 and $67,867,000 is outstanding at
December 31, 1995 and 1996, respectively.
3. SUBSEQUENT EVENT
Effective January 31, 1997, the Company amended the Revolver to, among
other things, increase the availability to $200,000,000, 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. In addition, the
amended Revolver modifies certain covenants, including the restrictions on
investments, capital expenditures and acquisitions. In connection with the
implementation of the amended Revolver, the Company anticipates recording 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.
S-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
RENTAL SERVICE CORPORATION
YEAR ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONS
----------------------------------------
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS-- BALANCE AT
DESCRIPTION YEAR EXPENSES ACQUISITIONS DESCRIBE END OF YEAR
- ----------------------------------- ------------ ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Deducted from assets accounts:
Allowance for doubtful accounts... $ 379,000 $ 621,000 $ 236,000 $ 280,000 (a) $ 956,000
Reserve for rental equipment...... 97,000 92,000 -- 32,000 (b) 157,000
Reserve for resale equipment...... 202,000 78,000 -- -- 280,000
Income tax valuation allowance.... -- 27,000 -- -- 27,000
----------- ---------- ---------- ---------- -----------
Total.............................. $ 678,000 $ 818,000 $ 236,000 $ 312,000 $ 1,420,000
=========== ========== ========== ========== ===========
YEAR ENDED DECEMBER 31, 1995
Deducted from assets accounts:
Allowance for doubtful accounts... $ 956,000 $1,040,000 $ 582,000 $ 787,000 (a) $ 1,791,000
Reserve for rental equipment...... 157,000 -- 519,000 165,000 (b) 511,000
Reserve for resale equipment...... 280,000 138,000 185,000 -- 603,000
Income tax valuation allowance.... 27,000 -- 7,831,000 -- 7,858,000
----------- ---------- ---------- ---------- -----------
Total.............................. $ 1,420,000 $1,178,000 $9,117,000 $ 952,000 $10,763,000
=========== ========== ========== ========== ===========
YEAR ENDED DECEMBER 31, 1996
Deducted from assets accounts:
Allowance for doubtful accounts... $ 1,791,000 $1,692,000 $ 276,000 $1,594,000 (a) $ 2,165,000
Reserve for rental equipment...... 511,000 434,000 -- 22,000 (b) 923,000
Reserve for resale equipment...... 603,000 97,000 224,000 142,000 (b) 782,000
Income tax valuation allowance.... 7,858,000 -- -- 3,118,000 (c) 4,740,000
----------- ---------- ---------- ---------- -----------
Total.............................. $10,763,000 $2,223,000 $ 500,000 $4,876,000 $ 8,610,000
=========== ========== ========== ========== ===========
</TABLE>
(a) Write-off of uncollectible accounts, net of recoveries.
(b) Write-off of physical inventory shortages or obsolescence.
(c) Decrease due to changes in the expected future utilization of net operating
loss carryforwards.
S-6
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
of
RENTAL SERVICE CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
AMENDED AND RESTATED
BYLAWS
of
RENTAL SERVICE CORPORATION
a Delaware Corporation
<S> <C>
ARTICLE I - OFFICES................................................................... 1
Section 1.01 REGISTERED OFFICE.................................................. 1
Section 1.02 PRINCIPAL OFFICE................................................... 1
Section 1.03 OTHER OFFICES...................................................... 1
ARTICLE II - MEETING OF STOCKHOLDERS.................................................. 1
Section 2.01 ANNUAL MEETINGS.................................................... 1
Section 2.02 SPECIAL MEETINGS................................................... 1
Section 2.03 PLACE OF MEETINGS.................................................. 2
Section 2.04 NOTICE OF MEETINGS................................................. 2
Section 2.05 QUORUM............................................................. 2
Section 2.06 VOTING............................................................. 2
Section 2.07 LIST OF STOCKHOLDERS............................................... 3
Section 2.08 INSPECTOR OF ELECTION.............................................. 3
Section 2.09 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS BEFORE ANY MEETING OF
STOCKHOLDERS....................................................... 4
Section 2.10 STOCKHOLDER ACTION WITHOUT MEETINGS................................ 4
ARTICLE III - BOARD OF DIRECTORS...................................................... 5
Section 3.01 GENERAL POWERS..................................................... 5
Section 3.02 NUMBER............................................................. 5
Section 3.03 ELECTION OF DIRECTORS.............................................. 5
Section 3.04 NOMINATION OF DIRECTORS............................................ 6
Section 3.05 RESIGNATIONS....................................................... 7
Section 3.06 VACANCIES.......................................................... 7
Section 3.07 PLACE OF MEETING; TELEPHONE CONFERENCE MEETING..................... 7
Section 3.08 FIRST MEETING...................................................... 7
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Section 3.09 REGULAR MEETINGS................................................... 8
Section 3.10 SPECIAL MEETINGS................................................... 8
Section 3.11 QUORUM AND ACTION.................................................. 8
Section 3.12 ACTION BY CONSENT.................................................. 8
Section 3.13 COMPENSATION....................................................... 8
Section 3.14 COMMITTEES......................................................... 9
Section 3.15 OFFICERS OF THE BOARD.............................................. 9
ARTICLE IV - OFFICERS................................................................. 9
Section 4.01 OFFICERS........................................................... 9
Section 4.02 ELECTION........................................................... 10
Section 4.03 SUBORDINATE OFFICERS............................................... 10
Section 4.04 REMOVAL AND RESIGNATION............................................ 10
Section 4.05 VACANCIES.......................................................... 10
Section 4.06 CHIEF EXECUTIVE OFFICER............................................ 10
Section 4.07 PRESIDENT.......................................................... 10
Section 4.08 VICE PRESIDENT..................................................... 11
Section 4.09 SECRETARY.......................................................... 11
Section 4.10 TREASURER.......................................................... 11
ARTICLE V - SHARES AND THEIR TRANSFER................................................. 12
Section 5.01 CERTIFICATES FOR STOCK............................................. 12
Section 5.02 TRANSFER OF STOCK.................................................. 13
Section 5.03 REGULATIONS........................................................ 13
Section 5.04 LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES................. 13
Section 5.05 RECORD DATE........................................................ 13
Section 5.06 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..................... 13
Section 5.07 STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES................. 14
ARTICLE VI - INDEMNIFICATION.......................................................... 14
Section 6.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION........... 14
Section 6.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION...................... 14
Section 6.03 DETERMINATION OF RIGHT OF INDEMNIFICATION.......................... 15
Section 6.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY............... 15
Section 6.05 ADVANCE OF EXPENSES................................................ 15
Section 6.06 INSURANCE.......................................................... 16
Section 6.07 CONSTITUENT CORPORATIONS........................................... 16
Section 6.08 OTHER ENTERPRISES.................................................. 16
Section 6.09 BROADEST LAWFUL INDEMNIFICATION.................................... 16
Section 6.10 NON-EXCLUSIVITY.................................................... 17
Section 6.11 SEVERABILITY....................................................... 17
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Section 6.12 AMENDMENTS......................................................... 18
ARTICLE VII - MISCELLANEOUS........................................................... 18
Section 7.01 SEAL............................................................... 18
Section 7.02 WAIVER OF NOTICES.................................................. 18
Section 7.03 LOANS AND GUARANTIES............................................... 18
Section 7.04 GENDER............................................................. 18
Section 7.05 AMENDMENTS......................................................... 19
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AMENDED AND RESTATED
BYLAWS
of
RENTAL SERVICE CORPORATION
a Delaware Corporation
I
OFFICES
Section 1.01 REGISTERED OFFICE. The registered office of Rental
Service Corporation (hereinafter called the "Corporation") shall be at such
place in the State of Delaware as shall be designated by the Board of Directors
(hereinafter called the "Board").
Section 1.02 PRINCIPAL OFFICE. The principal office for the
transaction of the business of the Corporation shall be at such location, within
or without the State of Delaware, as shall be designated by the Board.
Section 1.03 OTHER OFFICES. The Corporation may also have an office
or offices at such other place or places either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
II
MEETINGS OF STOCKHOLDERS
Section 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of
the Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at such
time, date and place as the Board shall determine by resolution.
Section 2.02 SPECIAL MEETINGS. Except as otherwise required by law
and subject to any provision fixed by, or pursuant to, the Certificate of
Incorporation of the Corporation (the "Certificate of Incorporation"), special
meetings of the stockholders of the Corporation for any purpose or purposes may
be called at any time by the Board pursuant to a resolution approved by a
majority of the entire Board, or by the Chairman of the Board or the Chief
Executive Officer of the Corporation or by a committee of the Board (duly
authorized and empowered by the Board to call such meetings), but such special
meetings shall not be called by any other person or persons.
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Section 2.03 PLACE OF MEETINGS. All meetings of the stockholders
shall be held at such places, within or without the State of Delaware, as may
from time to time be designated by the person or persons calling the respective
meetings and specified in the respective notices or waivers of notice thereof.
In the absence of any such designation, stockholders' meetings shall be held at
the principal executive offices of the Corporation.
Section 2.04 NOTICE OF MEETINGS. Except as otherwise required by
law, notice of each meeting of the stockholders, whether annual or special,
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder of record entitled to vote at such
meeting by delivering a typewritten or printed notice thereof to him personally,
or by depositing such notice in the United States mail, in a postage prepaid
envelope, directed to him at his address furnished by him to the Secretary of
the Corporation for such purpose or, if he shall not have furnished to the
Secretary his address for such purpose, then at his address last known to the
Secretary, or by transmitting a notice thereof to him at such address by
telegraph, cable or wireless. Except as otherwise expressly required by law, no
publication of any notice of a meeting of the stockholders shall be required.
Every notice of a meeting of the stockholders shall state the place, date and
hour of the meeting, and, in the case of a special meeting, shall also state the
purpose or purposes for which the meeting is called. Except as otherwise
expressly required by law, notice of any adjourned meeting of the stockholders
need not be given if the time and place thereof are announced at the meeting at
which the adjournment is taken.
Section 2.05 QUORUM. The holders of record of a majority in voting
interest of the shares of stock of the Corporation entitled to be voted, present
in person or by proxy, shall constitute a quorum for the transaction of business
at any meeting of the stockholders of the Corporation or any adjournment
thereof. The stockholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. In the
absence of a quorum at any meeting or any adjournment thereof, a majority in
voting interest of the stockholders present in person or by proxy and entitled
to vote thereat or, in the absence therefrom of all the stockholders, a majority
of the voting stock represented in person or by proxy may adjourn such meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present or represented. At any such adjourned meeting at
which a quorum is present or represented any business may be transacted which
might have been transacted at the meeting as originally called. If the
adjournment if for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote thereat.
Section 2.06 VOTING.
(a) At each meeting of the stockholders, each stockholder shall be
entitled to vote in person or by proxy each share or fractional share of the
stock of the Corporation which has voting rights on the matter in question,
unless the question is one upon
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which by express provision of Statute or the Certificate of Incorporation or
these Bylaws, a different vote is required, in which case such express
provisions shall govern and control the decision of such question.
Section 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation
shall prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the entire duration thereof, and may be inspected by any stockholder who
is present.
Section 2.08 INSPECTOR OF ELECTION. If at any meeting of the
stockholders a vote by written ballot shall be taken on any question, the
chairman of such meeting may appoint an inspector or inspectors of election to
act with respect to such vote. Each inspector so appointed shall first
subscribe an oath faithfully to execute the duties of an inspector at such
meeting with strict impartiality and according to the best of his ability. Such
inspectors shall decide upon the qualification of the voters and shall report
the number of shares represented at the meeting and entitled to vote on such
question, shall conduct and accept the votes, and, when the voting is completed,
shall ascertain and report the number of shares voted respectively for and
against the question. Reports of the inspectors shall be in writing and
subscribed and delivered by them to the Secretary of the Corporation.
Inspectors need not be stockholders of the Corporation, and any officer of the
Corporation may be an inspector on any question other than a vote for or against
a proposal in which he shall have a material interest.
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Section 2.09 ADVANCE NOTICE OF STOCKHOLDER PROPOSALS BEFORE ANY
MEETING OF STOCKHOLDERS. To be properly brought before any meeting of
stockholders, business must be specified in the notice of meeting (or any
supplement or amendment thereto) given by or at the direction of the Board,
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or otherwise properly brought before the meeting by a
stockholder. In addition, for business to be properly brought before any
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to, or mailed and received at, the principal executive
offices of the Corporation not less than fifty (50) days nor more than seventy-
five (75) days prior to the annual meeting; provided, however, that in the event
less than sixty (60) days' notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the tenth (10th)
day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made, whichever first occurs. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought and the reasons for conducting
such business at the annual meeting; (ii) the name and record address of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal; (iii) the class, series and number
of shares of the Corporation which are beneficially owned by the stockholder and
by any other stockholders known by such stockholder to be supporting such
proposal; and (iv) any material or financial interest of the stockholder in such
business. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2.09. The Chairman of the Board or other
presiding officer of the annual meeting shall, if the facts warrant, determine
and declare at any meeting of the stockholders that business was not properly
brought before the meeting in accordance with the provisions of this Section
2.09, and if he should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted.
Section 2.10 STOCKHOLDER ACTION WITHOUT MEETINGS. Unless otherwise
provided in the Certificate of Incorporation, any action required by the General
Corporation Law of Delaware to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing setting forth the action so taken shall
be signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
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III
BOARD OF DIRECTORS
Section 3.01 GENERAL POWERS. The property, business and affairs of
the Corporation shall be managed by or under the direction of the Board, which
may exercise all of the powers of the Corporation, except such as are by the
Certificate of Incorporation, by these Bylaws or by law conferred upon or
reserved to the stockholders.
Section 3.02 NUMBER. The authorized number of directors of the
Corporation shall be not less than four (4) nor more than sixteen (16) until
changed by amendment of these Bylaws. The exact number of directors shall be
fixed, within the limits specified, by resolution duly adopted by the Board of
Directors. The initial number of directors shall be seven (7) until changed as
provided in this Section 3.02. Directors need not be stockholders of the
Corporation.
Section 3.03 ELECTION OF DIRECTORS. The directors shall be elected
by the stockholders of the Corporation, and at each election the persons
receiving the greatest number of votes, up to the number of directors then to be
elected, shall be the persons then elected. The directors shall be elected at
the annual meeting of stockholders, except as provided in Section 3.06 of this
Article, and each director elected shall hold office until his successor is
elected and qualified; provided, however, that unless otherwise restricted by
the Certificate of Incorporation or by law, any director or the entire Board may
be removed, with or without cause, from the Board at any meeting of stockholders
by a majority of the stock represented and entitled to vote thereat.
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Section 3.04 NOMINATION OF DIRECTORS. Nomination of persons for
election to the Board, other than those made by or at the direction of the Board
or by any nominating committee or person appointed by the Board, shall be made
by a stockholder only if timely written notice of such nomination or nominations
has been given to the Secretary of the Corporation. To be timely, such notice
shall be delivered to or mailed and received at the principal executive offices
of the Corporation not less than fifty (50) days nor more than seventy-five (75)
days prior to the annual meeting; provided, however, that in the event that less
than sixty (60) days' notice or prior public disclosure of the date of the
annual meeting is given or made to stockholders, notice by the stockholder to be
timely must be received not later than the close of business on the tenth (10th)
day following the day of which such notice of the date of the annual meeting was
mailed or such public disclosure was made. Each such notice to the Secretary
shall set forth: (i) the name and address of record of the stockholder who
intends to make the nomination or nominations; (ii) the class and number of
shares of capital stock of the Corporation that are beneficially owned by the
stockholder and a representation that the stockholder intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice; (iii) the name, age, business address and residence address, and
principal occupation or employment of each nominee; (iv) the class and number of
shares of capital stock of the Corporation that are beneficially owned by each
nominee; (v) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons pursuant to which
the nomination or nominations are to be made by the stockholder; (vi) such other
information regarding each nominee as would be required to be disclosed and
included in a proxy statement pursuant to the proxy rules then in effect
promulgated by the Securities Exchange Act of 1934, as amended; and (vii) the
consent of each nominee to serve as a director of the Corporation if so elected.
The Corporation may require any proposed nominee to furnish such other
information as may reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of the Corporation.
The Board may reject any nomination by a stockholder not timely made
or otherwise not in accordance with the terms of this Section 3.04. If the
Board determines that the information provided in the stockholder's notice does
not satisfy the informational requirements of this Section 3.04 in any material
respect, the Secretary of the Corporation shall promptly notify such stockholder
of the deficiency in writing. The stockholder shall have an opportunity to cure
the deficiency by providing additional information to the Secretary within such
period of time, not to exceed ten (10) days from the date such deficiency notice
is given to the stockholder, as the Board shall determine. If the deficiency is
not cured within such period, or if the Board of Directors reasonably
determines that the additional information provided by the stockholder, together
with the information previously provided, does not satisfy the requirements of
this Section 3.04 in any material respect, then the Board may reject such
stockholder's nomination. The Secretary of the Corporation shall notify a
stockholder in writing whether his nomination has been made in accordance with
the requirements of this Section 3.04.
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Section 3.05 RESIGNATIONS. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary of
the Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, it shall take effect immediately upon
its receipt; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.06 VACANCIES. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors,
or any other cause, may be filled by vote of the majority of the remaining
directors, although less than a quorum, or by a sole remaining director. Each
director so chosen to fill a vacancy shall hold office until the next annual
election of directors and his successor shall have been elected and shall
qualify or until he shall resign or shall have been removed. If there are no
directors in office, then an election of directors may be held in the manner
prescribed by statute. No reduction of the authorized number of directors shall
have the effect of removing any director prior to the expiration of this term of
office. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least ten percent of the total number of the shares at the time
outstanding have the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
Upon the resignation of one or more directors from the Board,
effective at future date, a majority of the directors then in office, including
those who have so resigned, shall have the power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or resignations
shall become effective, and each director so chosen shall hold office as
provided hereinabove in the filling of other vacancies.
Section 3.07 PLACE OF MEETING; TELEPHONE CONFERENCE MEETING. The
Board may hold any of its meetings at such place or places within or without the
State of Delaware as the Board may from time to time by resolution designate or
as shall be designated by the person or persons calling the meeting or in the
notice or waiver of notice of any such meeting. Directors may participate in
any regular or special meeting of the Board, or any committee designated by the
Board, by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting can hear each other,
and such participation shall constitute presence in person at such meeting.
Section 3.08 FIRST MEETING. The Board shall meet as soon as
practicable after each annual election of directors and notice of such first
meeting shall not be required.
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Section 3.09 REGULAR MEETINGS. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution determine.
If any day fixed for a meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and place
on the next succeeding business day which is not a legal holiday. Except as
provided by law, notice of regular meetings need not be given.
Section 3.10 SPECIAL MEETINGS. Special meetings of the Board may be
called at any time by the Chief Executive Officer or Chairman of the Board on
forty-eight hours' notice to each director, either personally or by mail or by
telegram; special meetings shall be called by the Secretary in like manner and
on like notice on the written request of two directors unless the Board consists
of only one director, in which case special meetings shall be called by the
Secretary in like manner or on like notice on the written request of the sole
director.
Section 3.11 QUORUM AND ACTION. Except as otherwise provided in
these Bylaws or by law, the presence of a majority of the authorized number of
directors shall be required to constitute a quorum for the transaction of
business at any meeting of the Board, and all matters shall be decided at any
such meeting, a quorum being present, by the affirmative votes of a majority of
the directors present. In the absence of a quorum, a majority of directors
present at any meeting may adjourn the same from time to time until a quorum
shall be present. Notice of any adjourned meeting need not be given. If only
one director is authorized, such sole director shall constitute a quorum. The
directors shall act only as a Board, and the individual directors shall have no
power as such.
Section 3.12 ACTION BY CONSENT. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board or of any committee thereof may be taken
without a meeting if a written consent thereto is signed by all members of the
Board or of such committee, as the case may be, and such written consent is
filed with the minutes of proceedings of the Board or such committee. Such
action by written consent shall have the same force and effect as the unanimous
vote of such directors.
Section 3.13 COMPENSATION. No stated salary need be paid to
directors, as such, for their services but, as fixed from time to time by
resolution of the Board, the directors may receive directors' fees, compensation
and reimbursement for expenses for attendance at directors' meetings, for
serving on committees and for discharging their duties; provided that nothing
herein contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
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Section 3.14 COMMITTEES. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have any power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending these Bylaws; and unless the resolution of the Board expressly so
provides, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger. Any such committee shall keep written minutes of its
meetings and report the same to the Board when required.
In the absence or disqualification of any member of any such
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
member of the Board to act at the meeting in the place of such absent or
disqualified member.
A majority of the members, or replacements thereof, of any such
committee shall constitute a quorum for the transaction of business. Every act
or decision done or made by a majority of the members, or replacements thereof,
of any such committee shall be regarded as the act or decision of the entire
committee.
Section 3.15 OFFICERS OF THE BOARD. The Board shall have a Chairman
of the Board and may, at the discretion of the Board, have one or more Vice
Chairmen. The Chairman of the Board and the Vice Chairmen shall be appointed
from time to time by the Board and shall have such powers and duties as shall be
designated by the Board.
IV
OFFICERS
Section 4.01 OFFICERS. The officers of the Corporation shall be a
Chairman of the Board, a Chief Executive Officer or a President, a Secretary and
a Treasurer. The Corporation may also have, at the discretion of the Board, one
or more Vice Presidents, one or more Assistant Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers and such other officers
as may be appointed in accordance with the provisions of Section 4.03 of these
Bylaws. One person may hold two or more offices, except that the
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Secretary may not also hold the office of President. The salaries of all
officers of the Corporation shall be fixed by the Board.
Section 4.02 ELECTION. The officers of the Corporation, except such
officers as may be appointed in accordance with the provisions of Section 4.03
or Section 4.05 of these Bylaws, shall be chosen annually by the Board, and each
shall hold his office until he shall resign or shall be removed or otherwise
disqualified to serve, or until his successor shall be elected and qualified.
Section 4.03 SUBORDINATE OFFICERS. The Board may appoint, or may
authorize the Chief Executive Officer to appoint, such other officers as the
business of the Corporation may require, each of whom shall have such authority
and perform such duties as are provided in these Bylaws or as the Board or the
President from time to time may specify, and shall hold office until he shall
resign or shall be removed or otherwise disqualified to serve.
Section 4.04 REMOVAL AND RESIGNATION. Any officer may be removed,
with or without cause, by a majority of the directors at the time in office, at
any regular or special meeting of the Board, or, except in case of an officer
chosen by the Board, by the Chief Executive Officer upon whom such power of
removal may be conferred by the Board. Any officer may resign at any time by
giving written notice to the Board, the Chairman of the Board, the President or
the Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice or at any later time specified therein; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 4.05 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the Bylaws for the regular appointments to such office.
Section 4.06 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of
the Corporation shall, subject to the control of the Board, have general
supervision, direction and control of the business and affairs of the
Corporation. He shall preside at all meetings of stockholders and the Board.
He shall have the general powers and duties of management usually vested in the
chief executive officer of a corporation, and shall have such other powers and
duties with respect to the administration of the business and affairs of the
Corporation as may from time to time be assigned to him by the Board or as
prescribed by the Bylaws. In the absence or disability of the President, the
Chief Executive Officer, in addition to his assigned duties and powers, shall
perform all the duties of the President and when so acting shall have all the
powers and be subject to all restrictions upon the President.
Section 4.07 PRESIDENT. The President shall exercise and perform
such powers and duties with respect to the administration of the business and
affairs of the Corporation as may from time to time be assigned to him by the
Chief Executive Officer
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(unless the President is also the Chief Executive Officer) or by the Board or as
is prescribed by the Bylaws. In the absence or disability of the Chief Executive
Officer, the President shall perform all of the duties of the Chief Executive
Officer and when so acting shall have all the powers and be subject to all the
restrictions upon the Chief Executive Officer.
Section 4.08 VICE PRESIDENT. The Vice President(s), if any, shall
exercise and perform such powers and duties with respect to the administration
of the business and affairs of the Corporation as from time to time may be
assigned to each of them by the President, by the Chief Executive Officer, by
the Board or as is prescribed by the Bylaws. In the absence or disability of
the President, the Vice Presidents, in order of their rank as fixed by the
Board, or if not ranked, the Vice President designated by the Board, shall
perform all of the duties of the President and when so acting shall have all of
the powers of and be subject to all the restrictions upon the President.
Section 4.09 SECRETARY. The Secretary shall keep, or cause to be
kept, a book of minutes at the principal office for the transaction of the
business of the Corporation, or such other place as the Board may order, of all
meetings of directors or stockholders, with the time and place of holding,
whether regular or special, and if special, how authorized and the notice
thereof given, the names of those present at directors' meetings, the number of
shares present or represented at stockholders' meetings and the proceedings
thereof.
The Secretary shall keep, or cause to be kept, at the principal office
for the transaction of the business of the Corporation or at the office of the
Corporation's transfer agent, a share register, or a duplicate share register,
showing the names of the stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the
meetings of the stockholders and of the Board required by these Bylaws or by law
to be given, and he shall keep the seal of the Corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board or these Bylaws. If for any reason the Secretary shall fail to
give notice of any special meeting of the Board called by one or more of the
persons identified in Section 3.10 of these Bylaws, or if he shall fail to give
notice of any special meeting of the stockholders called by one or more of the
persons identified in Section 2.02 of these Bylaws, then any such person or
persons may give notice of any such special meeting.
Section 4.10 TREASURER. The Treasurer shall keep and maintain or
cause to be kept and maintained, adequate and correct accounts of the properties
and business transactions of the Corporation, including accounts of its assets,
liabilities, receipts, disbursements, gains, losses, capital, surplus and
shares. Any surplus, including earned surplus, paid-in surplus and surplus
arising from a reduction of capital, shall be classified
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<PAGE>
according to source and shown in a separate account. The books of account at all
reasonable times shall be open to inspection by any director.
The Treasurer shall deposit all moneys and other valuables in the name
and to the credit of the Corporation with such depositories as may be designated
by the Board. He shall disburse the funds of the Corporation as may be ordered
by the Board, shall render to the President, to the Chief Executive Officer and
to the directors, whenever they request it, an account of all of his
transactions as Treasurer and of the financial condition of the Corporation, and
shall have such other powers and perform such other duties as may be prescribed
by the Board or these Bylaws. If required by the Board, he shall give the
Corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board, for the faithful performance of his duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
V
SHARES AND THEIR TRANSFER
Section 5.01 CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, in such
form as the Board shall prescribe, certifying the number and class of shares of
the stock of the Corporation owned by him. The certificates representing the
shares of such stock shall be numbered in the order in which they shall be
issued and shall be signed in the name of the Corporation by the Chairman of the
Board, the President or a Vice President and by the Secretary or an Assistant
Secretary or by the Treasurer or an Assistant Treasurer. Any or all of the
signatures on the certificates may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon any such certificate shall thereafter have ceased to be such
officer, transfer agent or registrar before such certificate is issued, such
certificate may nevertheless be issued by the Corporation with the same effect
as though the person who signed such certificate, or whose facsimile signature
shall have been placed thereupon, were such officer, transfer agent or registrar
at the date of issue. A record shall be kept of the respective names of the
persons, firms or corporations owning the stock represented by such
certificates, the number and class of shares represented by such certificates,
respectively, and the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be cancelled, and
no new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been cancelled, except in
cases provided for in Section 5.04 of these Bylaws.
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<PAGE>
Section 5.02 TRANSFER OF STOCK. Transfer of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney
duly executed and filed with the Secretary, or with a transfer clerk or a
transfer agent appointed as provided in Section 5.03 of these Bylaws, and upon
surrender of the certificate or certificates for such shares properly endorsed
and the payment of all taxes thereon. The person in whose name shares of stock
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation. Whenever any transfer of shares shall be
made for collateral security, and not absolutely, such fact shall be stated
expressly in the entry of transfer if, when the certificate or certificates
shall be presented to the Corporation for transfer, both the transferor and
transferee request the Corporation to do so.
Section 5.03 REGULATIONS. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. The Board may appoint, or authorize any officer
or officers to appoint, one or more transfer clerks or one or more transfer
agents and one or more registrars, and may require all certificates for stock to
bear the signature or signatures of any of them.
Section 5.04 LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. In
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft, destruction,
or mutilation and upon the giving of a bond of indemnity to the Corporation in
such form and in such sums as the Board may direct; provided, however, that a
new certificate may be issued without requiring any bond when, in the judgment
of the Board, it is proper to do so.
Section 5.05 RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
the stockholders or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any other change, conversion or exchange of
stock or for the purpose of any other lawful action, the Board may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. If, in any case involving the determination of
stockholders for any purpose other than notice of or voting at a meeting of
stockholders, the Board shall not fix such a record date, the record date for
determining stockholders for such purpose shall be the close of business on the
day on which the Board shall adopt the resolution relating thereto. A
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of such meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
Section 5.06 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The
President or any Vice President and the Secretary or any Assistant Secretary of
this Corporation are authorized to vote, represent and exercise on behalf of
this
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<PAGE>
Corporation all rights incident to all shares of any other corporation or
corporations standing in the name of this Corporation. The authority herein
granted to said officers to vote or represent on behalf of this Corporation any
and all shares held by this Corporation in any other corporation or corporations
may be exercised either by such officers in person or by any person authorized
so to do by proxy or power of attorney duly executed by said officers.
Section 5.07 STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If
the Corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the powers, designations, preferences and
relative, participating, option or other special rights of each class of stock
or series thereof and the qualification, limitations or restrictions of such
preferences and/or rights shall be set forth in full or summarized on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, provided that, except as otherwise provided in Section
202 of the General Corporation Law of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
VI
INDEMNIFICATION
Section 6.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, that he had reasonable cause to believe that his conduct was
unlawful.
Section 6.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened to
be made
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<PAGE>
a party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 6.03 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any
indemnification under Section 6.01 or 6.02 of these Bylaws (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in Sections 6.01 and 6.02 of these Bylaws. Such
determination shall be made (i) by a majority vote of directors who were not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders.
Section 6.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Article VI, to the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in Section 6.01 or 6.02 of these Bylaws, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 6.05 ADVANCE OF EXPENSES. Expenses (including attorneys'
fees) incurred by an officer or director in defending a civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board upon receipt of an undertaking by or on
behalf of such director or officer, to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VI. Such expenses (including attorneys' fees)
incurred by other employees or agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate.
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<PAGE>
Section 6.06 INSURANCE. Upon resolution passed by the Board, the
Corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
Section 6.07 CONSTITUENT CORPORATIONS. For the purposes of this
Article VII, references to "the Corporation" include in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise shall stand in the same position under the provisions
of this Article VI with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
Section 6.08 OTHER ENTERPRISES. For the purposes of this Article VI,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director, officer, employee or agent with respect to any employee benefit
plan, its participants or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VI.
Section 6.09 BROADEST LAWFUL INDEMNIFICATION. In addition to the
foregoing, the Corporation shall, to the broadest and maximum extent permitted
by Delaware law, as the same exists from time to time (but, in case of any
amendment to or change in Delaware law, only to the extent that such amendment
or change permits the Corporation to provide broader rights of indemnification
than is permitted to the Corporation prior to such amendment or change),
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative by reason of the fact that he
is or was a director or officer of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding. In addition,
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<PAGE>
the Corporation shall, to the broadest and maximum extent permitted by Delaware
law, as the same may exist from time to time (but, in case of any amendment to
or change in Delaware law, only to the extent that such amendment or change
permits the Corporation to provide broader rights of payment of expenses
incurred in advance of the final disposition of an action, suit or proceeding
than is permitted to the Corporation prior to such amendment or change), pay to
such person any and all expenses (including attorneys' fees) incurred in
defending or settling any such action, suit or proceeding in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the director or officer, to repay such amount if
it shall ultimately be determined by a final judgment or other final
adjudication that he is not entitled to be indemnified by the Corporation as
authorized in this Section 6.09. The first sentence of this Section 6.09 to the
contrary notwithstanding, the Corporation shall not indemnify any such person
with respect to any of the following matters: (i) remuneration paid to such
person if it shall be determined by a final judgment or other final adjudication
that such remuneration was in violation of law; or (ii) any accounting of
profits made from the purchase or sale by such person of the Corporation's
securities within the meaning of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law; or (iii) actions brought about or contributed to by the
dishonesty of such person, if a final judgment or other final adjudication
adverse to such person establishes that acts of active and deliberate dishonesty
were committed or attempted by such person with actual dishonest purpose and
intent and were material to the adjudication; or (iv) actions based on or
attributable to such person having gained any personal profit or advantage to
which he was not entitled, in the event that a final judgment or other final
adjudication adverse to such person establishes that such person in fact gained
such personal profit or other advantage to which he was not entitled; or (v) any
matter in respect of which a final decision by a court with competent
jurisdiction shall determine that indemnification is unlawful; provided,
however, that the Corporation shall perform its obligations under the second
sentence of this Section 6.09 on behalf of such person until such time as it
shall be ultimately determined by a final judgment or other final adjudication
that he is not entitled to be indemnified by the Corporation as authorized by
the first sentence of this Section 6.09 by virtue of any of the preceding
clauses (i), (ii), (iii), (iv) or (v).
Section 6.10 NON-EXCLUSIVITY. The indemnification provided by this
Article VI shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of the heirs, executors and administrators
of such a person.
Section 6.11 SEVERABILITY. If any part of this Article VI shall be
found, in any action, suit or proceeding or appeal therefrom or in any other
circumstances or as to any particular officer, director, employee or agent to be
unenforceable, ineffective or invalid
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<PAGE>
for any reason, the enforceability, effect and validity of the remaining parts
or of such parts in other circumstances shall not be affected, except as
otherwise required by applicable law.
Section 6.12 AMENDMENTS. The foregoing provisions of this Article VI
shall be deemed to constitute an agreement between the Corporation and each of
the persons entitled to indemnification hereunder, for as long as such
provisions remain in effect. Any amendment to the foregoing provisions of this
Article VII which limits or otherwise adversely affects the scope of
indemnification or rights of any such persons hereunder shall, as to such
persons, apply only to claims arising, or causes of action based on actions or
events occurring, after such amendment and delivery of notice of such amendment
is given to the person or persons whose rights hereunder are adversely affected,
such amendment shall have no effect on such rights of such persons hereunder.
Any person entitled to indemnification under the foregoing provisions of this
Article VI shall, as to any act or omission occurring prior to the date of
receipt of such notice, be entitled to indemnification to the same extent as had
such provisions continued as Bylaws of the Corporation without such amendment.
VII
MISCELLANEOUS
Section 7.01 SEAL. The Board shall provide a corporate seal, which
shall be in the form of a circle and shall bear the name of the Corporation and
words and figures showing that the Corporation was incorporated in the State of
Delaware and showing the year of incorporation.
Section 7.02 WAIVER OF NOTICES. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
Section 7.03 LOANS AND GUARANTIES. The Corporation may lend money
to, or guarantee any obligation of, and otherwise assist any officer or other
employee of the Corporation or of its subsidiaries, including any officer or
employee who is a director of the Corporation or of its subsidiaries, whenever,
in the judgment of the Board, such loan, guaranty or assistance may reasonably
be expected to benefit the Corporation. The loan, guaranty, or other assistance
may be with or without interest, and may be unsecured or secured in such manner
as the Board shall approve, including, without limitation, a pledge of shares of
stock of the Corporation.
Section 7.04 GENDER. All personal pronouns used in these Bylaws
shall include the other genders, whether used in the masculine, feminine or
neuter gender, and the singular shall include the plural, and vice versa,
whenever and as often as may be appropriate.
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<PAGE>
Section 7.05 AMENDMENTS. These Bylaws, or any of them, may be
rescinded, altered, amended or repealed, and new Bylaws may be made (i) by the
Board, by vote of a majority of the number of directors then in office as
directors, acting at any meeting of the Board or (ii) by the stockholders, by
the vote of sixty-six and two-thirds percent (66_%) of the outstanding shares of
voting stock of the Corporation, at an annual meeting of stockholders, without
previous notice, or at any special meeting of stockholders, provided that notice
of such proposed amendment, modification, repeal or adoption is given in the
notice of special meeting; provided, however, that Section 2.02 of these Bylaws
can only be amended if that Section as amended would not conflict with the
Corporation's Certificate of Incorporation. Any Bylaw made or altered by the
stockholders may be altered or repealed by the Board or may be altered or
repealed by the stockholders.
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<PAGE>
Exhibit 11.1
RENTAL SERVICE CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding 4,337,820 4,116,412 7,020,405
Net effect of dilutive common stock
options - based on the treasury stock
method using the average market price -- -- 50,270
Net effect of common stock, common
stock options and warrants issued at
less than IPO price within twelve
months - based on the treasury stock
method:
Common stock 876,483 757,953 5,401
Options 152,604 152,604 94,805
Warrants 60,821 60,821 47,160
----------- ----------- -----------
5,427,728 5,087,790 7,218,041
=========== =========== ===========
Income before extraordinary item $ 1,976,000 $ 3,715,000 $ 3,989,000
Preferred stock accretion (1,646,000) (1,717,000) (1,643,000)
----------- ----------- -----------
$ 330,000 $ 1,998,000 $ 2,346,000
=========== =========== ===========
Net income $ 1,976,000 $ 3,237,000 $ 2,720,000
Preferred stock accretion (1,646,000) (1,717,000) (1,643,000)
----------- ----------- -----------
$ 330,000 $ 1,520,000 $ 1,077,000
=========== =========== ===========
Per share amount:
Income before extraordinary item $ .06 $ .39 $ .33
Extraordinary item -- (.09) (.18)
----------- ----------- -----------
Net income $ .06 $ .30 $ .15
=========== =========== ===========
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-22403) pertaining to the 1996 Equity Participation Plan of Rental
Service Corporation and to the Registration Statement (Form S-8 No. 333-18637)
pertaining to the 1995 Stock Option Plan for Key Employees of Acme Acquisition
Holdings Corp. of our report dated February 28, 1997 with respect to the
consolidated financial statements of Rental Service Corporation included in the
Annual Report and Form 10-K for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
March 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF RENTAL SERVICE CORPORATION AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,452,000
<SECURITIES> 0
<RECEIVABLES> 23,021,000
<ALLOWANCES> 0
<INVENTORY> 10,099,000
<CURRENT-ASSETS> 0
<PP&E> 166,210,000
<DEPRECIATION> 29,246,000
<TOTAL-ASSETS> 218,933,000
<CURRENT-LIABILITIES> 42,404,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 218,933,000
<SALES> 94,218,000
<TOTAL-REVENUES> 128,354,000
<CGS> 73,042,000
<TOTAL-COSTS> 97,112,000
<OTHER-EXPENSES> 17,468,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,063,000
<INCOME-PRETAX> 6,711,000
<INCOME-TAX> 2,722,000
<INCOME-CONTINUING> 3,989,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,269,000
<CHANGES> 0
<NET-INCOME> 2,720,000
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
