<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
RENTAL SERVICE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7353 33-0569350
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
14505 N. HAYDEN ROAD, SUITE 322
SCOTTSDALE, ARIZONA 85260
(602) 905-3300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARTIN R. REID
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
RENTAL SERVICE CORPORATION
14505 N. HAYDEN ROAD, SUITE 322
SCOTTSDALE, ARIZONA 85260
(602) 905-3300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ELIZABETH A. BLENDELL, ESQ. LARRY A. BARDEN, ESQ.
LATHAM & WATKINS SIDLEY & AUSTIN
633 WEST FIFTH STREET ONE FIRST NATIONAL PLAZA
SUITE 4000 SUITE 4400
LOS ANGELES, CALIFORNIA 90071 CHICAGO, ILLINOIS 60603
(213) 485-1234 (312) 853-7000
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(1)(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share............................... 4,600,000 $19.25 $88,550,000 $26,833
- ------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Includes 600,000 shares subject to an over-allotment option granted to the
Underwriters.
(2) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933 based on the average of
the high and low trading prices of the Common Stock on the Nasdaq National
Market on May 7, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 9, 1997
PROSPECTUS
4,000,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION]
COMMON STOCK
Of the 4,000,000 shares of Common Stock offered hereby, 3,000,000 are being
sold by Rental Service Corporation ("RSC" or the "Company") and 1,000,000 are
being sold by the Selling Stockholders. The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"RSVC." On May 7, 1997 the last sale price of the Company's Common Stock as
reported on the Nasdaq National Market was $19.25 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share........................ $ $ $ $
Total(3)......................... $ $ $ $
- ---------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) Certain Selling Stockholders have granted the Underwriters a 30-day option
to purchase up to an additional 600,000 shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Selling Stockholders will be $ , $ and $ ,
respectively.
The shares of Common Stock are offered by the several Underwriters when, as
and if delivered to and accepted by them and subject to their right to reject
orders in whole or in part. It is expected that delivery of the certificates
for the shares of Common Stock will be made on or about , 1997.
WILLIAM BLAIR & COMPANY
MORGAN STANLEY & CO.
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[MAP SHOWING RENTAL LOCATIONS IN TEXAS, ARKANSAS, TENNESSEE, LOUISIANA,
MISSISSIPPI, ALABAMA, SOUTH CAROLINA, GEORGIA & FLORIDA [AND LOCATIONS TO BE
ACQUIRED IN ILLINOIS, IOWA, KANSAS, MISSOURI AND OKLAHOMA]]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET
IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the Notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option.
THE COMPANY
The Company is a leading equipment rental company serving the needs of a wide
variety of industrial, manufacturing, construction, government and homeowner
markets. RSC rents a broad selection of equipment ranging from small items such
as pumps, generators, welders and electric hand tools, to larger equipment such
as backhoes, forklifts, air compressors, scissor lifts, aerial manlifts and
skid-steer loaders. The Company also sells maintenance, repair and operations
("MRO") supplies, small tools, contractor supplies, parts, and used rental
equipment, and acts as a distributor for new equipment on behalf of certain
national equipment manufacturers. Depending upon market needs, RSC also offers
its customers 24 hours-a-day, seven days-a-week support services, including on-
site maintenance and repair.
RSC's strategy is to expand its presence in existing markets and capitalize
on opportunities to enter new geographic markets through a combination of
acquisitions and start-up locations. From July 1992 through September 1996, the
Company acquired 16 businesses comprised of 65 locations and opened 30 start-up
locations. In September 1996, the Company completed an initial public offering
and used the net proceeds primarily to redeem outstanding preferred stock and
to repay indebtedness which had been incurred to fund its growth strategy.
Since the initial public offering, the Company has completed 12 acquisitions
consisting of 21 locations, has executed definitive agreements (subject to
closing conditions and governmental approvals) to acquire an additional two
companies consisting of eight locations and has opened two start-up locations.
See "Recent Developments." The Company also focuses on increasing revenues
across its locations through investments in fleet expansion, the implementation
of sophisticated information systems designed to improve asset utilization and
targeted marketing efforts. Total revenues have increased from $25.6 million in
the year ended December 31, 1993 to $128.4 million in the year ended December
31, 1996. During the same period, operating income increased from $578,000 to
$13.8 million.
The Company believes that the rental equipment industry offers substantial
consolidation opportunities for large, well-capitalized equipment rental
companies such as RSC. The equipment rental industry is highly fragmented and
primarily consists of a large number of relatively small, independent
businesses typically serving discrete local markets within 30 to 50 miles of
the store location, and a small number of multi-location regional or national
operators. 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. As a result of consolidation and
industry growth, 1995 rental revenues of the top 100 rental equipment companies
increased over 1994 rental revenues by approximately 22%, to $2.5 billion,
according to estimates by the Rental Equipment Register (the "RER"), an
industry trade magazine. In spite of this growth, these top 100 companies
accounted for less than one-fifth of the estimated $15 billion in industry
rental revenues in 1995.
Management believes that the equipment rental industry benefits from the
trend among businesses to outsource non-core operations in order to reduce
capital investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. According to surveys published in 1995 by
The CIT Group, contractors intended to increase the percentage of equipment
they rent without a purchase option to an estimated 8% of their total equipment
requirements in 1996 from less than 5% in 1994.
3
<PAGE>
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 small, local equipment rental businesses and equipment
dealers who have traditionally served such markets. RSC has developed a cluster
strategy, whereby the Company 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. The Company believes this strategy
increases fleet utilization and gives it a competitive advantage in serving
markets with populations as small as 25,000 by allowing the Company to bring
the benefits of a large, high-quality and diversified rental equipment fleet to
markets where a full-scale rental facility might not otherwise be justified.
The Company has made substantial investments in its state-of-the-art, real-
time management information systems in order to improve asset utilization and
financial performance. Every rental location has on-line access to centralized
computer systems which 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. These
information systems have also enabled the Company to implement a decentralized
management structure, whereby RSC's regional vice presidents and district
managers are responsible for local management, customer service, local
marketing strategies and business growth in their regions. A small corporate
staff at the Company's headquarters focuses on corporate planning, financial
reporting and analysis and overseeing the execution of the Company's growth
strategy.
THE OFFERING
<TABLE>
<S> <C>
Shares Offered by the Company................ 3,000,000
Shares Offered by the Selling Stockholders... 1,000,000
Shares Outstanding Immediately After the
Offering.................................... 14,571,777(1)
Use of Proceeds to the Company............... To reduce the Company's indebtedness under
its revolving credit facility, in order to
provide borrowing availability for general
corporate purposes including acquisitions.
See "Use of Proceeds."
Nasdaq National Market Symbol................ RSVC
</TABLE>
- --------
(1) Excludes (i) 880,090 shares subject to options outstanding as of April 30,
1997 pursuant to the Company's Equity Participation Plans at a weighted
average exercise price of $17.66 per share, (ii) 403,410 shares reserved
for issuance pursuant to the Company's Equity Participation Plans, (iii)
250,000 shares reserved for issuance pursuant to the Company's Employee
Qualified Stock Purchase Plan (the "QSP Plan") and (iv) 686,855 shares
reserved for issuance in connection with certain acquisitions. See
"Management--Equity Participation Plans," "--Employee Qualified Stock
Purchase Plan" and "Recent Developments."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT SELECTED OPERATING DATA AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------------------
7/17/92
(INCEPTION) PRO FORMA PRO FORMA
THROUGH AS ADJUSTED AS ADJUSTED
12/31/92 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
----------- ------- ------- ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Revenues:
Equipment rentals...... $2,145 $17,238 $27,775 $47,170 $94,218 $139,932 $19,656 $27,527 $36,083
Sales of parts,
supplies
and equipment......... 2,042 8,394 14,040 18,747 34,136 95,935 7,541 13,782 25,114
------ ------- ------- ------- ------- -------- ------- ------- -------
Total revenues.......... 4,187 25,632 41,815 65,917 128,354 235,867 27,197 41,309 61,197
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 1,153 11,405 16,284 27,854 55,202 77,734 12,449 14,316 17,938
Depreciation, equipment
rentals .............. 245 2,161 4,020 7,691 17,840 24,839 3,633 6,306 7,854
Cost of sales of parts,
supplies and
equipment............. 1,898 5,959 10,298 12,617 24,070 71,452 5,067 9,709 18,536
------ ------- ------- ------- ------- -------- ------- ------- -------
Total cost of revenues.. 3,296 19,525 30,602 48,162 97,112 174,025 21,149 30,331 44,328
------ ------- ------- ------- ------- -------- ------- ------- -------
Gross profit............ 891 6,107 11,213 17,755 31,242 61,842 6,048 10,978 16,869
Selling, general and
administrative expense. 341 2,683 4,747 6,421 12,254 27,807 2,734 3,784 6,847
Depreciation and
amortization, excluding
equipment rental
depreciation........... 11 211 504 1,186 2,835 3,685 571 1,068 1,232
Amortization of
intangibles(3)......... 321 2,635 2,078 718 2,379 4,504 561 624 1,152
------ ------- ------- ------- ------- -------- ------- ------- -------
Operating income........ 218 578 3,884 9,430 13,774 25,846 2,182 5,502 7,638
Interest expense, net... 77 407 731 3,314 7,063 7,485 1,639 1,597 1,767
------ ------- ------- ------- ------- -------- ------- ------- -------
Income before income
taxes and extraordinary
items.................. 141 171 3,153 6,116 6,711 18,361 543 3,905 5,871
Provision for income
taxes.................. 81 465 1,177 2,401 2,722 7,455 213 1,722 2,589
------ ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before $ 10,906 $ 3,282
extraordinary items.... 60 (294) 1,976 3,715 3,989 ======== 330 2,183 =======
Extraordinary items(4).. -- -- -- (478) (1,269) -- (534)
------ ------- ------- ------- ------- ------- -------
Net income (loss)....... 60 (294) 1,976 3,237 2,720 330 1,649
Redeemable Preferred
Stock accretion........ 133 1,013 1,646 1,717 1,643 554 --
------ ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $ (73) $(1,307) $ 330 $ 1,520 $ 1,077 $ (224) $ 1,649
====== ======= ======= ======= ======= ======= =======
Income (loss) before
extraordinary items per $ .72 $ .22
common share........... $ (.01) $ (.23) $ .06 $ .39 $ .33 ======== $ (.04) $ .19 =======
Extraordinary items per
common share(4)........ -- -- -- (.09) (.18) -- (.05)
------ ------- ------- ------- ------- ------- -------
Net income (loss) per
common share........... $ (.01) $ (.23) $ .06 $ .30 $ .15 $ (.04) $ .14
====== ======= ======= ======= ======= ======= =======
Weighted average common
shares(5).............. 5,590 5,632 5,428 5,088 7,218 15,225 5,507 11,493 15,172
SELECTED OPERATING DATA:
Beginning locations..... -- 11 21 25 50 50 94
Locations acquired...... 11 11 1 26 25 8 12
Locations opened........ -- -- 3 10 19 5 --
Locations closed, sold
or held for sale(6).... -- (1) -- (11) -- -- --
------ ------- ------- ------- ------- ------- -------
Ending locations........ 11 21 25 50 94 63 106
====== ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------------------------- -----------------------
PRO FORMA
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment.............. $ 8,591 $16,223 $24,138 $ 52,818 $116,921 $155,395 $186,481
Total assets............ 18,360 35,877 48,098 137,832 218,933 267,543 381,714
Total debt (including
capital leases)........ 5,024 4,411 12,752 68,555 68,594 101,624 145,531
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 96,721 163,239
</TABLE>
5
<PAGE>
- --------
(1) The pro forma as adjusted consolidated statement of operations for the year
ended December 31, 1996 gives effect to (a) the acquisitions and pending
and proposed acquisitions described in "Unaudited Pro Forma Consolidated
Financial Information," and (b) the following transactions, in each case as
if such transactions had occurred on the first day of the period presented:
(i) the sale by the Company of 6,027,813 shares of Common Stock in the
initial public offering at a price of $16.00 per share and the sale by the
Company of 3,000,000 shares of Common Stock offered hereby at an assumed
price of $19.25 per share, (ii) the redemption of the Company's Redeemable
Preferred Stock upon application of a portion of the net proceeds to the
Company from its initial public offering (and the related elimination of
Redeemable Preferred Stock accretion), (iii) the repurchase of a warrant
upon application of a portion of the net proceeds to the Company from its
initial public offering, (iv) a reduction in interest expense as a result
of reductions in indebtedness upon application of a portion of the net
proceeds to the Company from its initial public offering and this offering,
(v) the elimination of a $235,000 annual monitoring fee paid to an
affiliate of the Company and (vi) the reduction of interest expense and
amortization of intangibles expense resulting from amendments and
restatements to the Revolver in September 1996, January 1997 and May 1997.
In addition to the acquisitions completed in 1997 and the pending and
proposed acquisitions described in "Unaudited Pro Forma Consolidated
Financial Information," the pro forma as adjusted consolidated statements
of operations for the three months ended March 31, 1997 and the pro forma
as adjusted balance sheet at March 31, 1997 give additional effect to the
following transactions, in the case of the statement of operations as if
such transactions had occurred on the first day of the period presented and
in the case of the balance sheet as if they had occurred at March 31, 1997:
(i) the sale by the Company of 3,000,000 shares of Common Stock offered
hereby at an assumed offering price of $19.25 per share, (ii) a reduction
in interest expense as a result of reductions in indebtedness upon
application of a portion of the net proceeds to the Company from this
offering, and (iii) the reduction of interest expense and amortization of
intangibles resulting from amendments and restatements to the Revolver in
January 1997 and May 1997. See "Use of Proceeds," "Capitalization,"
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Relationships and Related Transactions" and the Company's
Consolidated Financial Statements and the Notes thereto.
(2) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statement of operations data from the effective date of acquisition. On
April 25, 1997 the Company completed its acquisition of IAT, and pursuant
to the acquisition agreement, the Company assumed effective control of
IAT's operations on March 1, 1997. Accordingly, the Company has included
IAT's revenues, costs and expenses from such date in its consolidated
statements of operations, net of imputed purchase price adjustments, and
will include IAT's balance sheet in its consolidated balance sheet as of
April 25, 1997.
(3) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(4) The Company's 1995 extraordinary item represents the loss on extinguishment
of debt related to the $30.0 million revolving credit facility paid off
September 12, 1995. The Company's 1996 extraordinary item represents the
loss on extinguishment of debt related to the amendment to the Revolver in
September 1996. The Company's 1997 extraordinary item represents the loss
on extinguishment of debt related to the amendment and restatement to the
Revolver in January 1997.
(5) See Note 1 to the Company's Consolidated Financial Statements.
(6) In 1996, the Company closed or disposed of Holdings' California locations,
which were previously classified as "assets held for sale" in the Company's
Consolidated Financial Statements.
----------------
The Company operates through subsidiaries and, unless the context otherwise
requires, references in this Prospectus to the "Company" or "RSC" include
Rental Service Corporation, a Delaware corporation, and its direct and indirect
subsidiaries. The Company's principal executive offices are located at 14505 N.
Hayden Road, Suite 322, Scottsdale, Arizona 85260, and its telephone number is
(602) 905-3300.
6
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in
evaluating an investment in the shares of Common Stock offered hereby.
RISKS RELATING TO GROWTH STRATEGY
A principal component of the Company's growth strategy is to continue to
expand through additional acquisitions and start-up locations which complement
the Company's business in new or existing markets. Between its formation in
1992 and its initial public offering of Common Stock in September 1996, the
Company, through its aggressive expansion strategy, acquired 16 businesses
comprised of 65 locations and opened 30 start-up locations. Since its initial
public offering, the Company has completed 12 acquisitions consisting of 21
locations, has executed definitive agreements to acquire an additional two
companies consisting of eight locations and has opened two start-up locations.
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. Through two pending acquisitions, the Company expects to operate
in the midwest, a region in which it has no prior experience. The results
achieved to date by the Company may not be indicative of its prospects or
ability to succeed in the midwest or in other new markets, many of which may
have different competitive conditions, seasonality and demographic
characteristics than the Company's current markets. As a result of its recent
acquisition of Comtect, Inc. d/b/a Industrial Air Tool ("IAT"), the Company
has substantially increased its presence in the MRO supply business, which
generally requires maintenance of higher levels of inventory, is more
dependent on industrial customers and has lower operating margins than the
Company's rental equipment business.
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 increase its investment in its operating and financial systems and
to continue to expand, train and manage its employee base. There can be no
assurance that the Company will be able to attract and retain qualified
management and employees 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. See "Business--
Growth Strategy."
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: large national companies (such as Hertz
Equipment Rental Corporation, Prime Service, Inc., U.S. Rentals, Inc. and BET
Plant Services U.S.A.); regional competitors 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. The Company also competes against MRO suppliers, including large
companies (such as W.W. Grainger and McMaster Carr), as well as regional and
independent competitors. 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.
7
<PAGE>
Existing or future competitors also may seek to compete with the Company for
acquisition candidates which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates. In
addition, such competitors may also compete with the Company for start-up
locations, thereby limiting the number of attractive locations for expansion.
See "Business--Competition."
GENERAL ECONOMIC CONDITIONS
The Company believes that its business is sensitive to economic and
competitive conditions, including national, regional and local slowdowns in
construction, petrochemical or other industrial activity. RSC operates in nine
states (Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, South
Carolina, Tennessee and Texas) and has executed definitive agreements to
acquire operations in five more states (Illinois, Iowa, Kansas, Missouri and
Oklahoma). The Company's operating results may be adversely affected by events
or conditions in a particular area, such as regional economic slowdowns,
adverse weather and other factors. In addition, the Company's operating
results may be adversely affected by increases in interest rates that may lead
to a decline in economic activity, while simultaneously resulting in higher
interest payments by the Company under its variable rate credit facilities.
There can be no assurance that economic slowdowns, a decline in the
petrochemical industry or adverse economic or competitive conditions will not
have a material adverse effect on the Company's operating results and
financial condition. See "Business--Locations."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing 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 and purchasing patterns of the Company's customers; and price
changes in response to competitive factors. The Company incurs various costs
in establishing or integrating newly acquired locations or start-ups, and the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. 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. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Seasonality and Selected
Quarterly Operating Results."
HOLDINGS' BANKRUPTCY; INCREASE IN INDEBTEDNESS
In September 1995, the Company acquired Acme Holdings Inc. ("Holdings"), an
equipment rental business with 22 locations, primarily serving Florida, the
Texas/Louisiana Gulf Coast and California. Between 1986 and 1990, Holdings had
acquired nine equipment rental businesses financed primarily with debt. In
1993, Holdings refinanced its debt through the public sale of $78.0 million of
senior notes (the "Senior Notes"). In 1994, due to a downturn in business
conditions, combined with Holdings' highly leveraged capital structure,
Holdings faced liquidity constraints and was unable to service its debt. In
response, Holdings brought in a new management team and hired Martin R. Reid,
the Company's current Chief Executive Officer, as Holdings' Chief Executive
Officer in June 1994. This new management team initiated restructuring
discussions with the holders of the Senior Notes in August 1994, culminating
in the prepackaged bankruptcy of Holdings and its subsidiaries. On September
12, 1995, the effective date of the prepackaged bankruptcy plan, the holders
of the Senior Notes received an aggregate of $35.4 million in cash from the
Company in exchange for the surrender of the Senior Notes and the release of
all claims against Holdings. In addition, in exchange for providing the
financing necessary for the consummation of Holdings' prepackaged bankruptcy
plan, the Company acquired Holdings through a stock merger. Prior to such
acquisition, the Company and Holdings shared certain common stockholders,
including members of Holdings' management and affiliates of Brentwood
Associates. In addition,
8
<PAGE>
from July 1992 to September 1995, Holdings provided executive management
services to the Company pursuant to a Management Agreement. Holdings currently
operates as a subsidiary of the Company under the name RSC Holdings Inc. The
Company's growth strategy has increased and is expected to continue to
increase the Company's indebtedness. As a result of such increased levels of
indebtedness, a similar downturn in business could have a material adverse
effect on the Company. See "Capitalization" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's future performance and development will depend, in large part,
upon the efforts and abilities of certain members of senior management,
particularly Martin R. Reid, Chairman of the Board and Chief Executive
Officer, and Douglas A. Waugaman, Ronald Halchishak and David G. Ledlow, each
a Senior Vice President of Operations. The loss of service of one or more
members of senior management could have a material adverse effect on the
Company's business. The Company's future success also will depend on its
ability to attract, train and retain skilled personnel in all areas of its
business. See "Management."
CONTROL BY EXISTING STOCKHOLDERS
After the sale of the shares of Common Stock offered hereby, the Company's
executive officers and directors, and investors currently represented on its
Board of Directors, will in the aggregate beneficially own approximately 25.6%
of the Company's outstanding Common Stock (21.6% if the Underwriters' over-
allotment option is exercised in full). Accordingly, such persons, if they
choose to act together, generally will be able to elect a majority of the
directors and exercise significant control over the business, policies and
affairs of the Company. Similarly, such persons, acting together, would
generally be in a position to prevent a takeover of the Company by one or more
third parties, which could deprive the Company's stockholders of a control
premium that might otherwise be realized by them in connection with an
acquisition of the Company. See "Principal and Selling Stockholders."
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. See "Business--Government and Environmental
Regulation."
9
<PAGE>
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 the purchasers of Common Stock
offered hereby) 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. See "Business--Growth Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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. See "Business--Legal Proceedings."
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws ("Bylaws")
include provisions that may delay, defer or prevent a takeover attempt that
may be in the best interest of stockholders. These provisions include the
ability of the Board of Directors to issue up to 500,000 shares of preferred
stock without any further stockholder approval, a provision under which only
the Board of Directors may call meetings of stockholders and certain advance
notice procedures for nominating candidates for election to the Board of
Directors. Issuance of preferred stock could also discourage bids for the
Common Stock at a premium as well as create a depressive effect on the market
price of the Common Stock. In addition, under certain conditions, Section 203
of the Delaware General Corporation Law (the "DGCL") would prohibit the
Company from engaging in a "business combination" with an "interested
stockholder" (in general, a stockholder owning 15% or more of the Company's
outstanding voting stock) for a period of three years. See "Description of
Capital Stock."
VOLATILITY OF STOCK PRICE
The Common Stock's market price has experienced and can be expected to
continue to experience significant volatility. Such volatility may be caused
by fluctuations in the Company's operating results, changes in earnings
estimates by investment analysts, the degree of success the Company achieves
in implementing its business and growth strategies, changes in business or
regulatory conditions affecting the Company, its customers or its competitors,
and other factors. In addition, the Nasdaq National Market historically has
experienced extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic, political and market conditions,
may adversely affect the market price of the Common Stock. There can be no
assurance that the market price of the Common Stock will not decline below the
price at which shares of Common Stock are offered hereunder.
10
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the offering, the Company will have outstanding an
aggregate of 14,571,777 shares of Common Stock. After the offering, the
holders of 4,237,507 shares of Common Stock (3,637,507 shares if the
Underwriters' over-allotment option is exercised in full) will be entitled to
certain registration rights under the Securities Act, at the expense of the
Company. Such shares may also be sold under Rule 144 of the Securities Act,
depending on the holding period of such securities and subject to significant
restrictions in the case of shares held by persons deemed to be affiliates of
the Company. The Company, the Selling Stockholders, the Company's directors
and executive officers, and certain of the Company's other current
stockholders have, subject to certain exceptions in the case of the Company
described in "Underwriting," agreed not to directly or indirectly offer, sell,
contract to sell or otherwise dispose of or transfer any capital stock of the
Company, or any security convertible into, or exercisable or exchangeable for,
such capital stock, for a period of 90 days after the date of this Prospectus,
without the prior written consent of William Blair & Company, L.L.C. In
addition, the Company has the authority to issue additional shares of Common
Stock and shares of one or more series of preferred stock. The issuance of
such shares could result in the dilution of the voting power of the shares of
Common Stock purchased in the offering and could have a dilutive effect on
earnings per share. No prediction can be made as to the effect, if any, that
future sales of shares, or the availability of shares for future sale, will
have on the market price of the Common Stock. The Company currently has no
plans to designate and/or issue any shares of preferred stock. See
"Description of Capital Stock," "Principal and Selling Stockholders," "Shares
Available for Future Sale" and "Underwriting."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including
without limitation, statements concerning the Company's operations, economic
performance and financial condition, including in particular, the integration
of acquisitions and start-up locations into the Company's existing operations.
These forward-looking statements are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. The words
"believe," "expect," "anticipate" and other similar expressions generally
identify forward-looking statements. Investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of
their dates. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties, including without limitation, those identified under "Risk
Factors" and elsewhere in this Prospectus 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 or growth 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 Prospectus
will in fact occur.
11
<PAGE>
RECENT DEVELOPMENTS
Initial Public Offering
In September 1996, the Company completed an initial public offering of
6,325,000 shares of Common Stock. In the offering, the Company sold 6,027,813
shares of Common Stock at an initial public offering price of $16.00 per share
and used the net proceeds primarily to redeem its cumulative preferred stock
and to repay indebtedness. Consistent with its growth and business strategies,
the Company has taken the following actions since its initial public offering.
Acquisitions and Start-ups
On April 25, 1997, the Company acquired Comtect, Inc., d/b/a Industrial Air
Tool (the "IAT Acquisition") for a purchase price of $32.6 million cash and
189,189 shares of Common Stock, plus up to 108,108 shares of Common Stock if
certain performance objectives are achieved. IAT is a leading MRO supplier,
"on-site" small tool provider and rental management company, with three
locations in Texas and one in Louisiana. Pursuant to the acquisition
agreement, the Company assumed effective control of IAT's operations on March
1, 1997, and has included IAT's results of operations in its consolidated
statements of operations beginning March 1, 1997. IAT's balance sheet is
consolidated with the Company's under the purchase method of accounting as of
April 25, 1997.
IAT serves a variety of industrial customers, primarily petrochemical
refineries and contractors who perform maintenance and construction in the
refineries. IAT also sells and rents oilfield winches, blowout preventers and
other oilfield supply equipment. IAT manages "on-site" tool rooms at
petrochemical plants in the Houston area, controlling the issuance and return
of client-owned tools, equipment and supplies, as well as fulfilling rental
requisitions from the IAT rental fleet or on re-rent from third parties. IAT
also maintains a fleet of tool trailers which are stocked in advance to
customer requirements and taken into plants during turnarounds, shutdowns or
new construction to provide rental equipment and supplies to both plant
personnel and outside contractors. IAT's revenues for the year ended March 31,
1997 were approximately $49.0 million. See "Unaudited Pro Forma Consolidated
Financial Information" and the combined financial statements of IAT and notes
thereto appearing elsewhere in this Prospectus.
The acquisition of IAT allows RSC to expand its MRO supply and equipment
sales businesses, while providing additional opportunities to expand its
rental business in the industrial sector. IAT will serve as the basis for the
Company's new Industrial Division, with a dedicated and specially-trained
sales force focusing exclusively on industrial customers.
Since its initial public offering, the Company has also completed 11 other
acquisitions of equipment rental businesses, with 17 locations in Georgia,
Arkansas, Louisiana, Alabama and Texas for a total of $18.2 million cash and
has opened start-up locations in Tennessee and South Carolina.
Pending Acquisitions
On April 25, 1997, the Company reached a definitive agreement to acquire
substantially all of the assets of Brute Equipment Co. ("Foxx"), with a total
of four locations in Iowa and Illinois. The purchase price is $32.7 million
cash and 284,250 shares of Common Stock, of which 233,034 shares will be paid
at closing and the remaining 51,216 shares will be issued one year from the
date of closing. In addition, up to 89,630 additional shares of Common Stock
may be paid to the seller over a three year period if certain performance
objectives are achieved. The purchase price is subject to adjustment based on
levels of accounts receivable, inventory and equipment. Foxx specializes in
the rental and sale of aerial equipment to construction and industrial
customers. Foxx's revenues for its fiscal year ended December 31, 1996, were
approximately $20.0 million. The Foxx acquisition is anticipated to close by
June 30, 1997. See "Unaudited Pro Forma Consolidated Financial Information"
and the Financial Statements of Brute Equipment Co. and notes thereto
appearing elsewhere in this Prospectus.
12
<PAGE>
On April 26, 1997, the Company reached a definitive agreement to acquire
substantially all of the assets of Central States Equipment, Inc. and
Equipment Lessors, Inc. ("Central States"). The purchase price (subject to
adjustment) is $18.0 million in cash and 204,867 shares of Common Stock, of
which 102,435 shares of Common Stock will be paid to the sellers over a five
year period, which may be accelerated to three years if certain performance
objectives are achieved. The purchase price is subject to adjustment based on
levels of accounts receivable, inventory and equipment. Central States
specializes in the rental and sale of aerial equipment, ladders and
scaffolding, with a total of four locations in Kansas, Missouri and Oklahoma.
Central States' revenues for the year ended September 30, 1996 were
approximately $12.0 million. This transaction is expected to close by June 30,
1997. See "Unaudited Pro Forma Consolidated Financial Information."
The Foxx and Central States acquisitions are each subject to a number of
closing conditions, including the expiration or early termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
The Company believes it can expand the existing Foxx and Central States
businesses by supplementing their aerial fleets with RSC's full range of
rental equipment and supplies, as well as using RSC's "hub" and "satellite"
strategy. In addition, RSC believes that by providing a broader range of
rental equipment at the Foxx and Central States locations, it will be able to
generate additional business from existing customers by providing a single
source of "one-stop shopping" for equipment rentals and supply sales.
The Company has also entered into letters of intent for the acquisition of
four equipment rental businesses with eight locations in Arkansas, Florida and
Texas.
Directors and Officers
To support its continued growth, the Company has added to its board of
directors and senior management team. Eric Mattson, Chief Financial Officer of
Baker Hughes Incorporated, and Britton Murdoch, former Chief Financial Officer
of Airgas, Inc., have joined the board as outside directors. Effective April
14, 1997, Douglas Waugaman was promoted from Chief Financial Officer to Senior
Vice President of Operations, and Robert Wilson joined RSC as Senior Vice
President and Chief Financial Officer. The Company has also hired Bruce
Lisanti as Senior Vice President of Marketing.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common Stock
offered hereby, after deducting the underwriting discount and offering
expenses payable by the Company, are estimated to be $53.7 million (assuming
an offering price of $19.25 per share).
The Company intends to use the estimated net proceeds of the offering to
reduce the Company's indebtedness under the senior secured revolving credit
facility (the "Revolver") among the Company's subsidiaries and certain
financial institutions, in order to provide borrowing availability for general
corporate purposes including acquisitions. Proceeds from the Revolver, under
which approximately $146.0 million principal amount of indebtedness was
outstanding at May 7, 1997, were used to, among other things, fund capital
expenditures, acquisitions and start-up locations and meet seasonal
fluctuations in working capital. A reduction of amounts outstanding under the
Revolver will increase the amount of available borrowings under such facility.
At April 30, 1997, the Company was a party to two definitive purchase
agreements and four letters of intent to acquire additional businesses, a
significant portion of the purchase price of which is expected to be funded by
future borrowings by the Company. See "Description of Capital Stock,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Recent Developments."
The Company will not receive any of the proceeds from the sale of shares by
the Selling Stockholders. See "Principal and Selling Stockholders."
13
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on September 18, 1996, and is traded under the symbol "RSVC." The following
table sets forth for each period indicated, the high and low closing sales
prices for the Company's Common Stock as reported by the Nasdaq National
Market System.
<TABLE>
<CAPTION>
PRICE
-----------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
Third quarter (from September 18, 1996).................... 23 1/4 21 1/2
Fourth quarter............................................. 28 1/2 20 3/8
FISCAL YEAR ENDING DECEMBER 31, 1997
First quarter.............................................. 27 1/4 18
Second quarter (through May 7, 1997)....................... 20 1/2 18
</TABLE>
On May 7, 1997, the last sale price of the Common Stock as reported on the
Nasdaq National Market was $19.25 per share. As of May 7, 1997, there were
approximately 32 holders of record of the Common Stock. The Company believes
that the number of beneficial owners is substantially greater than the number
of record holders because a large portion of the Common Stock is held of
record in broker "street names".
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since its
formation and does not currently intend to pay cash dividends in the
foreseeable future. Management anticipates that all earnings and other cash
resources of the Company, if any, will be retained by the Company for the
operation and expansion of its business and for general corporate purposes.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, results of operations, level of indebtedness,
capital requirements, general business conditions and contractual restrictions
on payment of dividends, if any, as well as such other factors as the Board of
Directors may deem relevant. The Company is effectively restricted by the
terms of the revolving credit facility from paying cash dividends on its
Common Stock, and may in the future enter into loan or other agreements or
issue debt securities or preferred stock that restrict the payment of cash
dividends on Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth the total debt and total capitalization of
the Company at March 31, 1997 on (i) an historical basis, (ii) a pro forma
combined basis to give effect to the IAT Acquisition, the pending Foxx
acquisition and other pending 1997 acquisitions as though such acquisitions
were consummated as of January 1, 1997 and (iii) a pro forma as adjusted basis
to give effect to the IAT Acquisition, the pending Foxx acquisition and other
pending 1997 acquisitions and the sale by the Company of 3,000,000 shares of
Common Stock offered hereby and the application of the estimated net proceeds
to the Company therefrom. This table should be read in conjunction with "Use
of Proceeds," "Unaudited Pro Forma Consolidated Financial Information,"
"Selected Consolidated Financial Information and Operating Data" and the
Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------------
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Bank debt................................. $101,005 $198,630 $144,912
Notes payable............................. 301 301 301
Capital leases............................ 55 55 55
Equipment contracts payable............... 263 263 263
-------- -------- --------
Total debt.............................. 101,624 199,249 145,531
Stockholders' equity:
Preferred Stock, par value $.01 per share;
500,000 authorized and none outstanding,
actual, pro forma combined and pro forma
as adjusted.............................. -- -- --
Common Stock, par value $.01 per share;
20,000,000 authorized and 11,376,378
outstanding, actual; 20,000,000
authorized and 12,054,684 outstanding,
pro forma combined, 20,000,000 authorized
and 15,054,684 outstanding, pro forma as
adjusted(1).............................. 114 119 149
Additional paid-in capital................ 93,917 106,710 160,398
Common Stock issuable..................... -- 2 2
Retained earnings......................... 2,690 2,690 2,690
-------- -------- --------
Total stockholders' equity.............. 96,721 109,521 163,239
-------- -------- --------
Total capitalization.................. $198,345 $308,770 $308,770
======== ======== ========
</TABLE>
- --------
(1) Excludes (i) 880,090 shares subject to options outstanding as of April 30,
1997 pursuant to the Company's Equity Participation Plans at a weighted
average exercise price of $17.66 per share, (ii) 403,410 shares reserved
for issuance pursuant to the Company's Equity Participation Plans, (iii)
250,000 shares reserved for issuance pursuant to the Company's QSP Plan
and (iv) 686,855 shares reserved for issuance in connection with certain
acquisitions. See "Management--Equity Participation Plans," "--Employee
Qualified Stock Purchase Plan" and "Recent Developments."
15
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information of the
Company presents the unaudited pro forma consolidated statements of operations
for the year ended December 31, 1996 and the three months ended March 31,
1997, and the unaudited pro forma consolidated balance sheet at March 31,
1997. The pro forma combined consolidated statements of operations for the
year ended December 31, 1996 have been adjusted to give effect to the
following acquisitions (the "Pro Forma Combined Acquisitions") (i) the
Company's acquisitions of certain assets and liabilities of Sun Construction
Equipment, Inc. (completed in February 1996), Blanchard Machinery, Inc.
(completed in March 1996), B&S Rental Company, Inc. (completed in May 1996),
Equipment Rental & Supply Inc. (completed in June 1996), Hughes Rental and
Equipment Company, Inc. (completed in October 1996), AMKA, Inc. (completed in
October 1996), Performance Equipment Rental & Sales, Inc. (completed in
October 1996), Jones Tractor & Equipment Company, Inc. (completed in November
1996), Tool Shed Inc. (completed in November 1996) and City Sales, Inc.
(completed November 1996) (collectively, the "1996 Acquisitions"), (ii) the
Company's acquisition of all outstanding shares of Comtect, Inc. d/b/a
Industrial Air Tool (the "IAT Acquisition") effective March 1, 1997, (iii) the
Company's acquisitions of certain assets and liabilities of 3 W Services, Inc.
(completed in January 1997), Holt Equipment Rental & Supply (completed in
February 1997), Crider Electric Motor & Tool Rental Service, Inc. (completed
in March 1997), United Rental & Sales (completed in March 1997) and Kastner
Rentals (completed in March 1997) (collectively, the "1997 Other Completed
Acquisitions"), (iv) the Company's proposed acquisition of certain assets and
liabilities of Foxx (the "Pending Foxx Acquisition") for which the definitive
purchase agreement was signed April 25, 1997 and (v) the Company's proposed
acquisitions of Central States and the acquisition of four equipment rental
businesses with eight locations in three states (collectively, the "Other
Pending Acquisitions"). Such statements have been adjusted in each case as if
such transactions had occurred on January 1, 1996. The pro forma combined
consolidated statements of operations for the three months ended March 31,
1997 have been adjusted to give effect to the IAT Acquisition, the 1997 Other
Completed Acquisitions, the Pending Foxx Acquisition and the Other Pending
Acquisitions as if these transactions had occurred on January 1, 1997. The pro
forma combined consolidated balance sheet gives effect to these transactions
as if they had occurred on March 31, 1997. The pro forma adjustments relating
to the acquisitions referred to in clauses (i) through (v) above are referred
to herein collectively as "Pro Forma Acquisition Adjustments." There can be no
assurance that the Pending Foxx Acquisition or the Other Pending Acquisitions
will be consummated.
In addition to the Pro Forma Combined Acquisitions, the pro forma as
adjusted consolidated statement of operations for the year ended December 31,
1996 gives effect to the following transactions, in each case as if such
transactions had occurred on the first day of the period presented: (i) the
sale by the Company of 6,027,813 shares of Common Stock in the initial public
offering at a price of $16.00 per share and the sale by the Company of
3,000,000 shares of Common Stock offered hereby at an assumed price of $19.25
per share, (ii) the redemption of the Company's Redeemable Preferred Stock
upon application of a portion of the net proceeds to the Company from its
initial public offering (and the related elimination of Redeemable Preferred
Stock accretion), (iii) the repurchase of a warrant upon application of a
portion of the net proceeds to the Company from its initial public offering,
(iv) a reduction in interest expense as a result of reductions in indebtedness
upon application of a portion of the net proceeds to the Company from its
initial public offering and this offering, (v) the elimination of a $235,000
annual monitoring fee paid to an affiliate of the Company and (vi) the
reduction of interest expense and amortization of intangibles expense
resulting from amendments and restatements to the Revolver in September 1996,
January 1997 and May 1997. In addition to the IAT Acquisition, the 1997 Other
Completed Acquisitions, the Pending Foxx Acquisition and the Other Pending
Acquisitions, the pro forma as adjusted consolidated statements of operations
for the three months ended March 31, 1997 and the pro forma as adjusted
balance sheet at March 31, 1997 give additional effect to the following
transactions, in the case of the statement of operations as if such
transactions had occurred on the first day of the period presented and in the
case of the balance sheet as if they had occurred at March 31, 1997: (i) the
sale by the Company of 3,000,000 shares of Common Stock offered hereby, at an
assumed offering price of $19.25 per share (ii) a reduction in interest
expense as a result of reductions in indebtedness upon application of a
portion of the net proceeds to the Company from this offering, and (iii) the
reduction of interest expense and amortization of intangibles resulting
16
<PAGE>
from amendments and restatements to the Revolver in January 1997 and May 1997.
The pro forma adjustments relating to the transactions referred to in this
paragraph are referred to herein collectively as the "Pro Forma Offering
Adjustments." See "Use of Proceeds, "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Certain
Relationships and Related Transactions," and the Company's Consolidated
Financial Statements and the Notes thereto.
The Pro Forma Acquisition Adjustments and Pro Forma Offering Adjustments
represent the Company's determination of all adjustments necessary to present
fairly the Company's pro forma results of operations and financial position
and are based upon available information and certain assumptions considered
reasonable under the circumstances. The pro forma consolidated financial
information presented herein does not purport to present what the Company's
financial position or results of operations would actually have been had such
events leading to the Pro Forma Acquisition Adjustments and Pro Forma Offering
Adjustments in fact occurred on the date or at the beginning of the periods
indicated or to project the Company's financial position or results of
operations for any future date or period.
The unaudited pro forma consolidated financial information should be read in
conjunction with the historical Consolidated Financial Statements of the
Company and the Notes thereto and management's discussion thereof contained
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto.
17
<PAGE>
18
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 OTHER PENDING OTHER PRO FORMA PRO
HISTORICAL 1996 IAT COMPLETED FOXX PENDING ACQUISITION FORMA
COMPANY ACQUISITIONS(1) ACQUISITION ACQUISITIONS ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED
---------- --------------- ----------- ------------ ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals......... $94,218 $5,775 $ 7,319 $6,125 $11,842 $14,653 $ -- $139,932
Sales of parts,
supplies and
equipment....... 34,136 3,213 41,694 1,640 7,976 7,276 -- 95,935
------- ------ ------- ------ ------- ------- ------- --------
Total revenues... 128,354 8,988 49,013 7,765 19,818 21,929 -- 235,867
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 55,202 4,591 5,170 3,884 4,228 4,659 -- 77,734
Depreciation,
equipment
rentals......... 17,840 999 445 1,076 2,718 4,644 (2,883)(2) 24,839
Cost of sales of
parts, supplies
and equipment... 24,070 1,403 33,307 1,300 5,308 6,064 -- 71,452
------- ------ ------- ------ ------- ------- ------- --------
Total cost of
revenues......... 97,112 6,993 38,922 6,260 12,254 15,367 (2,883) 174,025
------- ------ ------- ------ ------- ------- ------- --------
Gross profit..... 31,242 1,995 10,091 1,505 7,564 6,562 2,883 61,842
Selling, general
and
administrative
expense.......... 12,254 1,280 7,107 757 5,782 5,254 (4,392)(3) 28,042
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 2,835 87 164 72 258 269 -- 3,685
Amortization of
intangibles...... 2,379 -- -- -- -- 61 2,216 (4) 4,656
------- ------ ------- ------ ------- ------- ------- --------
Operating income. 13,774 628 2,820 676 1,524 978 5,059 25,459
Non-operating
income........... -- -- (373) -- -- -- 373 (5) --
Interest expense,
net.............. 7,063 98 67 203 235 1,201 7,938 (6) 16,805
------- ------ ------- ------ ------- ------- ------- --------
Income (loss)
before income
taxes and
extraordinary
items............ 6,711 530 3,126 473 1,289 (223) (3,252) 8,654
Provision
(benefit) for
income taxes..... 2,722 (60) 150 89 -- (141) 754 (7) 3,514
------- ------ ------- ------ ------- ------- ------- --------
Income (loss)
before
extraordinary
items............ 3,989 590 2,976 384 1,289 (82) (4,006) 5,140
Redeemable
Preferred Stock
accretion........ 1,643 -- -- -- -- -- -- 1,643
------- ------ ------- ------ ------- ------- ------- --------
Income (loss)
available to
common
stockholders
before
extraordinary
items............ $ 2,346 $ 590 $ 2,976 $ 384 $ 1,289 $ (82) $(4,006) $ 3,497
======= ====== ======= ====== ======= ======= ======= ========
Income before
extraordinary
items per common
share............ $ .33 $ .44
Weighted average
common
shares(12)....... 7,218 7,896
<CAPTION>
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS AS ADJUSTED
-------------- -----------
<S> <C> <C>
Revenues:
Equipment
rentals......... $ -- $139,932
Sales of parts,
supplies and
equipment....... -- 95,935
------------ ---------
Total revenues... -- 235,867
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... -- 77,734
Depreciation,
equipment
rentals......... -- 24,839
Cost of sales of
parts, supplies
and equipment... -- 71,452
------------ ---------
Total cost of
revenues......... -- 174,025
------------ ---------
Gross profit..... -- 61,842
Selling, general
and
administrative
expense.......... (235)(8) 27,807
Depreciation and
amortization,
excluding
equipment rental
depreciation..... -- 3,685
Amortization of
intangibles...... (152)(9) 4,504
------------ ---------
Operating income. 387 25,846
Non-operating
income........... -- --
Interest expense,
net.............. (9,320)(10) 7,485
------------ ---------
Income (loss)
before income
taxes and
extraordinary
items............ 9,707 18,361
Provision
(benefit) for
income taxes..... 3,941 (7) 7,455
------------ ---------
Income (loss)
before
extraordinary
items............ 5,766 10,906
Redeemable
Preferred Stock
accretion........ (1,643)(11) --
------------ ---------
Income (loss)
available to
common
stockholders
before
extraordinary
items............ $ 7,409 $ 10,906
============ =========
Income before
extraordinary
items per common
share............ $ .72
Weighted average
common
shares(12)....... 15,225
(12)(13)(14)(15)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(1) Represents the results of the 1996 Acquisitions prior to their
acquisition by the Company. Results of the 1996 Acquisitions subsequent
to the dates of their acquisition are included in the historical
Company's results for the year ended December 31, 1996. See Note 1 to the
Company's Consolidated Financial Statements.
(2) Represents the elimination of the historical carrying value rental
depreciation of $9,882,000 and the Company's estimate of $6,999,000 for
rental depreciation assuming the rental fleet acquired was stepped-up to
fair market value at the beginning of the period. As a result, pro forma
depreciation decreased by $2,883,000.
(3) Represents the elimination of certain stockholders' salaries associated
with the Pending Foxx Acquisition as one stockholder will not be employed
by the Company, and one stockholder will be employed, under a lower
contractual rate. Also, represents the elimination of $2,320,000 of
nonrecurring litigation judgement expense associated with the Pending
Foxx Acquisition.
(4) Represents the elimination of the historical amortization of goodwill and
covenants not to compete of $61 for the 1996 Acquisitions, the IAT
Acquisition, 1997 Other Completed Acquisitions, the Pending Foxx
Acquisition and Other Pending Acquisitions and the Company's estimate of
amortization of goodwill and covenants not to compete for the above
acquisitions of $2,277,000 as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma amortization
expense increased by $2,216,000.
(5) Represents elimination of income earned on assets not acquired in the IAT
Acquisition.
(6) Represents the elimination of historical interest expense of $1,804,000
for the effects on interest expense from borrowing to fund the above
acquisitions of $9,742,000 as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma interest
expense increased by $7,938,000.
(7) Represents the adjustment to effect pro forma adjustments for the
Company's effective tax rate of 40.6%.
(8) Represents elimination of a $235,000 annual monitoring fee paid to an
affiliate of the Company.
(9) Represents the elimination of the amortization of capitalized debt
issuance costs associated with the Bank Note and the net reduction of
amortization of capitalized debt issuance costs associated with the
amended and restated Revolver.
(10) Represents the elimination of historical interest expense on the Bank
Note and a portion of the Revolver assuming the repayment of such
indebtedness at the beginning of the period presented with a portion of
the net proceeds from the sale of Common Stock offered in the Company's
initial public offering in September 1996 and this Offering, and the
effect of the reduction of interest expense resulting from the Company's
amendments and restatements to the Revolver.
(11) Represents the elimination of historical accretion of dividends on
Redeemable Preferred Stock assuming the redemption of the Redeemable
Preferred Stock at the beginning of the period presented.
(12) Reflects the issuance of capital stock on January 4, 1996, as if the
stock was sold at the beginning of the period presented. See Note 1 to
the Company's Consolidated Financial Statements.
(13) Gives additional effect to the repurchase and elimination of a warrant
and issuance of shares in the Company's initial public offering as if
such transactions were consummated at the beginning of the period
presented. See Note 1 to the Company's Consolidated Financial Statements.
(14) The acquisition agreements for the IAT Acquisition and the Pending Foxx
Acquisition provide for the potential issuance of up to 108,108 shares of
Common Stock and up to 89,630 shares of Common Stock, respectively, over
three year periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
were not considered in the pro forma consolidated financial statements.
(15) Weighted average common shares include 678,306 shares of Common Stock for
IAT, Foxx, and Central States.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 OTHER PENDING OTHER PRO FORMA PRO PRO FORMA
HISTORICAL IAT COMPLETED FOXX PENDING ACQUISITION FORMA OFFERING
COMPANY(1) ACQUISITION ACQUISITIONS ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS
---------- ----------- ------------ ----------- ------------ ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals......... $27,527 $1,029 $1,008 $2,856 $3,663 $ -- $36,083 $ --
Sales of parts,
supplies and
equipment....... 13,782 6,960 312 2,241 1,819 -- 25,114 --
------- ------ ------ ------ ------ ------- ------- -------
Total revenues... 41,309 7,989 1,320 5,097 5,482 -- 61,197 --
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 14,316 828 622 1,007 1,165 -- 17,938 --
Depreciation,
equipment
rentals......... 6,306 81 186 782 1,161 (662)(2) 7,854 --
Cost of sales of
parts, supplies
and equipment... 9,709 5,595 234 1,482 1,516 -- 18,536 --
------- ------ ------ ------ ------ ------- ------- -------
Total cost of
revenues......... 30,331 6,504 1,042 3,271 3,842 (662) 44,328 --
------- ------ ------ ------ ------ ------- ------- -------
Gross profit..... 10,978 1,485 278 1,826 1,640 662 16,869 --
Selling, general
and
administrative
expense.......... 3,784 1,194 138 417 1,314 -- 6,847 --
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 1,068 30 15 52 67 -- 1,232 --
Amortization of
intangibles...... 624 -- -- -- 15 397 (3) 1,036 116
------- ------ ------ ------ ------ ------- ------- -------
Operating income
(loss)........... 5,502 261 125 1,357 244 265 7,754 (116)
Non-Operating
income........... -- (59) -- -- -- 59 (4) -- --
Interest expense,
net.............. 1,597 13 39 64 300 1,388 (5) 3,401 (1,634)(7)
------- ------ ------ ------ ------ ------- ------- -------
Income (loss)
before income
taxes and
extraordinary
item............. 3,905 307 86 1,293 (56) (1,182) 4,353 1,518
Provision
(benefit) for
income taxes..... 1,722 37 15 -- (35) 181 (6) 1,920 669 (8)
------- ------ ------ ------ ------ ------- ------- -------
Income (loss)
before
extraordinary
item............. $ 2,183 $ 270 $ 71 $1,293 $ (21) $(1,363) $ 2,433 $ 849
======= ====== ====== ====== ====== ======= ======= =======
Net income per
common share
before
extraordinary
item............. $ .19 $ .20
Weighted average
common shares.... 11,493 12,172
<CAPTION>
PRO FORMA
AS ADJUSTED
----------------
<S> <C>
Revenues:
Equipment
rentals......... $36,083
Sales of parts,
supplies and
equipment....... 25,114
----------------
Total revenues... 61,197
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 17,938
Depreciation,
equipment
rentals......... 7,854
Cost of sales of
parts, supplies
and equipment... 18,536
----------------
Total cost of
revenues......... 44,328
----------------
Gross profit..... 16,869
Selling, general
and
administrative
expense.......... 6,847
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 1,232
Amortization of
intangibles...... 1,152
----------------
Operating income
(loss)........... 7,638
Non-Operating
income........... --
Interest expense,
net.............. 1,767
----------------
Income (loss)
before income
taxes and
extraordinary
item............. 5,871
Provision
(benefit) for
income taxes..... 2,589
----------------
Income (loss)
before
extraordinary
item............. $ 3,282
================
Net income per
common share
before
extraordinary
item............. $ .22
Weighted average
common shares.... 15,172(9)(10)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statements of
Operations
20
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(1) Results of the 1997 Other Completed Acquisitions and IAT Acquisition
subsequent to the dates of their acquisition are included in the
historical Company's results for the three months ended March 31, 1997.
See Note 1 to the Company's Consolidated Financial Statements.
(2) Represents the elimination of the historical carrying value rental
depreciation of $2,210,000 and the Company's estimate of $1,548,000 for
rental depreciation assuming the rental fleet acquired was stepped up to
fair market value at the beginning of the period presented. As a result,
pro forma depreciation decreased by $662,000.
(3) Represents the Company's estimate of amortization of goodwill and
covenants not to compete for the IAT Acquisition, 1997 Other Completed
Acquisitions, the Pending Foxx Acquisition and Other Pending Acquisitions
of $397,000, as if the acquisitions were consummated at the beginning of
the period presented.
(4) Represents elimination of income earned on assets not acquired in the IAT
Acquisition.
(5) Represents the elimination of the IAT Acquisition, 1997 Other Completed
Acquisitions, Pending Foxx Acquisition and Other Pending Acquisitions
interest expense of $416,000 and the effects on interest expense from
borrowing to fund the acquisitions of $1,804,000, as if the transactions
were consummated at the beginning of the period presented. As a result,
pro forma interest expense increased by $1,388,000.
(6) Represents the elimination of the IAT Acquisition, 1997 Other Completed
Acquisitions, Pending Foxx Acquisition and Other Pending Acquisitions
provision for income taxes of $17,000 and the establishment of the
Company's effective income tax rate which created an additional provision
of $181,000 as if the transactions were consummated at the beginning of
the period presented. As a result, pro forma provision for income taxes
increased by $198,000.
(7) Represents the elimination of historical interest expense on a portion of
the Revolver assuming the repayment of such indebtedness at the beginning
of the period presented with a portion of the net proceeds from the sale
of Common Stock offered hereby, and the effect of the reduction of
interest expense resulting from the Company's amendments and restatements
to the Revolver.
(8) Represents the adjustment to effect pro forma adjustments for the
Company's effective tax rate of 44.1%.
(9) The acquisition agreements for the IAT Acquisition and the Pending Foxx
Acquisition provide for the potential issuance of up to 108,108 shares of
Common Stock and up to 89,630 shares of Common Stock, respectively, over
three year periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
were not considered in the pro forma consolidated financial statements.
(10) Weighted average common shares include 678,306 shares of Common Stock for
IAT, Foxx and Central States.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997(1)
--------------------------------------------------------------------------------------------------
PENDING OTHER PRO FORMA PRO PRO FORMA
HISTORICAL IAT FOXX PENDING ACQUISITION FORMA OFFERING PRO FORMA
COMPANY ACQUISITION ACQUISITION ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ----------- ----------- ------------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents........... $ 1,578 $ 7,165 $ 3 $ 467 $ (7,635)(4) $ 1,578 $ -- $ 1,578
Accounts receivable,
net................... 22,844 6,993 2,453 2,029 -- 34,319 -- 34,319
Other receivables and
prepaid expense....... 2,850 217 51 173 (224)(4) 3,067 -- 3,067
Income tax receivable.. 1,524 -- -- -- -- 1,524 -- 1,524
Parts and supplies
inventories, net...... 10,515 6,664 405 966 -- 18,550 -- 18,550
Deferred taxes......... 8,645 -- -- -- -- 8,645 -- 8,645
Rental equipment, net.. 155,395 1,010 13,841 11,042 5,193 (5) 186,481 -- 186,481
Operating property and
equipment, at cost,
net................... 20,764 1,377 422 1,553 480 (5) 24,596 -- 24,596
Intangible assets...... 41,048 -- -- 5 59,173 (6) 100,226 -- 100,226
Other assets........... 2,380 716 237 828 (1,433)(4) 2,728 -- 2,728
-------- ------- ------- ------- -------- -------- -------- --------
$267,543 $24,142 $17,412 $17,063 $ 55,554 $381,714 $ -- $381,714
======== ======= ======= ======= ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Accounts payable....... $ 33,265 $ 2,513 $ 236 $ 1,475 $ (1,711)(4) $ 35,778 -- $ 35,778
Payroll and other
accrued expenses...... 21,389 1,233 2,642 1,134 (3,776)(4) 22,622 -- 22,622
Accrued interest
payable............... 742 -- -- 26 (26)(4) 742 -- 742
Income taxes payable... 939 -- -- 18 (18)(4) 939 -- 939
Deferred taxes......... 12,863 -- -- 201 (201)(4) 12,863 -- 12,863
Bank debt and long
term obligations...... 101,569 705 2,420 12,421 82,079 (7) 199,194 (53,718)(9) 145,476
Obligations under
capital leases........ 55 -- -- -- -- 55 -- 55
-------- ------- ------- ------- -------- -------- -------- --------
Total liabilities...... 170,822 4,451 5,298 15,275 76,347 272,193 (53,718) 218,475
Stockholders' equity
Common stock(2)...... 114 11,678 100 12 (11,785)(8) 119 30 (9) 149
Additional paid-in
capital............. 93,917 -- -- 1,144 11,649 (3) 106,710 53,688 (9) 160,398
Common stock
issuable(3)......... -- -- -- -- 2 (3) 2 -- 2
Accumulated earnings. 2,690 8,013 12,014 632 (20,659)(8) 2,690 -- 2,690
-------- ------- ------- ------- -------- -------- -------- --------
Total stockholders'
equity................ 96,721 19,691 12,114 1,788 (20,793) 109,521 53,718 163,239
-------- ------- ------- ------- -------- -------- -------- --------
$267,543 $24,142 $17,412 $17,063 $ 55,554 $381,714 $ -- $381,714
======== ======= ======= ======= ======== ======== ======== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(1) The purchase method of accounting has been used in preparing the Unaudited
Pro Forma Consolidated Financial Statements of the Company with respect to
the IAT Acquisition, Pending Foxx Acquisition and Other Pending
Acquisitions. Purchase accounting values have been assigned to the IAT
Acquisition, Foxx Acquisition and Other Pending Acquisitions on a
preliminary basis.
(2) The acquisition agreements for the IAT Acquisition and the Pending Foxx
Acquisition provide for the potential issuance of up to 108,108 shares of
Common Stock and up to 89,630 shares of Common Stock, respectively, over
three year periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
were not considered in the pro forma consolidated financial statements.
(3) The Common Stock issuable is associated with Common Stock for Foxx and
Central States which vests over future time periods.
(4) Represents assets not acquired or liabilities not assumed in the IAT
Acquisition, Pending Foxx Acquisition and Other Pending Acquisitions.
(5) Represents preliminary estimates of fair market value step-up for assets
acquired.
(6) Represents the estimated fair market value of covenants not-to-compete and
goodwill represented by the excess purchase price over the estimated fair
market value of net assets acquired.
(7) Represents borrowings under the Revolver to fund the IAT Acquisition,
Pending Foxx Acquisition and Other Pending Acquisitions .
(8) Represents the elimination of the equity accounts of the IAT Acquisition,
Pending Foxx Acquisition and Other Pending Acquisitions.
(9) Represents the use of the net proceeds (from the offering of the 3,000,000
shares of Common Stock offered hereby at an assumed offering price of
$19.25 per share) estimated at $53.7 million to paydown the Revolver.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OPERATING DATA
(IN THOUSANDS, EXCEPT LOCATION DATA AND PER SHARE AMOUNTS)
The following selected consolidated statement of operations data for the
years ended December 31, 1994, 1995 and 1996, and selected consolidated
balance sheet data as of December 31, 1995 and 1996, has been derived from the
audited consolidated financial statements of the Company appearing elsewhere
in this Prospectus. The selected consolidated financial information with
respect to the Company's statement of operations data for the period ending
December 31, 1992 and for the year ending December 31, 1993, and with respect
to the balance sheet as of December 31, 1992, 1993 and 1994 has been derived
from audited financial statements of the Company that are not included in this
Prospectus. The selected consolidated financial information for the three
months ended March 31, 1996 and 1997 has been derived from the unaudited
consolidated financial statements of the Company, which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments), necessary to present fairly the Company's results of operations
and financial position at such dates and for such periods. The results for the
three months ended March 31, 1997 are not necessarily indicative of the
results that may be expected for future periods or for the year ending
December 31, 1997. The selected operating data presented below has not been
audited. The selected consolidated financial information and operating data
presented below should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- -----------------------------
7/17/92
(INCEPTION) PRO FORMA PRO FORMA
THROUGH AS ADJUSTED AS ADJUSTED
12/31/92 1993 1994 1995 1996 1996(1) 1996 1997 1997(1)
----------- ------- ------- ------- ------- ----------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Revenues:
Equipment rentals...... $2,145 $17,238 $27,775 $47,170 $94,218 $139,932 $19,656 $27,527 $36,083
Sales of parts,
supplies
and equipment......... 2,042 8,394 14,040 18,747 34,136 95,935 7,541 13,782 25,114
------ ------- ------- ------- ------- -------- ------- ------- -------
Total revenues.......... 4,187 25,632 41,815 65,917 128,354 235,867 27,197 41,309 61,197
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 1,153 11,405 16,284 27,854 55,202 77,734 12,449 14,316 17,938
Depreciation, equipment
rentals .............. 245 2,161 4,020 7,691 17,840 24,839 3,633 6,306 7,854
Cost of sales of parts,
supplies and
equipment............. 1,898 5,959 10,298 12,617 24,070 71,452 5,067 9,709 18,536
------ ------- ------- ------- ------- -------- ------- ------- -------
Total cost of revenues.. 3,296 19,525 30,602 48,162 97,112 174,025 21,149 30,331 44,328
------ ------- ------- ------- ------- -------- ------- ------- -------
Gross profit............ 891 6,107 11,213 17,755 31,242 61,842 6,048 10,978 16,869
Selling, general and
administrative expense. 341 2,683 4,747 6,421 12,254 27,807 2,734 3,784 6,847
Depreciation and
amortization, excluding
equipment rental
depreciation........... 11 211 504 1,186 2,835 3,685 571 1,068 1,232
Amortization of
intangibles(3)......... 321 2,635 2,078 718 2,379 4,504 561 624 1,152
------ ------- ------- ------- ------- -------- ------- ------- -------
Operating income........ 218 578 3,884 9,430 13,774 25,846 2,182 5,502 7,638
Interest expense, net... 77 407 731 3,314 7,063 7,485 1,639 1,597 1,767
------ ------- ------- ------- ------- -------- ------- ------- -------
Income before income
taxes and extraordinary
items.................. 141 171 3,153 6,116 6,711 18,361 543 3,905 5,871
Provision for income
taxes.................. 81 465 1,177 2,401 2,722 7,455 213 1,722 2,589
------ ------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before
extraordinary items.... 60 (294) 1,976 3,715 3,989 $ 10,906 330 2,183 $ 3,282
======== =======
Extraordinary items(4).. -- -- -- (478) (1,269) -- (534)
------ ------- ------- ------- ------- ------- -------
Net income (loss)....... 60 (294) 1,976 3,237 2,720 330 1,649
Redeemable Preferred
Stock accretion........ 133 1,013 1,646 1,717 1,643 554 --
------ ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $ (73) $(1,307) $ 330 $ 1,520 $ 1,077 $ (224) $ 1,649
====== ======= ======= ======= ======= ======= =======
Income (loss) before
extraordinary items per
common share........... $ (.01) $ (.23) $ .06 $ .39 $ .33 $ .72 $ (.04) $ .19 $ .22
======== =======
Extraordinary items per
common share(4)........ -- -- -- (.09) (.18) -- (.05)
------ ------- ------- ------- ------- ------- -------
Net income (loss) per
common share........... $ (.01) $ (.23) $ .06 $ .30 $ .15 $ (.04) $ .14
====== ======= ======= ======= ======= ======= =======
Weighted average common
shares(5).............. 5,590 5,632 5,428 5,088 7,218 15,225 5,507 11,493 15,172
SELECTED OPERATING DATA:
Beginning locations..... -- 11 21 25 50 50 94
Locations acquired...... 11 11 1 26 25 8 12
Locations opened........ -- -- 3 10 19 5 --
Locations closed, sold
or held for sale(6).... -- (1) -- (11) -- -- --
------ ------- ------- ------- ------- ------- -------
Ending locations........ 11 21 25 50 94 63 106
====== ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
------------------------------------------- -----------------------
PRO FORMA
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED(1)
------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment.............. $ 8,591 $16,223 $24,138 $ 52,818 $116,921 $155,395 $186,481
Total assets............ 18,360 35,877 48,098 137,832 218,933 267,543 381,714
Total debt (including
capital leases)........ 5,024 4,411 12,752 68,555 68,594 101,624 145,531
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 96,721 163,239
</TABLE>
- --------
(1) In addition to the Pro Forma Combined Acquisitions, the pro forma as
adjusted statement of operations for the year ended December 31, 1996
gives effect to the following transactions, in each case as if such
transactions had occurred on the first day of the period presented: (i)
the sale by the Company of 6,027,813 shares of Common Stock in the initial
public offering at a price of $16.00 per share and the sale by the Company
of 3,000,000 shares of Common Stock offered hereby at an assumed price of
$19.25 per share, (ii) the redemption of the Company's Redeemable
Preferred Stock upon application of a portion of the net proceeds to the
Company from its initial public offering (and the related elimination of
Redeemable Preferred Stock accretion), (iii) the repurchase of a warrant
upon application of a portion of the net proceeds to the Company from its
initial public offering, (iv) a reduction in interest expense as a result
of reductions in indebtedness upon application of a portion of the net
proceeds to the Company from its initial public offering and this
offering, (v) the elimination of a $235,000 annual monitoring fee paid to
an affiliate of the Company and (vi) the reduction of interest expense and
amortization of intangibles expense resulting from amendments and
restatements to the Revolver in September 1996, January 1997 and May 1997.
In addition to the IAT Acquisition, the 1997 Other Completed Acquisitions,
the Pending Foxx Acquisition and the Other Pending Acquisitions, the pro
forma as adjusted consolidated statements of operations for the three
months ended March 31, 1997 and the pro forma as adjusted balance sheet at
March 31, 1997 give additional effect to the following transactions, in
the case of the statement of operations as if such transactions had
occurred on the first day of the period presented and in the case of the
balance sheet as if they had occurred at March 31, 1997: (i) the sale by
the Company of 3,000,000 shares of Common Stock offered hereby at an
assumed offering price of $19.25 per share, (ii) a reduction in interest
expense as a result of reductions in indebtedness upon application of a
portion of the net proceeds to the Company from this offering, and
(iii) the reduction of interest expense and amortization of intangibles
resulting from amendments and restatements to the Revolver in January 1997
and May 1997. See "Use of Proceeds," "Capitalization," "Unaudited Pro
Forma Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Relationships and Related Transactions" and the Company's Consolidated
Financial Statements and the Notes thereto.
(2) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statement of operations data from the effective date of acquisition. On
April 25, 1997 the Company completed its acquisition of IAT, and pursuant
to the acquisition agreement, the Company assumed effective control of
IAT's operations on March 1, 1997. Accordingly, the Company has included
IAT's revenues, costs and expenses from such date in its consolidated
statements of operations, net of imputed purchase price adjustments, and
will include IAT's balance sheet in its consolidated balance sheet as of
April 25, 1997.
(3) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(4) The Company's 1995 extraordinary item represents the loss on
extinguishment of debt related to the $30.0 million revolving credit
facility paid off September 12, 1995. The Company's 1996 extraordinary
item represents the loss on extinguishment of debt related to the
amendment to the Revolver in September 1996. The Company's 1997
extraordinary item represents the loss on extinguishment of debt related
to the amendment and restatement to the Revolver in January 1997.
(5) See Note 1 to the Company's Consolidated Financial Statements.
(6) In 1996, the Company closed or disposed of Holdings' California locations,
which were previously classified as "assets held for sale" in the
Company's Consolidated Financial Statements.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated financial
condition and consolidated results of operations should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
OVERVIEW
From its formation in 1992 through the initial public offering of its Common
Stock in September 1996, the Company acquired 16 businesses comprised of 65
locations and opened 30 start-up locations. Since the initial public offering,
the Company has completed 12 acquisitions consisting of 21 locations, has
executed definitive agreements (subject to closing conditions and governmental
approvals) to acquire an additional two companies consisting of eight locations
and has opened two start-up locations. See "Recent Developments." 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 $25.6 million in
the year ended December 31, 1993 to $128.4 million in the year ended December
31, 1996. During the same period, the Company's operating margin has expanded
from 2.3% to 10.6%.
The Company has historically financed its acquisitions, start-up locations
and capital expenditures primarily through the issuance of equity securities,
internally generated cash flow and bank borrowings. Such financings have
increased the Company's interest expense and resulted in the accretion of
dividends on Redeemable Preferred Stock prior to its redemption in September
1996. Because all of the acquisitions have been accounted for under the
purchase method of accounting, such acquisitions have increased the Company's
goodwill and other intangibles (including covenants not to compete). During the
initial phase of an acquisition or start-up location, the Company typically
incurs expenses related to completing acquisitions and opening start-up
locations, training employees, installing or converting information systems,
facility set-up and marketing expenses. As a result, the profitability of a new
location is generally expected to be lower in the initial period of its
operation than in subsequent periods. Integration of acquisitions is generally
completed within the first six months, while the Company generally expects
start-up locations to achieve normalized profitability after one year. The
Company anticipates that as it continues to implement its growth strategy, new
locations will continue to impact the Company's margins until such locations
achieve normalized profitability.
The Company is continually involved in the investigation and evaluation of
potential acquisitions and start-up locations. 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
one or more letters of intent or binding acquisition agreements. The Company
has executed definitive agreements to acquire Foxx and Central States. In
addition, the Company has entered into letters of intent to acquire four rental
businesses with a total of eight locations for an aggregate purchase price of
$17.0 million. There can be no assurance, however, that such definitive
agreements, letters of intent or discussions will result in any particular
transaction being consummated.
In connection with the acquisition of Holdings, the Company sold or closed
all of Holdings' 11 rental locations in California, which were previously
classified as "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
26
<PAGE>
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. In recent years,
the Company has also made substantial investments in information systems.
On September 18, 1996, the Company completed an initial public offering of
6,325,000 shares of its Common Stock, of which 6,027,813 shares were offered
by the Company, with the remainder offered by the selling stockholders. Net
proceeds to the Company of approximately $89.7 million were utilized to redeem
all outstanding shares of its preferred stock, repay in full a senior secured
term loan (the "Bank Note") and to repurchase the related warrants, reduce its
outstanding obligations under the Revolver and to pay offering expenses.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company
expressed as a percentage of total revenues, and the percentage change in such
items compared to the same period in the prior year. There can be no assurance
that the trends in revenue growth or operating results will continue in the
future.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE INCREASE (DECREASE)
----------------------------------- -----------------------------------------
THREE MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31, THREE MONTHS
------------------- -------------- ENDED MARCH 31,
1994 1995 1996 1996 1997 1995 VS 1994 1996 VS 1995 1997 VS 1996
----- ----- ----- ------ ------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... 66.4% 71.6% 73.4% 72.3% 66.6% 69.8% 99.7% 40.0%
Sales of parts,
supplies and
equipment............. 33.6 28.4 26.6 27.7 33.4 33.5 82.1 82.8
----- ----- ----- ------ ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 57.6 94.7 51.9
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 39.0 42.3 43.0 45.8 34.6 71.1 98.2 15.0
Depreciation, equipment
rentals............... 9.6 11.7 13.9 13.4 15.3 91.3 132.0 73.6
Cost of sales of parts,
supplies and
equipment............. 24.6 19.1 18.8 18.6 23.5 22.5 90.8 91.6
----- ----- ----- ------ ------
Total cost of revenues. 73.2 73.1 75.7 77.8 73.4 57.4 101.6 43.4
----- ----- ----- ------ ------
Gross profit............ 26.8 26.9 24.3 22.2 26.6 58.3 76.0 81.5
Selling, general and ad-
ministrative expense... 11.4 9.7 9.5 10.1 9.2 35.3 90.8 38.4
Depreciation and amorti-
zation, excluding
equipment rental depre-
ciation................ 1.2 1.8 2.2 2.1 2.6 135.3 139.0 87.0
Amortization of intangi-
bles................... 4.9 1.1 1.9 2.0 1.5 (65.4) 231.3 11.2
----- ----- ----- ------ ------
Operating income........ 9.3 14.3 10.7 8.0 13.3 142.8 46.1 152.2
Interest expense, net... 1.8 5.0 5.5 6.0 3.8 353.4 113.1 (2.6)
----- ----- ----- ------ ------
Income before income
taxes and extraordinary
items.................. 7.5% 9.3% 5.2% 2.0% 9.5% 94.0 9.7 619.2
===== ===== ===== ====== ======
Other Data:
Rental gross profit.... 26.9 24.6 22.5 18.2 25.1 55.6 82.2 93.2
Sales gross profit..... 26.7 32.7 29.5 32.8 29.6 63.8 64.2 64.6
</TABLE>
27
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenues. Total revenues for the three months ended March 31, 1997 increased
51.9% to $41.3 million from $27.2 million in the same period in 1996. This
increase was primarily due to the inclusion of revenues from acquisitions of
14 businesses (consisting of 28 locations) and the opening of 15 start-up
locations subsequent to March 31, 1996. Equipment rental revenues increased
40.0% to $27.5 million from $19.7 million due to a larger rental fleet as a
result of acquisitions, the partial period impact of $44.1 million in capital
expenditures during the first three months of 1997 and the full period impact
of $86.8 million in capital expenditures in 1996. Sales of parts, supplies and
equipment increased 82.8% to $13.8 million from $7.5 million due primarily to
the increased number of rental locations selling these items and the
acquisition of IAT, effective in the Company's results of operations from
March 1, 1997.
Gross Profit. Gross profit for the three months ended March 31, 1997
increased to $11.0 million, or 26.6% of total revenues, from $6.0 million, or
22.2% of total revenues, in the same period in 1996. Gross margins on
equipment rentals increased to 25.1% of equipment rental revenues from 18.2%
for the three months ended March 31, 1996 primarily due to the impact of the
43 locations added since March 31, 1996 and the absence of start-up locations
during the three months ended March 31, 1997. Gross margin on sales of parts,
supplies and equipment decreased to 29.6% of sales from 32.8%, due primarily
to the acquisition of IAT (effective in the Company's results of operations
from March 1, 1997) and a change in the product mix of parts, supplies and
equipment sales. The Company believes that the gross margin on sales of parts,
supplies and equipment will likely continue to decline due to the impact of
IAT's product sales, which generally have lower gross margins than the parts,
supplies and equipment sold by the Company prior to the acquisition of IAT.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the three months ended March 31, 1997 was $3.8
million, or 9.2% of total revenues, compared to $2.7 million, or 10.1% of
total revenues, in the same period in 1996. This percentage decrease is a
result of total revenues increasing at a faster rate than selling, general and
administrative expenses.
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the three months ended March 31, 1997 was $1.1 million, or
2.6% of total revenues, compared to $571,000, or 2.1% of total revenues, for
the same period in 1996. This increase is primarily attributable to the larger
fleet of service and delivery vehicles in 1997 versus 1996, which has grown as
a result of the Company's increased number of locations.
Amortization of Intangibles. Amortization of intangibles for the three
months ended March 31, 1997 was $624,000, or 1.5% of total revenues, compared
to $561,000, or 2.0% of total revenues, for the same period in 1996. This
increase is due to additional goodwill and covenants not-to-compete associated
with acquisitions since March 31, 1996.
Provision for Income Taxes. Provision for income taxes was $1.7 million for
the three months ended March 31, 1997 compared to $213,000 in the same period
in 1996. The Company's effective tax rate was 44.1% for the three months
ending March 31, 1997, compared to 39.2% for the same period in 1996. The
increase in the Company's effective tax rate is a result of increased levels
of non-deductible items, primarily goodwill.
Extraordinary Items. In connection with the implementation of the amended
Revolver in January 1997, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of
$920,000, which has been classified as an extraordinary item, net of income
taxes of $386,000.
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 11
acquired businesses (consisting of 25 locations) and the opening of 19 start-
up locations during 1996. Equipment rental revenues increased 99.7% to
$94.2 million for the year ended December 31, 1996 from $47.2 million in the
same period in 1995 due to a
28
<PAGE>
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 profit margins than the Company's more established locations. 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 $13.0 million to repay the Bank Note and $37.7 million to
reduce its indebtedness under the Revolver.
Provision for Income Taxes. Provision for income taxes was $2.7 million for
the year ended December 31, 1996, compared to $2.4 million for the same period
in 1995. The Company's effective tax rate was 40.6% for 1996, as compared to
39.3% for 1995. The Company's effective tax rate for the fourth quarter of
1996 increased to 42.0% as a result of increased levels of non-deductible
items. This higher tax rate is expected to continue in future periods.
Extraordinary Items. In connection with the implementation of the amended
Revolver in September 1996, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of $2.5
million, which has been classified as an extraordinary item, net of income
taxes of $964,000. Additionally, in September 1996, the Company repaid the
Bank Note and repurchased the related warrants for $13.0 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.
29
<PAGE>
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. 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
Revolver.
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.
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. Specifically, the Company used these proceeds as
follows: (i) to redeem all of the outstanding shares of its redeemable
preferred stock for
30
<PAGE>
$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 $13.0 million; (iii) to reduce indebtedness under its
Revolver through repayments of $37.7 million; and (iv) to pay offering
expenses.
The Company's primary uses of cash have been the funding of capital
expenditures, acquisitions and start-up locations. The Company historically
has financed its capital expenditures, acquisitions and start-up locations
primarily through the issuance of equity securities, secured bank borrowings
and net cash provided by operating activities. The Company had cash and cash
equivalents of $1.6 million at March 31, 1997 and $1.5 million at December 31,
1996.
During the three months ended March 31, 1997, the Company's operating
activities provided net cash flow of $20.3 million, as compared to $9.8
million for the same period in the prior year. The principal causes for the
variation in cash flow between the periods were higher net income, increased
depreciation and amortization, higher average accounts payable and decreased
levels of other receivables and prepaid expense. 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 profit level based on an increased number of locations, increased
depreciation and amortization and higher average accounts payable.
Net cash used in investing activities was $51.5 million in the three months
ended March 31, 1997, compared to $29.7 million in the same period for the
prior year. The increase was primarily attributable to a higher combined level
of capital expenditures and acquisitions. Acquisition spending totaled $12.0
million in the three months ended March 31, 1997 and 1996. In addition, the
Company had capital expenditures of $44.1 million and $18.9 million in the
three months ended March 31, 1997 and 1996, respectively. Capital expenditures
were primarily for purchases of rental equipment. Included in investing
activities were proceeds from the sale of equipment, which were $4.6 million
for the three months ended March 31, 1997, compared to $2.7 million for the
same period in the prior year. This increase was primarily the result of a
larger fleet resulting from acquisitions and capital expenditures.
Net cash 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. The Company had capital expenditures of $86.8
million and $23.6 million in the years ended December 31, 1996 and 1995,
respectively. Acquisition spending totaled $27.3 million and $42.1 million in
the years ended December 31, 1996 and 1995, respectively. Capital expenditures
were primarily for purchases of rental equipment. Included in investing
activities were proceeds from the sale of equipment, which were $12.7 million
for the year ended December 31, 1996, compared to $4.1 million 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. Also included
in 1996 in investing activities were $16.7 million of proceeds from assets
held for sale.
Net cash provided by financing activities was $31.3 million for the three
months ended March 31, 1997, compared to $19.9 million in the same period for
the prior year. The net cash provided by financing activities was primarily
due to borrowings under the Revolver.
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 initially could not exceed $125.0 million. As of February 1, 1997,
the Company amended the Revolver to, among other things, increase the
availability to $200.0 million, increase the advance rates on eligible rental
equipment to 100%, decrease the interest rate margins by 0.50% and extend the
maturity date to January 31, 2002. The amended Revolver increased the allowed
investments and
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capital expenditures to $90.0 million in 1997, $105.0 million in each of 1998
and 1999, $115.0 million in 2000 and $105.0 million in 2001 (plus amounts
reinvested from asset sales). In connection with the implementation of the
amended Revolver, the Company recorded an extraordinary loss on extinguishment
of debt of $920,000, net of income taxes of $386,000, in the first quarter of
1997 associated with the write-off of unamortized debt issuance costs.
The amended Revolver also contains provisions to annually adjust the prime
and Eurodollar interest rate margins based on the Company's achievement of
specified interest coverage ratios. The total amount of credit available under
the amended Revolver is limited to a borrowing base equal to the sum of (i)
85% of eligible accounts receivable of the Company's subsidiaries and (ii)
100% of the value (at the lower of net book value or market) of eligible
rental equipment. The amended Revolver expires January 31, 2002. The
obligation of the lender to make loans or issue letters of credit under the
Revolver is subject to certain customary conditions. In addition, the Revolver
has financial covenants for RSC regarding debt incurrence, interest coverage,
capital expenditure investment and minimum EBITDA levels. The Revolver also
contains covenants and provisions that restrict, among other things, the
Company's subsidiaries' ability to: (i) incur additional indebtedness; (ii)
incur liens on their property, (iii) enter into contingent obligations; (iv)
make certain capital expenditures and investments; (v) engage in certain sales
of assets; (vi) merge or consolidate with or acquire another person or engage
in other fundamental changes; (vii) enter into leases; (viii) engage in
certain transactions with affiliates; and (ix) declare or pay dividends to
RSC. As of March 31, 1997, the Company was in compliance with all covenants of
the Revolver, and substantially all of the Company's net consolidated assets
were restricted under the terms of the Revolver.
Borrowings under the Revolver are secured by all of the real and personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Revolver, and has granted liens on
substantially all of its assets (including the stock of its subsidiaries) to
secure such guaranty. The Revolver also restricts the Company from declaring
or paying dividends on its Common Stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Revolver. The Revolver includes a $2 million letter of credit facility,
with a fee equal to 2.75% of the face amount of letters of credit payable to
the lenders and other customary fees payable to the issuer of the letter of
credit. A commitment fee equal to 0.5% of the unused commitment, excluding the
face amount of all outstanding and undrawn letters of credit, is also payable
monthly in arrears.
At May 7, 1997, the principal amount outstanding under the Revolver was
$146.0 million, the interest rate on such borrowings was 7.8%, and an
additional $24.1 million was available to the Company under the Revolver. In
conjunction with and subject to completion of the offering, the Company
intends to amend the Revolver to increase the availability to $300.0 million,
to decrease the interest rate margins by 25 basis points, with further
decreases if certain interest coverage ratios are met, and to reduce the
unused line fee to .25% of the unused commitment.
As part of its growth strategy, the Company is continually involved in the
investigation and evaluation of potential acquisitions and start-up locations.
The Company is currently evaluating a number of acquisition opportunities and
start-up locations and may at any time be a party to one or more letters of
intent or acquisition agreements. The Company has executed definitive
agreements to acquire Foxx and Central States. In addition, the Company has
also entered into letters of intent for the acquisition of four businesses
with eight locations in Arkansas, Florida and Texas. Since December 31, 1996,
the Company has completed six acquisitions of rental equipment businesses with
an aggregate of 12 locations in Arkansas, Georgia, Louisiana and Texas. The
Company's liquidity and capital resources have been and will continue to be
significantly impacted by the Company's growth strategy and by the need to
offer customers a modern and well-maintained rental equipment fleet. The
Company must be able to 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
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<PAGE>
incurrence of additional indebtedness, including convertible debt, 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
Between July 1992 and January 1996, the Company issued a total of 319,805
shares of its Redeemable Preferred Stock at a price of $100 per share. The
Redeemable Preferred Stock accrued dividends at the rate of 6% per annum,
compounded quarterly. The dividends accrued were $1.6 million, $1.7 million
and $1.6 million for the years ended December 31, 1994, 1995 and 1996,
respectively. In September 1996, the Company utilized $37.9 million of the
proceeds from its initial public offering to redeem all outstanding shares of
its Redeemable Preferred Stock.
ENVIRONMENTAL
The Company and its operations are subject to a variety of federal, state
and local laws and regulations governing, among other things, worker safety,
air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. The Company incurs ongoing expenses
associated with the removal of older underground storage tanks and the
performance of appropriate remediation at certain of its locations. The
Company has accrued $763,000 at December 31, 1996 and March 31, 1997, related
to the removal of underground tanks and remediation expenses. The Company
believes that the impact of the cost of such remediation on its financial
position, results of operations and cash flows will not be material. See "Risk
Factors--Government and Environmental Regulation."
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. During the three months ended March
31, 1997, $249,000 was charged to the accrual, leaving a remaining balance of
$663,000 at March 31, 1997.
COMMITMENTS TO PURCHASE EQUIPMENT
At March 31, 1997, the Company was obligated, under noncancellable purchase
commitments, to purchase $17.8 million of rental equipment. Such purchases are
expected to be financed with cash flows from operations and through borrowings
under the Revolver.
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SEASONALITY AND SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly consolidated statement of
operations data for the years ended December 31, 1995 and 1996 and the quarter
ended March 31, 1997. The unaudited quarterly information has been prepared on
the same basis as the annual financial information and, in management's
opinion, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information for the quarters
presented. Historically, the Company's revenues and operating results have
varied from quarter to quarter and are expected to continue to fluctuate in
the future. These fluctuations have been due to a number of factors,
including: general economic conditions in the Company's markets; the timing of
acquisitions and start-up locations and related costs; the effectiveness of
integrating acquired businesses and start-up locations; the timing of fleet
expansion capital expenditures; the realization of targeted equipment
utilization rates; seasonal rental patterns of the Company's customers; and
price changes in response to competitive factors. In addition, operating
results have been seasonally lower during the first and fourth fiscal quarters
than during the other quarters of the fiscal year. The operating results for
any historical quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
1995 QUARTERS ENDED 1996 QUARTERS ENDED 1997 QUARTER
---------------------------------- ----------------------------------- ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
-------- ------- -------- ------- -------- ------- -------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND LOCATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... $ 7,578 $ 9,009 $11,894 $18,689 $19,656 $22,874 $25,212 $26,476 $27,527
Sales of parts,
supplies and
equipment............. 4,005 3,943 4,567 6,232 7,541 8,393 9,419 8,783 13,782
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues.......... 11,583 12,952 16,461 24,921 27,197 31,267 34,631 35,259 41,309
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 4,476 5,067 7,189 11,122 12,449 13,551 14,977 14,225 14,316
Depreciation, equipment
rentals............... 1,317 1,558 1,881 2,935 3,633 4,156 4,586 5,465 6,306
Cost of sales of parts,
supplies and
equipment............. 2,550 2,683 3,157 4,227 5,067 5,802 6,750 6,451 9,709
------- ------- ------- ------- ------- ------- ------- ------- -------
Total cost of revenues.. 8,343 9,308 12,227 18,284 21,149 23,509 26,313 26,141 30,331
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 3,240 3,644 4,234 6,637 6,048 7,758 8,318 9,118 10,978
Selling, general and
administrative expense. 1,097 1,159 1,413 2,752 2,734 3,028 3,299 3,193 3,784
Depreciation and
amortization, excluding
equipment rental
depreciation........... 159 193 237 597 571 607 651 1,006 1,068
Amortization of
intangibles............ 155 157 14 392 561 600 664 554 624
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 1,829 2,135 2,570 2,896 2,182 3,523 3,704 4,365 5,502
Interest expense, net... 355 456 890 1,613 1,639 2,045 2,135 1,244 1,597
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes and extraordinary
items.................. 1,474 1,679 1,680 1,283 543 1,478 1,569 3,121 3,905
Provision for income
taxes.................. 575 660 659 507 213 581 617 1,311 1,722
------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary items.... 899 1,019 1,021 776 330 897 952 1,810 2,183
Extraordinary items, net
of income tax benefit
of $305 in 1995 and
$822 in 1996 and $386
in 1997................ -- -- (478) -- -- -- (1,269) -- (534)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.............. 899 1,019 543 776 330 897 (317) 1,810 1,649
Redeemable preferred
stock accretion........ 420 426 432 439 554 565 524 -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)
available to common
stockholders........... $ 479 $ 593 $ 111 $ 337 $ (224) $ 332 $ (841) $ 1,810 $ 1,649
======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average common
and common equivalent
shares................. 5,090 5,090 5,090 5,081 5,507 5,511 6,289 11,508 11,493
Income (loss) before
extraordinary items per
common share........... $ .09 $ .12 $ .11 $ .07 $ (.04) $ .06 $ .07 $ .16 $ .19
Extraordinary items per
common share........... -- -- (.09) -- -- -- (.20) -- (.05)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per
common share........... $ .09 $ .12 $ .02 $ .07 $ (.04) $ .06 $ (.13) $ .16 $ .14
======= ======= ======= ======= ======= ======= ======= ======= =======
Net increase in
locations at period
end.................... 2 1 15 7 13 17 3 11 12
</TABLE>
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<PAGE>
INCOME TAXES
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14.1 million that expire in
years 2005 through 2011. In addition, the Company had combined state 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, of which
$589,000 of the federal and all of the state alternative minimum tax credit
carryovers resulted from the Company's September 12, 1995 acquisition of
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.
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.
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<PAGE>
BUSINESS
GENERAL
The Company is a leading equipment rental company serving the needs of a
wide variety of industrial, manufacturing, construction, government and
homeowner markets. RSC rents a broad selection of equipment ranging from small
items such as pumps, generators, welders and electric hand tools to larger
equipment such as backhoes, forklifts, air compressors, scissor lifts, booms,
aerial manlifts and skid-steer loaders. The Company also sells MRO supplies,
small tools, contractor supplies, parts and used rental equipment, and acts as
a distributor for new equipment on behalf of certain national equipment
manufacturers.
Since its formation in 1992, the Company has pursued an aggressive expansion
strategy and has acquired 28 businesses comprised of 86 locations and has
opened 32 start-up locations through May 7, 1997. With a focus on operating
rental locations in underserved small- to medium-sized markets, RSC intends to
continue to expand its presence in existing markets and capitalize on
opportunities to enter new geographic markets through a combination of
acquisitions and start-up locations. The Company also seeks to increase
revenues across its locations through fleet expansion, improved asset
utilization and targeted marketing efforts. Management believes that RSC is
well-positioned to capitalize on the substantial consolidation opportunities
in the equipment rental industry, and to take advantage of the growing demand
for equipment rental as businesses increasingly outsource non-core operations.
INDUSTRY OVERVIEW
The equipment rental industry serves a wide variety of industrial,
manufacturing, construction, governmental and homeowner markets. Equipment
available for rent ranges from construction and industrial equipment to
general tools and homeowners equipment. A survey conducted for the Associated
Equipment Distributors ("AED") estimates that industry rental revenues were
approximately $13 billion in 1993, which the author of the survey estimates
increased to $15 billion in 1995.
Management believes that the equipment rental industry benefits from the
trend among businesses to outsource non-core operations in order to reduce
capital investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. While customers traditionally rented
equipment for specific purposes such as supplementing capacity during peak
periods and using equipment in connection with special projects, customers are
increasingly looking to rental operators to provide an on-going comprehensive
supply of equipment that can enable such customers to benefit from the
economic advantages and convenience of rental. According to surveys published
in 1995 by The CIT Group, contractors intended to increase the percentage of
equipment they rent without a purchase option to an estimated 8% of their
total equipment requirements in 1996 from less than 5% in 1994. Many of the
businesses that rent equipment also purchase complimentary tools and supplies
from MRO distributors. The Company believes that many of such customers would
be interested in a one-stop solution consisting of both equipment rental and
MRO supplies.
The equipment rental industry is highly fragmented and primarily consists of
a large number of relatively small, independent businesses typically serving
discrete local markets within 30 to 50 miles of the store location, and a
small number of multi-location regional or national operators. Traditionally,
large equipment rental companies have focused their operations on serving
relatively large customers, primarily in medium to large metropolitan markets,
while generally serving smaller markets through delivery from distant major
markets without establishing a local presence. In such smaller markets, the
primary source of rental equipment has traditionally been relatively small,
local equipment rental businesses and equipment dealers with product offerings
typically limited in both depth and breadth.
The Company believes that the rental equipment industry offers substantial
consolidation opportunities for large, well-capitalized equipment rental
companies such as RSC. Relative to smaller companies with only one or two
rental locations, the Company believes that national operators such as RSC
benefit from several competitive
36
<PAGE>
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. As a result of consolidation and industry growth, 1995 rental
revenues of the top 100 rental equipment companies increased over 1994 rental
revenues by approximately 22%, to $2.5 billion in 1995, according to estimates
by the RER. In spite of this growth, these top 100 companies represent less
than one-fifth of the total estimated 1995 industry rental revenues. See "--
Competition."
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by taking
advantage of its strong market position and pursuing a business strategy that
includes the following key elements:
Small- to Medium-Sized Market Focus. The Company focuses on operating rental
locations in underserved small- to medium-sized rental markets where the
Company can capitalize on its competitive advantages relative to the small,
local equipment rental businesses and equipment dealers who have traditionally
served such markets. In addition, the Company believes 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. See "--Locations" and
"--Growth Strategy."
Cluster Strategy. Under its cluster strategy, RSC establishes a
comprehensive pool of rental equipment at a central, readily-accessible "hub"
location, and surrounds the hub with smaller "satellite" locations 30 to 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 utilization and allows RSC to bring the benefits of a large, high-
quality and diversified rental equipment fleet to markets with populations as
small as 25,000 where a full-scale rental facility might not otherwise be
justified. See "--Fleet Management."
Advanced Information Systems. The Company has made substantial investments
in its 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. See "--Fleet Management" and "--Information
Systems."
Decentralized Management. Under the Company's decentralized management
structure, RSC's region vice presidents and district managers, who currently
average over 20 years of rental experience, are responsible for management,
customer service, marketing strategies and business growth in their regions.
Each region vice president and district 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.
Superior 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 supplies, tools, parts, and equipment. Depending upon market
needs, RSC also
37
<PAGE>
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
("RSU"), 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. See "--Products" and "--Sales
and Marketing."
GROWTH STRATEGY
RSC's growth strategy is to continue to expand its presence in existing
markets and capitalize on opportunities to enter new geographic markets
through a combination of acquisitions and start-up locations. The Company also
seeks to increase revenues across its locations through fleet expansion,
improved asset utilization and targeted marketing efforts. Following its
recent acquisition of IAT, the Company also plans to increase revenue across
existing locations by cross selling its industrial customers both equipment
rental services and MRO tools and supplies. 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.
Acquisitions. 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 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. Proprietors of smaller businesses often place significant
emphasis on the Company's proven track record in completing and integrating
acquisitions and the Company believes that its reputation in these areas
provides it access to other acquisition opportunities. Since its formation in
1992, RSC has acquired 28 businesses comprised of 86 locations. See "--
Business Strategy--Small- to Medium-Sized Market Focus" and "--Locations."
Start-Up Locations. RSC also enters targeted markets through start-up
locations where there is no quality business available for acquisition or
where such a business cannot be acquired on terms acceptable to the Company.
The Company's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. RSC 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. Since January 1, 1994, the Company has opened 32 start-up
locations. See "--Business Strategy--Cluster Strategy" and "--Locations."
Internal Growth. The Company focuses on achieving internal growth through an
emphasis on fleet expansion, improved asset utilization and targeted marketing
efforts. The Company intends to 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 provide
the data necessary to improve asset deployment based upon such factors as
price realization, time utilization and individual asset return on investment.
Through its recently-introduced national accounts marketing program, the
Company targets large petrochemical, industrial and commercial customers. The
Company recently began offering 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
38
<PAGE>
operating expenses such as equipment transportation and delivery, and improve
asset utilization rates resulting from the sole-source arrangement with the
customer. In addition, through the acquisition of IAT, the Company has
increased its MRO supply business and its tool room management and small tool
trailer business. The Company has also recently announced the creation of an
Industrial Division, with a dedicated and specially trained sales force
focusing exclusively on industrial customers. See "--Fleet Management," "--
Information Systems" and "--Sales and Marketing."
PRODUCTS
The Company believes 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. In 1996, equipment rental
accounted for approximately 73.4% of the Company's total revenues.
Sales of Parts, Supplies and Equipment. In addition to equipment rental,
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, Wacker, and as a result of its
acquisition of IAT, Ingersoll-Rand, Stanley Proto and Weldon Pumps. Following
its acquisition of Foxx and Central States, RSC will also become a dealer for
JGL, Sky-Jack, Sky Trak, Lull and Genie. In connection with the IAT
Acquisition, the Company will also begin to offer its customers a one-source
catalog for a variety of equipment, tools and supplies.
The Company also routinely sells used rental equipment in order to maintain
an economically competitive fleet and to adjust to fluctuations in the demand
for specific rental products. The Company has developed a proprietary
algorithm, the "CAPCOM" model, 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. RSC is able to realize attractive prices on used
equipment sales due to its strong preventative maintenance program, ability to
use offshore, retail and direct mail distribution channels to redirect
disposals to markets where the equipment is in highest demand, and ability to
negotiate attractive fee arrangements with third-party auctioneers. In
addition, the Company markets its used rental equipment via the Internet. The
Company is also currently evaluating additional disposal alternatives,
including the creation of a used rental equipment catalog.
In 1996, the sale of parts, supplies and equipment accounted for
approximately 26.6% of the Company's total revenues. As a result of the
acquisition of IAT, which focuses primarily on MRO tool and supply sales
rather than equipment rentals, management expects that the sale of parts,
supplies and equipment will constitute a greater percentage of the Company's
total revenues in the near future.
FLEET MANAGEMENT
The Company believes its advanced information systems, combined with its
cluster strategy and ability to redeploy equipment among locations, allow RSC
to better manage its fleet and achieve higher equipment utilization rates than
many of its competitors. Under this strategy, an employee at any location can
locate a specific piece of equipment throughout the region, whether on rent
(in which case the estimated date available is provided), in transit, in the
service bay or ready for rent. Once identified, the equipment can be reserved
for a customer through the system and scheduled for delivery (generally within
24 hours) to the job site or store location by the Company's radio-dispatched
transportation fleet of trucks, trailers and independent carriers. The
39
<PAGE>
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. As a result, the Company believes that it is
able to enhance the reliability and extend the useful life of its rental
equipment fleet, and obtain favorable prices when used rental equipment is
sold.
INFORMATION SYSTEMS
Each rental location is networked with a commonly configured 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 AS400 system located at corporate headquarters, which can be
accessed by the employee at the point of sale to determine equipment
availability. Local, regional and corporate management can access this
information to monitor current business activity, including daily sales volume
and fleet availability. As a result of its acquisition of IAT, the Company
also has a proprietary tool management software system which controls the
issuance, return and management of tools and equipment used by plant personnel
and contractors. The Company believes that its use of advanced information
technology will continue to create profit improvement opportunities and
improve equipment utilization.
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.
The Company has recently announced the creation of an Industrial Division,
with a dedicated and specially trained sales force focusing exclusively on
industrial customers. Management expects that as a result of the Company's
acquisitions of IAT, Foxx and Central States and the formation of the
Industrial Division, industrial customers will account for an increased
portion of the Company's total revenues. See "--Growth Strategy--Internal
Growth."
SALES AND MARKETING
The Company markets its products and services through a sales force
consisting of approximately 142 field-based commissioned salespeople and 152
store-based salespeople as of April 30, 1997. 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 and supply needs are fulfilled. The Company's store-based
sales force handles telephone inquiries and assists customers at each rental
location to select the
40
<PAGE>
proper equipment and supplies to meet their needs. In addition, 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's sales force attends RSU training programs in order to develop
extensive product knowledge and refine their customer service skills. See "--
Business Strategy--Superior Customer Service."
The Company supplements its sales and marketing activities through
participation in industry trade shows and conferences, direct mail, and
advertising in local industry publications and the yellow pages in the markets
it serves. In addition, the Company maintains a home page on the Internet
describing the Company's products and services, geographic locations and used
rental equipment for sale. RSC's home page can be found at
"http://www.rentalservice.com." The Company also maintains a Website on the
Internet describing the products and services of IAT at
"http://www.industrial.air.tool.mrop.net."
LOCATIONS
At March 31, 1997, the Company operated 106 rental locations (including 12
locations acquired since December 31, 1996), in the following 9 states:
Alabama (10), Arkansas (10), Florida (17), Georgia (18), Louisiana (8),
Mississippi (10), South Carolina (4), Tennessee (5) and Texas (24). Through
its acquisitions of Foxx and Central States, the Company expects to add 8
locations in the following states: Illinois (2), Iowa (2), Kansas (1),
Missouri (2) and Oklahoma (1).
The following table shows the increase in number of RSC locations since the
Company's formation in 1992:
<TABLE>
<CAPTION>
QUARTER
ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Beginning locations...... -- 11 21 25 50 94
Locations acquired...... 11 11 1 26 25 12
Locations opened........ -- -- 3 10 19 --
Locations closed, sold
or held for sale(1).... -- (1) -- (11) -- --
--- --- --- --- --- ---
Ending locations......... 11 21 25 50 94 106
=== === === === === ===
</TABLE>
- --------
(1) In connection with the acquisition of Holdings, the Company sold or closed
all of Holdings' California rental locations, which were previously
included in "assets held for sale" in the Company's Consolidated Financial
Statements.
The Company's locations are generally situated in industrial, commercial or
mixed-use zones. The buildings range from approximately 1,500 to 47,000 square
feet, consisting of a customer showroom, an equipment service area and storage
facilities, and are located on parcels of one to five acres of land. Eight of
the Company's rental locations are owned, with the remaining locations subject
to leases with terms expiring from 1997 to 2005, most with options to extend.
In a number of instances, the Company's rental locations are leased from the
former owners of businesses acquired by the Company.
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: large national companies (such as Hertz
Equipment Rental Corporation, Prime Service, Inc., U.S. Rentals, Inc. and BET
Plant Services U.S.A.); regional competitors 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. The Company also competes against MRO suppliers, including large
companies such as W.W. Grainger and McMaster Carr as well as regional and
independent competitors. 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. See "Risk Factors--Competition."
41
<PAGE>
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 and supplies. Relative to smaller companies with only one or
two rental locations, the Company believes 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 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 it currently conducts its operations in material compliance
with all applicable laws and regulations. Compliance by the Company with
applicable environmental laws has not had a material adverse effect on the
Company's financial condition or competitive position to date. See "Risk
Factors--Government and Environmental Regulation."
TRADE NAMES
The Company currently does business under the name Rental Service
CorporationSM. The Company believes this brand name identity enables it to
more effectively target national accounts. In certain local markets the
Company also selectively continues to use the name of an acquired business
where there is strong local name recognition and customer loyalty.
42
<PAGE>
EMPLOYEES
At May 6, 1997, the Company employed 1,167 people, including 294
salespeople, 768 operational employees and 105 corporate and regional
management employees. None of these employees is represented by a union or a
collective bargaining agreement. However, upon consummation of the Central
States acquisition, approximately 20 of the Company's employees in Kansas City
will be represented by a union. The Company considers its labor relations to
be good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal and financial liability of the Company with
respect to such pending litigation cannot be estimated with certainty but the
Company believes, based on its examination of such matters, that such ultimate
liability will not have a material adverse effect on the business or financial
condition of the Company.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the directors and executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Martin R. Reid 54 Chairman of the Board and Chief Executive Officer
Douglas A. Waugaman 39 Senior Vice President of Operations
Ronald Halchishak 49 Senior Vice President of Operations
David G. Ledlow 38 Senior Vice President of Operations
Robert M. Wilson 39 Senior Vice President, Chief Financial Officer, Secretary and Treasurer
Bruce A. Lisanti 46 Senior Vice President of Marketing
William M. Barnum, Jr. 43 Director
James R. Buch 43 Director
Christopher A. Laurence 29 Director
Eric L. Mattson 46 Director
Britton H. Murdoch 39 Director
John G. Quigley 43 Director
Frederick J. Warren 57 Director
</TABLE>
The principal occupations and positions for the past five years and, in
certain cases prior years, of the directors and executive officers named above
are as follows:
MARTIN R. REID was elected as a Director and Chief Executive Officer of the
Company in June 1994 and became Chairman of the Board in October 1995. Mr.
Reid is a director of Tuboscope Vetco International Corporation ("Tuboscope"),
a provider of oilfield-related inspection and coating services. Mr. Reid
served as Chief Executive Officer of Tuboscope from May 1991 to October 1993
and as Chairman of the Board of Directors from October 1990 to April 1996.
From September 1986 to June 1990, Mr. Reid was Chief Executive Officer of
Eastman Christensen Co., a provider of oil and gas drilling systems. Mr. Reid
was also Vice Chairman of Eastman Christensen Co. from August 1989 to June
1990. Mr. Reid is a director of Cobblestone Holdings, Inc. and Cobblestone
Golf Group, Inc.
DOUGLAS A. WAUGAMAN has served as Senior Vice President of Operations of the
Company since April 1997. From January 1994 through April 1997, Mr. Waugaman
served as Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company. From June 1993 until joining the Company in January 1994, Mr.
Waugaman served as Operations Manager for Plastiglide Manufacturing
Corporation, a subsidiary of Illinois Tool Works. From September 1991 until
June 1993, Mr. Waugaman was Vice President of Finance for Knapp Communications
Corporation, a magazine publisher. From September 1989 until September 1991,
Mr. Waugaman was Controller for Plastiglide Manufacturing Corporation. Mr.
Waugaman's experience also includes public accounting experience with Arthur
Andersen and Co. Mr. Waugaman is a Certified Public Accountant.
RONALD HALCHISHAK joined the Company in October 1991 as Vice President of
Purchasing and Director of Safety and became Region Manager for California in
1994. He was appointed Regional Vice President of Operations in January 1995
and was promoted to Senior Vice President of Operations in December 1996.
Prior to joining the Company, Mr. Halchishak worked for 13 years at Hertz
Equipment Corporation in various positions, including Director of European
Operations and Region Manager of the Midwest Division.
DAVID G. LEDLOW joined the Company in conjunction with the acquisition of
Walker Jones Equipment in 1992. Mr. Ledlow had been employed by Walker Jones
Equipment since 1982, serving most recently as its Vice President of
Marketing. Mr. Ledlow was promoted to Regional Vice President of Operations of
the Company in February 1993 and to Senior Vice President of Operations in
December 1996.
44
<PAGE>
ROBERT M. WILSON joined the Company in April 1997 as Senior Vice President,
Chief Financial Officer, Secretary and Treasurer. From October 1994 until
joining the Company, Mr. Wilson served as Senior Vice President of Operations,
Finance and Administration for Shade/Allied Inc. From September 1989 through
October 1994, Mr. Wilson served in various positions at Simon Engineering plc,
including Vice President of Finance for the United States holding company and
President of Simon LGI. Mr. Wilson is a Certified Public Accountant and has
public accounting experience with Arthur Andersen and Co.
BRUCE A. LISANTI joined the Company in April 1997 as Senior Vice President
of Marketing. From March 1992 until joining the Company, Mr. Lasonti served as
Vice President, Sales and Marketing for Petroleum Information Corporation.
Prior thereto, he served as Vice President, Sales and Marketing for Corporate
Express, National Sales Manager for General Electric Computer Services and in
various positions at Electronic Data Systems.
WILLIAM M. BARNUM, JR. has served as a director of the Company since its
formation in 1992 and served as Chairman of the Board from June 1993 through
October 1995. Mr. Barnum is a general partner of BBP, the general partner of
Brentwood RSC Partners, L.P. ("Brentwood RSC Partners"). Brentwood RSC
Partners is a significant stockholder of the Company. See "Principal and
Selling Stockholders." Mr. Barnum was an associate at Morgan Stanley & Co.
Incorporated from October 1981 until joining Brentwood Associates, an
affiliate of Brentwood RSC Partners, in July 1984. Mr. Barnum is a director of
Quiksilver, Inc., and several privately held companies.
JAMES R. BUCH has served as a director of the Company since October 1995.
From October 1990 through May 1996, Mr. Buch served as President and Chief
Executive Officer of Evans Rents, Inc. Previously, he served as Director of
U.S. Operations for Brittania Security Group.
CHRISTOPHER A. LAURENCE has served as a director of the Company since
October 1995. Mr. Laurence is a Principal of Brentwood Associates and a member
of Brentwood Private Equity LLC. Prior to joining Brentwood Associates in
1991, Mr. Laurence was an analyst at Morgan Stanley & Co. Incorporated.
ERIC L. MATTSON has served as a director of the Company since December 1996.
Mr. Mattson is and has been Vice President and Chief Financial Officer of
Baker Hughes Incorporated ("BHI") since July 1993. For more than five years
prior to 1993, Mr. Mattson was Vice President and Treasurer of BHI. Mr.
Mattson is also a director of Tuboscope.
BRITTON H. MURDOCH has served as a director of the Company since January
1997. Mr. Murdoch is and has been Managing Director of Wendover Corp., a
privately held company, since October 1996. From 1990 to 1996, Mr. Murdoch was
Vice President and Chief Financial Officer of Airgas, Inc., an industrial gas
distribution and manufacturing company, and from 1987 to 1990, he was Vice
President of Corporate Development of Airgas, Inc.
JOHN G. QUIGLEY has served as a director of the Company since January 1996.
Mr. Quigley is a founding member of Nassau Capital, L.L.C., the general
partner of Nassau Capital Partners L.P. ("Nassau Capital"). Nassau Capital is
a significant stockholder of the Company. See "Principal and Selling
Stockholders." From 1992 to January 1995, Mr. Quigley was a partner of Clipper
Capital Partners. Mr. Quigley was a partner at Adler & Shaykin from 1984 to
1989. From 1980 to 1984, Mr. Quigley was an attorney with the law firm of
Kirkland & Ellis in Chicago. Mr. Quigley was selected as a director pursuant
to the terms of a Preferred Stock and Common Stock Purchase Agreement.
FREDERICK J. WARREN has served as a director of the Company since October
1995. Mr. Warren co-founded Brentwood Associates in 1972 and is a general
partner of BBP. See "Principal and Selling Stockholders." Mr. Warren is a
director of Digital Sound Corporation, a supplier of high-capacity network-
based message processing systems and applications, Cobblestone Holdings, Inc.,
Cobblestone Golf Group, Inc. and several privately held companies.
45
<PAGE>
Messrs. Reid, Waugaman, Warren and Barnum were also directors or executive
officers of Holdings at the time Holdings filed its prepackaged bankruptcy
plan under Chapter 11 of the United States Bankruptcy Code. See "Risk
Factors--Holdings' Bankruptcy; Increase in Indebtedness."
The Board of Directors presently consists of eight members, including four
independent directors. Directors of the Company serve until their successors
are elected and qualified or until the director resigns or is removed.
Officers of the Company serve at the discretion of the Company's Board of
Directors. There are no family relationships among executive officers or
directors of the Company.
Messrs. Quigley and Warren have resigned from the Board of Directors of the
Company, effective upon completion of the offering.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has the following standing committees: the Audit Committee and the
Compensation Committee. The Audit Committee was established to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the scope and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. The Audit Committee
consists of Messrs. Buch and Quigley. Upon the resignation of Mr. Quigley, Mr.
Murdoch will become a member of the Audit Committee. The Compensation
Committee was established on December 5, 1996 to establish remuneration levels
for executive officers of the Company and implementation of the Company's
stock option plans and any other incentive programs. The Compensation
Committee consists of Messrs. Mattson and Murdoch. The Audit Committee and the
Compensation Committee each met one time during 1996. The Company has no
nominating committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to December 5, 1996, the Company had no compensation committee or
other committee of the Board performing similar functions. Accordingly,
decisions concerning compensation of executive officers were made by the
entire Board. Other than Martin R. Reid, there were no officers or employees
of the Company who participated in deliberations concerning such compensation
matters. Mr. Reid was, until April 1996, an executive officer of Tuboscope,
and he currently serves on the Executive Committee of the Board of Directors
of Tuboscope, which is responsible for Tuboscope's compensation policies. Eric
L. Mattson is a director of Tuboscope.
COMPENSATION OF DIRECTORS
The Company did not pay any fees or remuneration to directors for their
service on the Board or any Board committee in 1996, however, the Company
reimbursed directors for their out-of-pocket expenses incurred in connection
with attending meetings of the Board. In addition, during 1996, Mr. Buch was
granted stock options under the 1995 Plan (as defined) in connection with his
election to the Board.
Effective January 1, 1997, in addition to reimbursement for out-of-pocket
expenses, all non-employee members of the Board will receive $10,000 per year
(payable $2,500 per quarter) as compensation for serving on the Board, plus
$1,500 for attendance at each Board meeting and $500 for attendance at each
committee meeting. In addition, each committee chairman will receive an
additional $1,500 per year. All non-employee directors receive non-qualified
stock options under the 1996 Plan (as defined) as described under "Equity
Participation Plans."
46
<PAGE>
LIMITATIONS ON LIABILITY
The Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in certain
cases where liability is mandated by the General Corporation Law of the State
of Delaware. The provision has no effect on any non-monetary remedies that may
be available to the Company or its stockholders, nor does it relieve the
Company or its directors from compliance with federal or state securities
laws. The Bylaws of the Company generally provide that the Company shall
indemnify, to the fullest extent permitted by law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities,
judgments, fines and amounts paid in settlement actually incurred by him in
connection with such Proceeding. The Company has entered into, or intends to
enter into, agreements to provide indemnification for the Company's directors
and executive officers in addition to the indemnification provided for in the
Bylaws. These agreements, among other things, will indemnify the Company's
directors and executive officers for certain expenses (including attorney's
fees), and all losses, claims, liabilities, judgments, fines and settlement
amounts incurred by such person arising out of or in connection with such
person's service as a director or officer of the Company to the fullest extent
permitted by applicable law. In addition, the Company has obtained director
and officer liability insurance that insures the Company's directors and
officers against certain liabilities.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the other executive officers of the
Company who earned more than $100,000 (salary and bonus) (the "Named Executive
Officers") for all services rendered in all capacities to the Company during
the fiscal year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------
LONG TERM
ALL OTHER COMPENSATION
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)
- --------------------------- --------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief Execu-
tive Officer.............. 294,231 84,375 5,641 (2) --
Douglas A. Waugaman
Senior Vice President of
Operations................ 155,923 42,900 7,149 (3) --
Ronald Halchishak
Senior Vice President of
Operations................ 150,000 100,000 920 (2) 71,250
David G. Ledlow
Senior Vice President of
Operations................ 117,692 36,709 4,200 (4) 71,250
</TABLE>
- --------
(1) The amount of bonus presented in this table for 1996 represents the bonus
earned in 1995, which was paid during 1996. Bonuses earned with respect to
1996 were as follows: Mr. Reid, $300,000; Mr. Waugaman, $200,000; Mr.
Halchishak, $75,000 and Mr. Ledlow, $75,000. Such 1996 bonuses were paid
during March 1997.
(2) Consists of an automobile allowance.
(3) Consists of an automobile allowance ($2,175) and insurance premiums paid
by the Company ($4,974) for life insurance and disability policies
covering Mr. Waugaman.
(4) Consists of relocation expenses reimbursed by the Company.
47
<PAGE>
Stock Options Granted in Fiscal 1996
The following table sets forth information concerning individual grants of
stock options made by the Company during the fiscal year ended December 31,
1996 to each of the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
---------------------------- STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME OPTIONS GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------------ ---------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... -- -- -- -- -- --
Douglas A. Waugaman
Senior Vice President
of Operations.......... -- -- -- -- -- --
Ronald Halchishak
Senior Vice President of 11,250(1) 5.4% $14.11 2006 $ 99,829 $ 252,987
Operations............. 60,000(2) 28.7% $21.00 2006 $792,407 $2,008,115
David G. Ledlow
Senior Vice President of 11,250(1) 5.4% $14.11 2006 $ 99,829 $ 252,987
Operations............. 60,000(2) 28.7% $21.00 2006 $792,407 $2,008,115
</TABLE>
- --------
(1) Such options vest equally over three years on April 1, 1997, 1998 and
1999.
(2) Such options vest equally over four years on October 22, 1997, 1998, 1999
and 2000.
48
<PAGE>
Aggregated Option Exercises
The following table sets forth information (on an aggregated basis)
concerning each exercise of stock options during the year ended December 31,
1996 by each of the Named Executive Officers and the year-end value of
unexercised options.
AGGREGATED OPTION EXERCISES
IN THE LAST FISCAL YEAR
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS
SHARES END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer..... -- -- -- -- -- --
Douglas A. Waugaman
Senior Vice President
of Operations......... -- -- -- -- -- --
Ronald Halchishak
Senior Vice President
of Operations......... 5,580 -- -- 82,410 -- $847,426
David G. Ledlow
Senior Vice President
of Operations......... 4,725 -- 855 82,410 $23,504 $847,426
</TABLE>
- --------
(1) Options are "in-the-money" at the fiscal year-end if the fair market value
(based on the closing price of the Company's Common Stock on the Nasdaq
National Market System on December 31, 1996 of $27.50 per share, less the
exercise price) of the underlying securities on such date exceeds the
exercise or base price of the option.
401(K) PLAN
The Company maintains a 401(k) Retirement Savings Plan (the "401(k) Plan")
to provide retirement and other benefits to employees of the Company and to
permit employees a means to save for their retirement. The 401(k) Plan is
intended to be a tax-qualified plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
Employees of the Company become eligible to participate in the 401(k) Plan
and to have salary deferral contributions made on their behalf after they
complete six months of service and attain the age of 18.
Subject to legal limitations, participants may elect, by salary reduction,
to have 401(k) Plan contributions of 2% to 16% of their compensation made to
their accounts. Under the 401(k) Plan, the Company may make discretionary
profit sharing contributions on behalf of participants who have completed
1,000 hours of service during the plan year or six months of continuous
employment and are employed on the last day of the plan year (or have retired
after attaining age 65, died or incurred a disability in a plan year), based
on compensation.
Participants in the 401(k) Plan always have a 100% vested and nonforfeitable
interest in the value of their 401(k) contributions. Participants become
vested in the Company's profit sharing and matching contributions based on a
graded five year vesting schedule (or upon a participant's retirement after
attaining age 65, death or disability, if earlier). Participants are entitled
to receive the vested amounts in their accounts in a single lump-sum payment
on death, disability, retirement or termination of employment. In certain
circumstances, participants may receive loans and hardship withdrawals from
their accounts in the 401(k) Plan.
49
<PAGE>
EQUITY PARTICIPATION PLANS
The Company currently maintains two plans, the Stock Option Plan for Key
Employees (the "1995 Plan") and the 1996 Equity Participation Plan (the "1996
Plan"), pursuant to which certain employees or directors may obtain options or
other awards that enable them to participate in the Company's equity. The
Board adopted the 1996 Plan on December 5, 1996, and the 1996 Plan was
approved by the Company's stockholders on February 5, 1997. The principal
purposes of the 1996 Plan are to provide incentives for officers, directors,
key employees and consultants of the Company and its subsidiaries through
granting options, restricted stock and other awards that stimulate the
personal and active interest of such persons in the Company's development and
financial success and induce them to remain in the Company's service. In
addition to awards made to officers, key employees or consultants, the 1996
Plan provides for the granting of options ("Director Options") to the
Company's independent non-employee directors pursuant to a formula. The 1995
Plan is maintained for the benefit of certain employees of the Company for
similar purposes.
The 1995 Plan provides that the Board or a committee appointed by the Board
(in either case, the "1995 Plan Committee") may grant non-transferable
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") to
key employees. The 1995 Plan Committee has the full authority and discretion,
subject to the terms of the 1995 Plan, to determine those individuals who are
eligible to be granted options and the amount and type of such options. Terms
and conditions of options are set forth in written option agreements. An
aggregate of up to 324,000 shares of Common Stock are issuable under the 1995
Plan, however, as of April 30, 1997, only 1,860 of these shares were available
for future stock option grants.
The 1996 Plan is administered by the Compensation Committee or a
subcommittee thereof (the "Committee") with respect to grants to employees or
consultants of the Company and by the full Board with respect to Director
Options. Subject to the terms and conditions of the 1996 Plan, the Committee
or the Board, as applicable, has the authority to select the persons to whom
awards are to be made, to determine the number of shares to be subject thereto
and the terms and conditions thereof, and to make all other determinations and
to take all other actions necessary or advisable for the administration of the
1996 Plan.
The 1996 Plan provides that the Committee may grant or issue stock options,
stock appreciation rights ("SARs"), restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments, other stock related benefits
and other awards (collectively, "Awards"), or any combination thereof. Each
Award will be set forth in a separate agreement with the person receiving the
Award. Under the 1996 Plan, not more than 1,000,000 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise or vesting of any Awards. Furthermore, the maximum number of shares
which may be subject to options or SARs granted under the 1996 Plan to any
individual in any calendar year cannot exceed 200,000. As of March 31, 1997,
575,050 shares of Common Stock were available for future Awards under the 1996
Plan.
Awards under the 1996 Plan may be granted to (i) individuals who are then
officers or other employees of the Company or any of its present or future
subsidiaries who are determined by the Committee to be key employees and (ii)
consultants of the Company selected by the Committee for participation in the
1996 Plan. Approximately 60 officers and other employees are currently
eligible to participate in the 1996 Plan. On February 26, 1997, Martin R. Reid
was granted options to purchase 200,000 shares and Douglas A. Wagaman was
granted options to purchase 100,000 shares. In addition, non-employee
directors of the Company are granted NQSOs by the Board under the 1996 Plan.
On February 26, 1997, Director Options to purchase an aggregate of 61,000
shares were granted to the Company's non-employee directors. During the term
of the 1996 Plan and pursuant to a formula, (a) each non-employee director is
automatically granted an option to purchase 10,000 shares of Common Stock on
the date of his initial election and (b) each then-current non-employee
director is automatically granted a NQSO to purchase 2,500 shares of Common
Stock at each subsequent annual meeting at which he is reelected to the Board.
On April 28, 1997, Robert M. Wilson and Bruce A. Lisanti were each granted
options to purchase 75,000 shares.
50
<PAGE>
EXECUTIVE INCENTIVE BONUS PLAN
The Company maintains a Corporate Management Bonus Plan (the "Management
Bonus Plan") for key corporate employees. The purpose of the Management Bonus
Plan is to offer incentives to key management of the Company so as to (i)
reward them for achieving financial goals and (ii) further the alignment of
interests of key management with the Company's stockholders. Bonuses under the
Management Bonus Plan are based on achieving certain earnings per share
objectives. Each participant's bonus award is calculated as a percentage of
base salary, and generally ranges from 20% to 30% of base salary.
In addition, the Company maintains Region Manager and General Manager Bonus
Plans (the "Operations Bonus Plan"). The Operations Bonus Plan is designed to
provide incentives to operations management to maintain a high level of
profitability and asset utilization and to achieve the Company's financial
goals in their individual market. Bonuses under the Operations Bonus Plan are
based on the degree to which region or individual location operating profit
objectives are met and generally range from 20% to 75% of the participant's
base salary if financial targets are achieved. If financial targets are
exceeded, participants may receive an additional bonus based on incremental
regional or store profit.
Bonuses under the Management Bonus Plan and the Operations Bonus Plan are
paid semi-annually. The first payment is made after finalization of the first
six months results, and the amount of the first payment is 50% of the bonus
earned for that six months, with the remainder of the bonus to be paid at year
end. The second payment is calculated after year end audited financial
statements are finalized, and the amount of the second payment is the total
bonus paid less the amount paid for the first six-month period.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1997, the Company adopted its Employee Qualified Stock Purchase Plan (the
"QSP Plan"). In general, the QSP Plan authorizes employees of the Company and
its subsidiaires to purchase shares of the Company's Common Stock, through
payroll deductions, at a purchase price of 85% of the fair market value of
such shares. The QSP Plan is intended to help the Company attract and retain
experienced and capable persons who can make significant contributions to the
further growth and success of the Company and to align further the interests
of such persons with those of the Company's stockholders.
The QSP Plan provides that an aggregate of up to 250,000 shares of the
Company's Common Stock may be issued thereunder. The QSP Plan also provides
for appropriate adjustments in the number and kind of shares subject to the
plan and to outstanding purchase rights in the event of a stock split, stock
dividend or certain other similar changes in the Company's Common Stock and in
the event of a merger, reorganization, consolidation or certain other types of
recapitalizations of the Company.
Each employee of the Company who has been employed by the Company for not
less than one year and who is customarily employed by the Company for more
than 20 hours per week and more than five months per calendar year is eligible
to participate in the QSP Plan. The Company presently has approximately
700 employees who are eligible to participate in the QSP Plan.
The per share exercise price of each purchase right shall be an amount equal
to the lesser of 85% of the fair market value of a share of Common Stock on
the first day of the Offering Period in which the eligible employee began
participating in the QSP Plan or 85% of the fair market value of a share of
Common Stock on the date of exercise of an installment of the purchase right.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock outstanding as of May 7, 1997 and as
adjusted to reflect the sale of Common Stock offered hereby by: (i) each
person known by the Company to own beneficially 5% or more of any class of the
Company's voting securities; (ii) each director and Named Executive Officer of
the Company; (iii) each Selling Stockholder and (iv) all directors and
executive officers of the Company as a group. Except as otherwise indicated,
each stockholder listed below has informed the Company that such stockholder
has (i) sole voting and investment power with respect to such stockholder's
shares of stock, except to the extent that authority is shared by spouses
under applicable law, and (ii) record and beneficial ownership with respect to
such stockholder's shares of stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED
OFFERING(1) NUMBER OF AFTER OFFERING(1)(3)
----------------------- SHARES -----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERED(2)(3) NUMBER PERCENT
---------------- ------------ ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Brentwood RSC Partners,
L.P.(4)....................... 3,731,715 32.2% 809,361 2,922,354 20.1%
William M. Barnum, Jr.(4)(8)... 3,731,715 32.2 -- 2,922,354 20.1
Frederick J. Warren(4)(8)...... 3,731,715 32.2 -- 2,922,354 20.1
David H. Wong(4)............... 3,731,715 32.2 -- 2,922,354 20.1
John G. Quigley(5)(8).......... 711,045 6.1 -- 556,828 3.8
Nassau Capital Partners
L.P.(5)....................... 707,220 6.1 153,387 553,833 3.8
NAS Partners I L.L.C. ......... 3,825 * 830 2,995 *
Martin R. Reid(6)(7)(8)........ 160,022 1.4 -- 160,022 *
Douglas A. Waugaman(6)(7)(8)... 58,806 * -- 58,806 *
Ronald Halchishak(6)(8)........ 16,930 * -- 16,930 *
David G. Ledlow(6)(8).......... 16,830 * -- 16,830 *
James R. Buch(6)(8)............ 1,800 * -- 1,800 *
Britton H. Murdoch(8)(9)....... 1,000 * -- 1,000 *
Christopher A. Laurence(4)(8).. -- -- -- -- --
Eric L. Mattson(8)(10)......... -- -- -- -- --
Robert M. Wilson(6)(8)......... -- -- -- -- --
Bruce A. Lisanti(6)(8)......... -- -- -- -- --
UST Private Equity Investors
Fund Inc. .................... 142,200 1.2 30,842 111,358 *
George Johnson................. 5,580 * 5,580 -- --
All directors and executive
officers as a group (13
persons)(4)(5)(6)(7)(8)(9)(10). 4,698,148 40.6 963,578 3,734,570 25.6%
</TABLE>
- --------
* Less than 1.0%.
(1) A person is deemed as of any date to have "beneficial ownership" of any
security that such person has a right to acquire within 60 days after such
date. Shares which each identified stockholder has the right to acquire
within 60 days of the date of the table set forth above are deemed to be
outstanding in calculating the percentage ownership of such stockholder,
but are not deemed to be outstanding as to any other person.
(2) The Underwriters' over-allotment option consists of 488,342 shares to be
sold by Brentwood RSC Partners, L.P., 92,549 shares to be sold by Nassau
Capital Partners L.P., 18,609 shares to be sold by UST Private Equity
Investors Fund Inc. and 500 shares to be sold by NAS Partners I L.L.C.
(3) For purposes of this table, information as to shares of Common Stock
assumes (i) the persons in the table do not purchase shares in the
offering and (ii) no exercise of the Underwriters' over-allotment option.
(4) Messrs. Barnum and Warren, directors of the Company, and Mr. Wong are
general partners of BBP, the general partner of Brentwood RSC Partners;
accordingly Messrs. Barnum, Warren and Wong may be deemed to be the
beneficial owners of such shares and for purposes of this table they are
included. Messrs. Barnum, Warren and Wong disclaim beneficial ownership of
such shares. The address of Brentwood RSC
52
<PAGE>
Partners, Mr. Barnum, Mr. Warren, Mr. Wong and Mr. Laurence is 11150 Santa
Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(5) Mr. Quigley, a director of the Company, is a member of Nassau Capital,
L.L.C., the general partner of Nassau Capital; accordingly Mr. Quigley may
be deemed to be beneficial owner of such shares and for purposes of this
table they are included. Mr. Quigley is also a member of NAS Partners I
L.L.C. which owns 3,825 shares of Common Stock; accordingly Mr. Quigley
may be deemed to be the beneficial owner
of such shares and for purposes of this table they are included. Mr.
Quigley disclaims beneficial ownership of all such shares. The address of
Nassau Capital, NAS Partners I L.L.C. and Mr. Quigley is 22 Chambers
Street, Princeton, New Jersey 08542.
(6) The address of such person is c/o Rental Service Corporation, 14505 N.
Hayden Road, Suite 322, Scottsdale, Arizona 85260.
(7) Includes shares subject to vesting which may be repurchased by the
Company if they fail to vest.
(8) Excludes shares issuable upon exercise of options which are not
exercisable within 60 days of the date of the table set forth above, as
follows: Mr. Barnum--10,000 shares; Mr. Buch--8,200 shares; Mr.
Halchishak--71,160 shares; Mr. Laurence--10,000 shares; Mr. Ledlow--71,160
shares; Mr. Mattson--10,000 shares; Mr. Murdoch--10,000 shares; Mr.
Quigley--10,000 shares; Mr. Reid--200,000 shares; Mr. Lisanti--75,000
shares; Mr. Warren--10,000 shares; Mr. Waugaman--100,000 shares and Mr.
Wilson--75,000 shares.
(9) The address of such person is c/o Wendover Corporation, 354 W. Lancaster
Avenue, Haverford, PA 19041.
(10) The address of such person is c/o Baker Hughes Incorporated, 3900 Essex
Lane, Suite 1200, Houston, Texas 77027.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to a Corporate Development and Administrative Services Agreement
(the "Services Agreement"), the Company, prior to its initial public offering
in September 1996, paid BBP a monitoring fee in connection with management,
consulting and financial advisory services equal to one percent (1%) per annum
of the aggregate amount of debt and equity investment in the Company of or by
BBP and any persons or entities associated with BBP (collectively, the
"Brentwood Entities"), and investors in any of the Brentwood Entities, plus
reimbursement of customary costs and expenses. In 1996, the Company paid BBP a
monitoring fee of $235,000 pursuant to the Services Agreement. From time to
time, BBP has also received investment banking fees from the Company in
connection with the Company's acquisitions, calculated at 1.5% of the total of
the purchase price plus acquisition costs and net capital expenditures.
Investment banking fees paid to BBP totaled $388,000 during 1996 and $0 for
the four months ended April 30, 1997. The Company's obligation to pay such
monitoring and investment banking fees terminated upon completion of its
initial public offering, although the Company anticipates utilizing BBP's
investment banking services from time to time in connection with future
transactions. The Company believes that these investment banking fees are no
less favorable than those which could be obtained for comparable services from
unaffiliated third parties. Messrs. Warren and Barnum, general partners of
BBP, who also serve as directors of the Company, do not receive additional
compensation for service as directors.
OTHER ARRANGEMENTS
The Company and Mr. Waugaman are parties to a Separation and Stock Purchase
Agreement dated July 25, 1995 (the "Waugaman Purchase Agreement"). Pursuant to
the Waugaman Purchase Agreement, if Mr. Waugaman's employment is terminated
without cause or if he is not offered a substantially similar position with a
successor entity following a change of control, he will be entitled to
severance pay equal to nine months base salary. Mr. Waugaman has agreed that
in consideration of such severance benefits, he will not compete with the
Company for a period of nine months if his employment is terminated other than
for cause. In addition, pursuant to an oral arrangement supplementing the
Waugaman Purchase Agreement, RSC has purchased a $500,000 life insurance
policy under which Mr. Waugaman's wife is the beneficiary and a disability
policy for Mr. Waugaman.
The Company has entered into a severance agreement with each of Messrs.
Halchishak, Ledlow, Lisanti and Wilson providing for certain benefits upon
termination of employment either by the Company without cause or by such named
executive officer due to a reduction in base salary and benefits (other than
across the board salary cuts for employees at such named executive officer's
level or changes in benefits). These benefits include a lump sum severance
payment equal to 100% of such named executive officer's base salary, plus a
pro rata portion of the current-year bonus opportunity, plus life, disability,
accident and group health insurance benefits substantially similar to those
received by such named executive officer immediately prior to termination for
a twelve (12) month period. In addition, all stock options granted prior to
1996, all stock options that are scheduled to vest in the year of termination
and one-third of all other stock options held by him, if any, shall become
vested and exercisable effective as of the day immediately prior to the date
of termination of such named executive officer. As consideration for these
benefits, each of Messrs. Halchishak and Ledlow agreed that during the term of
the severance agreement and for twenty-four (24) months after termination of
employment for any reason they would not solicit any customers of the Company
or hire or offer employment to any employee of the Company. Messrs. Lisanti
and Wilson agreed that during the term of the severence agreement and for
twelve (12) months after termination of employment for any reason they would
not solicit any customers of the Company or hire or offer employment to any
employee of the Company. The severance agreements with Messrs. Halchishak and
Ledlow will continue in effect through December 31, 2001 and those with
Messrs. Lisanti and Wilson will continue in effect through April 2000.
FUTURE TRANSACTIONS
The Company has adopted a policy that it will not enter into any material
transaction in which a Company director or officer has a direct or indirect
financial interest, unless the transaction is determined by the Company's
Board of Directors to be fair as to the Company or is approved by a majority
of the Company's disinterested directors or by the Company's stockholders, as
provided for under Delaware law. In addition, the Company's debt instruments
generally prohibit the Company from entering into any affiliate transaction on
other than arm's length terms.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation authorizes 20,000,000 shares of Common
Stock, par value $.01 per share, and 500,000 shares of Preferred Stock, par
value $.01 per share. As of April 30, 1997, no shares of Preferred Stock and
11,571,777 shares of Common Stock were issued and outstanding, 880,090 shares
of Common Stock were issuable upon exercise of outstanding options, 653,410
shares of Common Stock were reserved for issuance pursuant to the Company's
stock option and stock purchase plans and 686,855 shares of Common Stock were
reserved for issuance in connection with the Company's acquisition of IAT and
the pending acquisitions of Foxx and Central States.
The discussion below describes the capital stock of the Company as it will
exist upon the closing of this offering, unless otherwise noted. In addition,
the discussion below does not purport to be complete, and is subject to and
qualified in its entirety by reference to the Certificate of Incorporation and
Bylaws of the Company, forms of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Board of Directors of the Company, in its sole discretion, may issue
Common Stock from the authorized and unissued shares of Common Stock. Each
share of Common Stock is entitled to one vote at all meetings of stockholders
of the Company for the election of directors and all other matters submitted
to stockholder vote. There are no cumulative voting rights. Accordingly, the
holders of a majority of the outstanding shares of Common Stock can elect all
the directors if they choose to do so. The rights, privileges and preferences
of the holders of Common Stock are subject to the rights of the holders of any
shares of preferred stock that may be designated and issued by the Company in
the future. Subject to any restrictions contained in preferred stock issued by
the Company, if any, and to restrictions imposed by certain debt agreements of
the Company, holders of Common Stock are entitled to receive dividends when
and if declared by the Board of Directors out of legally available assets of
the Company. The Common Stock has no preemptive or similar rights. There are
no redemption or sinking fund provisions applicable to the Common Stock.
Holders of Common Stock are not liable to further call or assessment by the
Company. Upon any liquidation, dissolution or winding up of the Company, after
payment of the debts and other liabilities of the Company and subject to the
rights of holders of shares of preferred stock, if any, holders of Common
Stock are entitled to share pro rata in any distribution to the stockholders.
All outstanding shares of Common Stock are, and the shares offered hereby will
be, when issued and sold, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors, without the approval of the holders of the
Common Stock, is authorized to fix the number of shares of any series of
preferred stock and to designate for issuance up to 500,000 shares of
preferred stock, par value $.01 per share, in such number of series and with
such rights, preferences, privileges and restrictions (including without
limitation voting rights) as the Board of Directors may from time to time
determine. Issuance of preferred stock, while providing flexibility in
connection with possible acquisitions, may adversely affect the rights,
privileges and preferences afforded the holders of Common Stock, including a
decrease in the amount available for distribution to holders of the Common
Stock in the event of a liquidation or payment of preferred stock dividends.
Issuance of shares of preferred stock may also have the effect of preventing
or delaying a change in control of the Company without further action by the
stockholders and could make removal of present management of the Company more
difficult.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 203 of the DGCL prevents an "interested stockholder" (defined in
Section 203, generally, as a person owning 15% or more of a corporation's
outstanding voting stock) from engaging in a "business
55
<PAGE>
combination" with a publicly-held Delaware corporation for three years
following the date such person became an interested stockholder unless (i)
before such person became an interested stockholder, the board of directors of
the corporation approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination, (ii)
upon consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer), or (iii) following the transaction
in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of two-thirds of the outstanding voting stock of the corporation not owned by
the interested stockholder. A "business combination" includes mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
Section 203 could prohibit or delay mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company.
The Company's Bylaws will generally require 50 days advance notice of any
action to be proposed at any meeting of stockholders and set forth other
specific procedures that a stockholder must follow. There are also specific
procedures, including advance notice, for the nomination of a person to the
Board of Directors when such person is nominated other than at the direction
of the Board. In addition, the Company's Bylaws provide that a special meeting
of the Company's stockholders may only be called by certain officers of the
Company or by the Board of Directors; no such meeting may be called by
stockholders. These provisions could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management. See "Risk Factors--Control by Existing Stockholders" and "--Anti-
Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
56
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have outstanding an
aggregate of 14,571,777 shares of Common Stock. All of the shares sold in the
offering will be freely tradeable by persons other than affiliates of the
Company which will be subject to the resale limitations of Rule 144 adopted
under the Securities Act.
REGISTRATION RIGHTS
Pursuant to the Stockholders' Agreement, certain of the Company's
stockholders have been granted piggyback registration rights with respect to
Common Stock owned by such stockholders. Such piggyback registration rights
may be exercised by such stockholders, subject to the 90-day lock-up period
described under "Underwriting," on each occasion after the offering that the
Company proposes to register any public offering of shares of its capital
stock under the Securities Act (other than with respect to a registration of
(i) securities to be offered and sold by the Company pursuant to an employee
benefit plan, dividend or reinvestment plan, or other similar plan, (ii) debt
securities of the Company, (iii) preferred stock of the Company or (iv)
securities for the purpose of consummating any acquisition by the Company). In
addition, the Company has granted similar piggyback registration rights with
respect to 189,189 shares issued as a portion of the consideration for the IAT
Acquisition.
In addition to such piggyback registration rights, pursuant to certain
Common Stock Purchase Agreements between the Company and certain stockholders,
subject to certain conditions, stockholders owning certain shares of Common
Stock have the right, exercisable on two occasions after January 4, 2001, to
require the Company to register under the Securities Act up to 100% of such
shares of Common Stock.
Upon the consummation of the offering, there will be 4,237,507 shares of
Common Stock (3,637,507 shares if the Underwriters' over-allotment option is
exercised in full) subject to either piggyback or demand registration rights.
The Company is required to bear substantially all expenses of all such
registrations, except for underwriting discounts or commissions and fees and
disbursements of counsel for any stockholder; provided, however, the Company
is required to pay the reasonable fees and disbursements of one counsel for
all holders of Common Stock subject to demand registration rights.
The Company has reserved an aggregate of 1,574,000 shares of Common Stock
for issuance pursuant to the 1995 Plan, the 1996 Plan and the QSP Plan
(collectively, the "Plans"). As of the date hereof, the Company has issued
options to purchase an aggregate of 920,590 shares of Common Stock under the
1995 Plan and the 1996 Plan, of which options for 40,500 shares have been
exercised. To the extent not held by affiliates or subject to a lock-up
agreement, shares of Common Stock issued under the Plans will be available for
sale in the public market without restriction. See "Management--Equity
Participation Plans," "Management--Employee Qualified Stock-Purchase Plan."
RULE 144
In general, Rule 144, as currently in effect, provides that a person (or
persons whose sales are aggregated) who is an affiliate of the Company or who
has beneficially owned shares which are issued and sold in reliance upon
exemptions from registration under the Securities Act ("Restricted Shares")
for at least one year is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent (1%) of the
then outstanding shares of Common Stock (beginning on the 91st day immediately
after this offering) or the average weekly trading volume in the Common Stock
during the four calendar weeks preceding the filing of a notice of intent to
sell. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not deemed to have
been an "affiliate" of the Company at any time during the three months
preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, would be entitled to sell such shares under Rule 144(k)
without regard to volume limitations, manner-of-sale provisions, notice
requirements or the availability of current public information about the
Company. The Company, the Selling Stockholders, the
57
<PAGE>
Company's directors and executive officers and certain of the Company's other
present stockholders have, subject to certain exceptions in the case of the
Company, agreed that they will not, directly or indirectly, offer, sell,
contract to sell or otherwise dispose of or transfer any shares of capital
stock of the Company, or any security convertible into, or exercisable or
exchangeable for, such capital stock, for a period of 90 days after the date
of this Prospectus, without the prior written consent of William Blair &
Company, L.L.C. See "Underwriting."
No predictions can be made as to the effect, if any, that sales of Common
Stock under Rule 144, pursuant to a registration statement or otherwise, or
the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of Common Stock (including shares issued upon the exercise of stock options)
in the public market, or the perception that such sales could occur, could
adversely affect the prevailing market price and could impair the Company's
future ability to raise capital through an offering of its equity securities.
See "Risk Factors--Shares Eligible for Future Sale; Registration Rights."
58
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom William Blair &
Company, L.L.C., Morgan Stanley & Co. Incorporated and Donaldson, Lufkin &
Jenrette Securities Corporation are acting as Representatives, have severally
agreed, subject to the terms and conditions contained in the Underwriting
Agreement by and among the Company, the Selling Stockholders and the
Underwriters, to purchase from the Company and the Selling Stockholders the
aggregate number of shares of Common Stock set forth below opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
William Blair & Company, L.L.C. ...................................
Morgan Stanley & Co. Incorporated..................................
Donaldson, Lufkin & Jenrette Securities Corporation................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby (other than those
subject to the over-allotment option) if any are purchased.
The Underwriters, through their Representatives, have advised the Company
and the Selling Stockholders that they propose to offer the Common Stock to
the public initially at the offering price set forth on the cover page of this
Prospectus and to selected dealers at a price less a concession of not more
than $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. The
public offering price and concessions and reallowances to dealers may in the
future be changed by the Representatives.
Certain Selling Stockholders have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
additional 600,000 shares of Common Stock, to cover over-allotments, at the
same price per share to be paid by the Underwriters for the other shares
offered hereby. To the extent such option is exercised, each Underwriter will
be committed to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may exercise the
option only for the purpose of covering over-allotments, if any, made in
connection with this offering.
The Company, the Selling Stockholders, the Company's directors and executive
officers and certain of the Company's other current stockholders have agreed
that they will not, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of or transfer any capital stock of the Company, or any
security convertible into, or exercisable or exchangeable for, such capital
stock, for a period of 90 days after the date of this Prospectus without the
prior written consent of William Blair & Company, L.L.C., which may be granted
or withheld in their sole discretion, except for the Common Stock offered
hereby and, with respect to the Company, except for the grant of stock options
and purchase rights to employees of the Company under the 1995 Plan, the 1996
Plan and the QSP Plan, the issuance of shares upon the conversion or exercise
of outstanding options and warrants, the registration of the shares of Common
Stock underlying the QSP Plan and the issuance of shares in connection with
the Foxx and Central States acquisitions. See "Shares Eligible for Future
Sale."
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Exchange Act, certain persons participating in the offering may
engage in transactions that may stabilize, maintain or otherwise affect the
market price of the Common Stock, including stablizing bids, syndicate
covering transactions or the imposition of penalty bids. A "stabilizing bid"
is a bid for, or the purchase of, the Common Stock on behalf of
59
<PAGE>
the Underwriters for the purpose of stabilizing or maintaining the price of
the Common Stock. A "syndicate covering transaction" is a bid for, or the
purchase of, the Common Stock on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the managing underwriter to reclaim
the selling concession otherwise accruing to an Underwriter or selling group
member in connection with the offering if the Common Stock originally sold by
such Underwriter or selling group member is purchased by the Underwriters in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or selling group member. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, once commenced, may be discontinued at any time.
One or more of the Underwriters currently act as market makers for the
Common Stock and may engage in "passive market making" in such securities on
the Nasdaq National Market in accordance with Rule 103 of Regulation M under
the Exchange Act. Rule 103 permits, upon the satisfaction of certain
conditions, underwriters participating in a distribution that are also Nasdaq
market makers in the security being distributed to engage in limited market
making transactions during the period when Rule 103 would otherwise prohibit
such activity. Rule 103 prohibits underwriters engaged in passive market
making generally from entering a bid or effecting a purchase price that
exceeds the highest bid for those securities displayed on the Nasdaq National
Market by a market maker that is not participating in the distribution. Under
Rule 103, each underwriter engaged in passive market making is subject to a
daily net purchase limitation equal to the greater of (i) 30% of such entity's
average daily trading volume during the two full calendar months immediately
preceding, or any 60 consecutive calendar days ending within the ten calendar
days preceding, the date of the filing of the registration statement under the
Securities Act pertaining to the security to be distributed or (ii) 200 shares
of common stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters in connection with this offering will be passed upon for the Company
by Latham & Watkins, Los Angeles, California. Certain partners of Latham &
Watkins, members of their families, related persons and others have an
indirect interest in, through a limited partnership, less than 1% of the
Common Stock. Such persons do not have the power to vote or dispose of such
shares. Certain legal matters in connection with this offering will be passed
upon for the Underwriters by Sidley & Austin, Chicago, Illinois.
EXPERTS
The consolidated financial statements and financial statement schedules of
Rental Service Corporation as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
The financial statements of Brute Equipment Co. d/b/a Foxx Hy-Reach, Inc. as
of December 31, 1995 and 1996 and for the years then ended, appearing in this
Prospectus and Registration Statement have been audited by McGladrey & Pullen,
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The combined financial statements of Industrial Air Tool as of March 31,
1996 and 1997 and for the years then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
60
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, certain items of which are omitted in
accordance with the rules and regulations of the Commission. For further
information pertaining to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto and the financial statements, notes and schedules filed as a part
thereof. The Company is also subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. The Registration Statement and reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; at its Chicago Regional Office, 500 W. Madison
Street, 14th Floor, Chicago, Illinois 60661; and at its New York Regional
Office, Seven World Trade Center, 13th Floor, New York, New York 10048. Copies
of such material can be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Company's Common Stock is listed on the National Association of
Securities Dealers Automated Quotation National Market System. Consequently,
reports, proxy statements and other information concerning the Company may
also be inspected at the offices of the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. Electronic
filings made through the Electronic Data Gathering Analysis and Retrieval
System are publicly available through the Commission's Website
(http://www.sec.gov).
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statements of Rental Service Corporation
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets--December 31, 1995 and 1996, and March 31,
1997 (unaudited)....................................................... F-3
Consolidated Statements of Operations--for the years ended December 31,
1994, 1995 and 1996, and for the three months ended March 31, 1996 and
1997 (unaudited)....................................................... F-4
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity (Deficit)--for the years ended December 31, 1994,
1995 and 1996, and for the three months ended March 31, 1996 and 1997
(unaudited)............................................................ F-5
Consolidated Statements of Cash Flows--for the years ended December 31,
1994, 1995 and 1996, and for the three months ended March 31, 1997
(unaudited)............................................................ F-6
Notes to Consolidated Financial Statements--December 31, 1996 and March
31, 1997 (unaudited)................................................... F-7
Consolidated Financial Statements of Acme Holdings Inc.
Report of Independent Auditors.......................................... F-23
Consolidated Balance Sheets--December 31, 1993 and 1994, and June 30,
1995 (unaudited)....................................................... F-24
Consolidated Statements of Operations--for the years ended December 31,
1992, 1993 and 1994, and for the six months ended June 30, 1994 and
1995 (unaudited)....................................................... F-25
Consolidated Statements of Shareholders' Deficit--for the years ended
December 31, 1992, 1993 and 1994, and for the six months ended June 30,
1995 (unaudited)....................................................... F-26
Consolidated Statements of Cash Flows--for the years ended December 31,
1992, 1993 and 1994, and for the six months ended June 30, 1994 and
1995 (unaudited)....................................................... F-27
Notes to Consolidated Financial Statements--December 31, 1994, and June
30, 1995 (unaudited)................................................... F-29
Combined Financial Statements of Industrial Air Tool
Report of Independent Auditors.......................................... F-42
Combined Balance Sheets--March 31, 1996 and 1997........................ F-43
Combined Statements of Operations--for the years ended March 31, 1996
and 1997............................................................... F-44
Combined Statements of Redeemable Stock and Other Stockholders' and
Partners' Equity--for the years ended March 31, 1996 and 1997.......... F-45
Combined Statements of Cash Flows--for the years ended March 31, 1996
and 1997............................................................... F-46
Notes to Combined Financial Statements--March 31, 1997.................. F-47
Financial Statements of Brute Equipment Co. (d/b/a Foxx Hy-Reach)
Independent Auditor's Reports........................................... F-52
Balance Sheets--December 31, 1995 and 1996, and March 31, 1997
(unaudited)............................................................ F-53
Statements of Operations--for the years ended December 31, 1995 and
1996, and for the three months ended March 31, 1996 and 1997
(unaudited)............................................................ F-54
Statements of Stockholders' Equity--for the years ended December 31,
1995 and 1996, and for the three months ended March 31, 1997
(unaudited)............................................................ F-55
Statements of Cash Flows--for the years ended December 31, 1995 and
1996, and for the three months ended March 31, 1996 and 1997
(unaudited)............................................................ F-56
Notes to Financial Statements--December 31, 1996, and March 31, 1997
(unaudited)............................................................ F-57
</TABLE>
F-1
<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-2
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
MARCH 31,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents............. $ 1,455,000 $ 1,452,000 $ 1,578,000
Accounts receivable, net of allowance
for doubtful accounts of $1,791,000
and $2,165,000 at December 31, 1995
and 1996, respectively and $2,811,000
at March 31, 1997.................... 14,427,000 20,856,000 22,844,000
Other receivables and prepaid expense. 2,178,000 3,170,000 2,850,000
Income tax receivable................. -- 1,563,000 1,524,000
Parts and supplies inventories, net of
reserve for obsolescence of $603,000
and $782,000 at December 31, 1995 and
1996, respectively and $883,000 at
March 31, 1997....................... 5,997,000 10,099,000 10,515,000
Assets held for sale (Note 2)......... 16,054,000 -- --
Deferred taxes (Note 10).............. 7,310,000 8,645,000 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 and $29,420,000 at March
31, 1997 (Notes 5 and 8)............. 52,818,000 116,921,000 155,395,000
Operating property and equipment, at
cost, net (Note 3)................. 10,629,000 20,043,000 20,764,000
Intangible assets, net (Note 4)....... 24,154,000 34,801,000 41,048,000
Other assets, primarily deferred
financing costs, net............... 2,810,000 1,383,000 2,380,000
------------ ------------ ------------
$137,832,000 $218,933,000 $267,543,000
============ ============ ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED
STOCK, AND COMMON STOCKHOLDERS' EQUITY
- --------------------------------------
<S> <C> <C> <C>
Accounts payable...................... $ 10,185,000 $ 20,302,000 $ 33,265,000
Payroll and other accrued expenses.... 19,839,000 21,540,000 21,389,000
Accrued interest payable.............. 771,000 514,000 742,000
Income taxes payable (Note 10)........ 220,000 48,000 939,000
Deferred taxes (Note 10).............. 9,815,000 12,863,000 12,863,000
Bank debt and long term obligations
(Note 5)........................... 67,910,000 68,526,000 101,569,000
Obligations under capital leases (Note
8)................................. 645,000 68,000 55,000
------------ ------------ ------------
Total liabilities..................... 109,385,000 123,861,000 170,822,000
------------ ------------ ------------
Commitments and contingencies (Notes
5, 8 and 12)
Redeemable preferred stock,
cumulative, $.01 par value (Note
6):
Authorized shares--350,000
Issued and outstanding shares--
244,805 and none at December 31,
1995 and 1996, respectively and
none at March 31, 1997............. 28,401,000 -- --
Common stockholders' equity (Note 6):
Preferred stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--none
-- -- --
Common stock, $.01 par value:
Authorized shares--20,000,000
Issued and outstanding shares--
4,247,730 and 11,376,378 at
December 31, 1995 and 1996,
respectively and 11,376,378 at
March 31, 1997.................... 42,000 114,000 114,000
Additional paid-in capital.......... 40,000 93,917,000 93,917,000
Retained earnings (deficit)........... (36,000) 1,041,000 2,690,000
------------ ------------ ------------
Total common stockholders' equity..... 46,000 95,072,000 96,721,000
------------ ------------ ------------
$137,832,000 $218,933,000 $267,543,000
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals..... $27,775,000 $47,170,000 $ 94,218,000 $19,656,000 $27,527,000
Sales of parts,
supplies and
equipment............ 14,040,000 18,747,000 34,136,000 7,541,000 13,782,000
----------- ----------- ------------ ----------- -----------
Total revenues.......... 41,815,000 65,917,000 128,354,000 27,197,000 41,309,000
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation......... 16,284,000 27,854,000 55,202,000 12,449,000 14,316,000
Depreciation,
equipment rentals.... 4,020,000 7,691,000 17,840,000 3,633,000 6,306,000
Cost of sales of
parts, supplies and
equipment............ 10,298,000 12,617,000 24,070,000 5,067,000 9,709,000
----------- ----------- ------------ ----------- -----------
Total cost of revenues.. 30,602,000 48,162,000 97,112,000 21,149,000 30,331,000
----------- ----------- ------------ ----------- -----------
Gross profit............ 11,213,000 17,755,000 31,242,000 6,048,000 10,978,000
Selling, general and
administrative expense. 4,747,000 6,421,000 12,254,000 2,734,000 3,784,000
Depreciation and
amortization, excluding
equipment rental
depreciation........... 504,000 1,186,000 2,835,000 571,000 1,068,000
Amortization of
intangibles............ 2,078,000 718,000 2,379,000 561,000 624,000
----------- ----------- ------------ ----------- -----------
Operating income........ 3,884,000 9,430,000 13,774,000 2,182,000 5,502,000
Interest expense, net... 731,000 3,314,000 7,063,000 1,639,000 1,597,000
----------- ----------- ------------ ----------- -----------
Income before income
taxes and extraordinary
items.................. 3,153,000 6,116,000 6,711,000 543,000 3,905,000
Provision for income
taxes (Note 10)........ 1,177,000 2,401,000 2,722,000 213,000 1,722,000
----------- ----------- ------------ ----------- -----------
Income before
extraordinary items.... 1,976,000 3,715,000 3,989,000 330,000 2,183,000
Extraordinary items,
loss on extinguishment
of debt less applicable
income tax benefit of
$305,000, $822,000 and
$386,000 in 1995, 1996
and the three months
ended March 31, 1997,
respectively (Note 5).. -- 478,000 1,269,000 -- 534,000
----------- ----------- ------------ ----------- -----------
Net income.............. 1,976,000 3,237,000 2,720,000 330,000 1,649,000
Redeemable preferred
stock accretion........ 1,646,000 1,717,000 1,643,000 554,000 --
----------- ----------- ------------ ----------- -----------
Net income (loss)
available to common
stockholders........... $ 330,000 $ 1,520,000 $ 1,077,000 $ (224,000) $ 1,649,000
=========== =========== ============ =========== ===========
Earnings (loss) per
common and common
equivalent share:
Income (loss) before
extraordinary items.. $ .06 $ .39 $ .33 $ (.04) $ .19
Extraordinary items... -- (.09) (.18) -- (.05)
----------- ----------- ------------ ----------- -----------
Net income (loss)....... $ .06 $ .30 $ .15 $ (.04) $ .14
=========== =========== ============ =========== ===========
Weighted average common
and common equivalent
shares................. 5,427,728 5,087,790 7,218,041 5,506,756 11,493,273
=========== =========== ============ =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
REDEEMABLE PREFERRED STOCK COMMON STOCK
----------------------------------- -------------------------------
ADDITIONAL RETAINED
TREASURY TREASURY PAID-IN EARNINGS
SHARES AMOUNT STOCK SHARES AMOUNT STOCK CAPITAL (DEFICIT) TOTAL
-------- ------------ ----------- ---------- -------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ 253,475 $ 25,956,000 $ -- 4,675,320 $ 47,000 $ -- $ 52,000 $(1,380,000) $(1,281,000)
Issuance of
preferred
stock.......... 2,586 259,000 -- -- -- -- -- -- --
Purchase of
treasury stock. -- -- (1,177,000) -- -- (523,000) -- -- (523,000)
Redeemable
preferred stock
accretion...... -- 1,646,000 -- -- -- -- -- (1,646,000) (1,646,000)
Net income...... -- -- -- -- -- -- -- 1,976,000 1,976,000
-------- ------------ ----------- ---------- -------- --------- ----------- ----------- -----------
Balance at
December 31,
1994............ 256,061 27,861,000 (1,177,000) 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. (11,256) (1,177,000) 1,177,000 (706,275) (7,000) 523,000 (10,000) (506,000) --
Redeemable
preferred stock
accretion...... -- 1,717,000 -- -- -- -- -- (1,717,000) (1,717,000)
Net income...... -- -- -- -- -- -- -- 3,237,000 3,237,000
-------- ------------ ----------- ---------- -------- --------- ----------- ----------- -----------
Balance at
December 31,
1995............ 244,805 28,401,000 -- 4,247,730 42,000 -- 40,000 (36,000) 46,000
Issuance of
preferred
stock.......... 75,000 7,500,000 -- -- -- -- -- -- --
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.......... (319,805) (37,874,000) -- -- -- -- -- -- --
Preferred stock
adjustment..... -- 330,000 -- -- -- -- (330,000) -- (330,000)
Repurchase of
common stock
warrants....... -- -- -- -- -- -- (945,000) -- (945,000)
Redeemable
preferred stock
accretion...... -- 1,643,000 -- -- -- -- -- (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
Net income
(unaudited).... -- -- -- -- -- -- -- 1,649,000 1,649,000
-------- ------------ ----------- ---------- -------- --------- ----------- ----------- -----------
Balance at March
31, 1997
(unaudited)..... -- $ -- $ -- 11,376,378 $114,000 $ -- $93,917,000 $ 2,690,000 $96,721,000
======== ============ =========== ========== ======== ========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- --------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 1,976,000 $ 3,237,000 $ 2,720,000 $ 330,000 $ 1,649,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 6,602,000 9,595,000 23,054,000 4,765,000 7,998,000
Extraordinary item..... -- 478,000 1,269,000 -- 534,000
Interest paid in kind.. -- 710,000 1,706,000 576,000 --
Provision for losses
on accounts
receivable............ 621,000 1,040,000 1,692,000 330,000 446,000
Gain on sale of rental
equipment............. (920,000) (1,948,000) (3,729,000) (1,179,000) (1,766,000)
Changes in operating
assets and
liabilities, net of
effect of business
acquisitions:
Accounts receivable.. (2,834,000) (3,346,000) (5,725,000) 233,000 (1,677,000)
Other receivables and
prepaid expenses.... 200,000 (1,182,000) (1,703,000) (2,435,000) 341,000
Income tax
receivable.......... -- -- (1,563,000) -- 39,000
Intangible assets and
other assets........ (192,000) 1,351,000 379,000 (778,000) 68,000
Parts and supplies
inventories......... (469,000) (1,403,000) (2,444,000) (344,000) 88,000
Accounts payable..... 1,599,000 1,866,000 10,077,000 8,323,000 12,963,000
Payroll and other
accrued expenses and
related party
payables............ 410,000 (1,000,000) (3,523,000) (82,000) (1,485,000)
Accrued interest
payable............. (18,000) 737,000 (257,000) (4,000) 227,000
Assets held for sale. -- 2,652,000 -- -- --
Income taxes payable. 211,000 (375,000) (172,000) 94,000 891,000
Deferred taxes, net.. 223,000 132,000 1,713,000 1,000 --
------------ ------------ ------------- ------------ ------------
Net cash provided by
operating activities... 7,409,000 12,544,000 23,494,000 9,830,000 20,316,000
INVESTING ACTIVITIES
Acquisitions of rental
operations, net of cash
acquired............... (20,000) (42,057,000) (27,270,000) (11,997,000) (12,015,000)
Cash purchases of rental
equipment and operating
property and equipment. (17,043,000) (23,632,000) (86,842,000) (18,933,000) (44,119,000)
Proceeds from sale of
used equipment......... 3,240,000 4,126,000 12,695,000 2,703,000 4,617,000
Proceeds from (additions
to) assets held for
sale................... -- -- 16,668,000 (1,442,000) --
------------ ------------ ------------- ------------ ------------
Net cash used in
investing activities... (13,823,000) (61,563,000) (84,749,000) (29,669,000) (51,517,000)
FINANCING ACTIVITIES
Proceeds from bank debt. 20,557,000 114,826,000 225,335,000 55,154,000 71,400,000
Payments on bank debt... (11,125,000) (69,108,000) (213,511,000) (49,815,000) (38,262,000)
Payments of debt
issuance costs......... (400,000) (2,024,000) (984,000) -- (1,702,000)
Proceeds from long term
obligations............ -- 10,000,000 -- -- --
Payment on long term
obligations............ (894,000) (3,597,000) (12,916,000) (100,000) (95,000)
Payment on capital lease
obligations............ (197,000) (276,000) (577,000) (264,000) (14,000)
Purchase of treasury
stock--preferred....... (1,177,000) -- -- -- --
Purchase of treasury
stock--common.......... (523,000) -- -- -- --
Proceeds from issuance
of preferred stock..... 259,000 -- 7,500,000 7,500,000 --
Repurchase of preferred
stock.................. -- -- (37,874,000) -- --
Proceeds from issuance
common stock, net of
issuance costs......... -- -- 95,223,000 7,387,000 --
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 19,862,000 31,327,000
------------ ------------ ------------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 86,000 802,000 (3,000) 23,000 126,000
Cash and cash
equivalents at
beginning of period.... 567,000 653,000 1,455,000 1,455,000 1,452,000
------------ ------------ ------------- ------------ ------------
Cash and cash
equivalents at end of
period................. $ 653,000 $ 1,455,000 $ 1,452,000 $ 1,478,000 $ 1,578,000
============ ============ ============= ============ ============
Supplemental disclosure
of cash flow
information:
Cash paid for interest.. $ 749,000 $ 1,863,000 $ 5,614,000 $ 1,068,000 $ 1,369,000
Cash paid for income
taxes.................. $ 777,000 $ 1,545,000 $ 1,850,000 $ 53,000 $ 67,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND MARCH 31, 1997
(THE INFORMATION AS OF MARCH 31, 1997 AND FOR
THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Presentation
Rental Service Corporation (RSC or Company), a Delaware Corporation, was
formed in June 1993 when all of the outstanding preferred and common shares of
RSC Acquisition Corp. (RSC Acquisition) were exchanged for the same number,
class and par value of shares of RSC. RSC Acquisition was formed in July 1992.
The Company operates in a single industry segment: the short-term rental of
equipment, including ancillary sales of parts, supplies and equipment, through
a network of rental 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-7
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................ 3-7 years
Operating property and equipment............................ 3-27 years
Leasehold improvements...................................... Term of lease
</TABLE>
Rental equipment is depreciated to a salvage value of 10% of cost.
Amortization of assets under capital leases is included in depreciation
expense. Rental equipment costing less than $600 in 1994 and 1995 and less
than $400 in 1996 and 1997 is immediately expensed at the date of purchase.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the straight-
line method over their estimated useful lives of usually one to three years
for covenants not to compete, and 30 to 40 years for goodwill. The
recoverability of goodwill attributable to the Company's acquisitions is
analyzed annually based on actual and projected levels of profitability and
cash flows of the locations acquired on an undiscounted basis.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards 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, $1,050,000, $178,000 and $233,000 in advertising costs
during the years ended December 31, 1994, 1995 and 1996 and the three months
ended March 31, 1996 and 1997, respectively.
Debt Costs
Deferred financing costs are amortized using the straight-line method over
the lives of the related debt. Deferred financing costs are expensed in
connection with refinancings if there are substantive changes in the terms of
the related debt. Interest expense for the Company's increasing interest rate
Bank Note (see Note 5) was determined based on the average effective interest
rate payable over the period in which the debt was expected to be outstanding,
which was three years.
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
F-8
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and, accordingly, recognizes no compensation expense for stock option grants.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions located throughout the country in order to limit exposure to any
one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in the
Company's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers.
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of long-term debt is
determined using current applicable interest rates as of the balance sheet
date and approximates the carrying value of such debt because the underlying
instruments are at variable rates which are repriced frequently.
Interim Financial Statements
The accompanying consolidated balance sheet at March 31, 1997 and the
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity and cash flows for the three-month periods ended March
31, 1996 and 1997 are unaudited and have been prepared on the same basis as
the audited consolidated financial statements included herein. In the opinion
of management, such unaudited consolidated financial statements include all
adjustments necessary to present fairly the information set forth therein,
which consist solely of normal recurring adjustments. The results of
operations for such interim period are not necessarily indicative of results
for the full year.
Earnings (Loss) Per Share and Supplemental Earnings (Loss) Per Share
Earnings (loss) per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year. In accordance with the accounting rules of the Securities and Exchange
Commission common stock and stock options and warrants issued by the Company
in the twelve month period prior to the Company's initial public offering have
been included in the calculation of common and common equivalent shares as if
they were outstanding for all periods presented, computed using the treasury
stock method and the initial offering price, through the effective date of the
Company's initial public offering. Dilutive common stock equivalent shares
subsequent to the Company's initial public offering are computed using the
treasury stock method.
Supplementary pro forma net income per common and common equivalent share,
assuming the proceeds from the issuance of common shares in connection with
the initial public offering at the initial public offering 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.
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share, which is
required to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact is expected to result in no material change in earnings
(loss) per share (before or after extraordinary items) for the quarterly
periods ended March 31, 1997 and 1996.
F-9
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. BUSINESS ACQUISITIONS
A principal component of the Company's business strategy is to continue to
grow through acquisitions which augment its present operations as well as
enter into new geographic markets. In keeping with this strategy, the Company
has made several acquisitions of rental operations. These acquisitions have
been accounted for as purchases and, accordingly, the acquired tangible and
identifiable intangible assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition with any excess purchase
price reflected as goodwill in the accompanying consolidated financial
statements. The operations of the acquired businesses are included in the
consolidated statements of operations from the date of acquisition.
The following table sets forth, for the periods indicated, the net assets
acquired, liabilities assumed and cash purchase price for these acquisitions.
Certain 1997 acquisitions have been recorded based on preliminary estimates.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
----------------------------------- ENDED
1994 1995 1996 MARCH 31, 1997
-------- ------------ ----------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets acquired............ $113,000 $ 50,109,000 $20,316,000 $ 6,551,000
Goodwill and covenants not
to compete................ (91,000) 19,513,000 12,221,000 6,798,000
Less: liabilities assumed.. (2,000) (27,565,000) (5,267,000) (1,334,000)
-------- ------------ ----------- -----------
Cash purchase price........ $ 20,000 $ 42,057,000 $27,270,000 $12,015,000
======== ============ =========== ===========
Number of acquisitions..... 1 5 11 5
</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, THREE MONTHS
------------------------------------------ ENDED
1994 1995 1996 MARCH 31, 1997
----------- ------------ ------------ --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues.......... $85,712,000 $118,954,000 $194,120,000 $50,619,000
Income (loss) before
non-recurring and
extraordinary items.... (2,451,000) 1,660,000 2,123,000 2,024,000
Net income (loss)....... (2,451,000) 47,030,000 (a) 854,000 1,490,000
Earnings (loss) per
common and common
equivalent share:
Income (loss) before
non-recurring and
extraordinary items.. (.76) (.01) .29 .17
Net income (loss)..... (.76) 8.15 (a) .12 .13
</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-
F-10
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
$2,492,000 included $1,404,000 of allocated interest expense. The pre-tax
income during the period from September 12, 1995 through December 31, 1995 was
$508,000, which included allocated interest expense of $422,000 and a gain on
disposal of assets of $649,000, and was credited to the accrual. The pre-tax
loss during the year ended December 31, 1996 was $3,380,000, which included
allocated interest expense of $751,000 and a gain on disposal of assets of
$513,000, and was charged to the accrual. In 1996, the Company revised its
estimates of the operating cash outflows expected to be incurred as part of
the disposal of the California locations and accrued an additional $1,292,000,
which was recorded as an adjustment to goodwill. During 1996, the Company sold
or closed all of the California locations, and has a remaining balance in the
accrual of $912,000 at December 31, 1996. During the three months ended March
31, 1997, $249,000 was charged to the accrual, leaving a remaining balance of
$663,000 at March 31, 1997.
Effective March 1, 1997, the Company reached a definitive agreement, to
acquire all of the outstanding stock of Comtect, Inc. and subsidiaries d/b/a
Industrial Air Tool (IAT) for $32.6 million in cash and 189,189 shares of RSC
common stock. Up to an additional 108,108 shares of RSC common stock may be
paid to the sellers over a three year period if certain performance objectives
are met. IAT is a leading "on-site" small tool provider, rental management
company and maintenance, repair and operations (MRO) supplier and operates a
total of four locations in Texas and Louisiana. The transaction closed on
April 25, 1997, and IAT's balance sheet will be consolidated with the
Company's under the purchase method of accounting as of that date. This
acquisition is anticipated to result in $23.0 million in goodwill, which will
be amortized over 40 years. Pursuant to the acquisition agreement, the Company
assumed effective control of IAT's operations on March 1, 1997 and has
included IAT's revenues, costs and expenses from such date in its consolidated
statements of operations, net of related imputed purchase price adjustments.
The pro forma information above includes this acquisition as if it had
occurred as of the beginning of 1997 and 1996, respectively.
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment....... $ 7,010,000 $14,638,000 $15,914,000
Leasehold improvements.................. 1,284,000 2,695,000 2,844,000
Furniture, fixtures and computer
equipment.............................. 2,663,000 5,385,000 5,683,000
Land and building....................... 1,634,000 1,828,000 1,838,000
----------- ----------- -----------
Total................................... 12,591,000 24,546,000 26,279,000
Less: accumulated depreciation and
amortization........................... 1,962,000 4,503,000 5,515,000
----------- ----------- -----------
$10,629,000 $20,043,000 $20,764,000
=========== =========== ===========
</TABLE>
F-11
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Covenants not to compete................ $ 141,000 $ 2,281,000 $ 2,556,000
Goodwill................................ 24,685,000 34,766,000 41,289,000
----------- ----------- -----------
Total................................... 24,826,000 37,047,000 43,845,000
Less: accumulated amortization.......... 672,000 2,246,000 2,797,000
----------- ----------- -----------
$24,154,000 $34,801,000 $41,048,000
=========== =========== ===========
</TABLE>
The Company has entered into noncompetition agreements with the former
owners of certain acquired businesses. The agreements are generally for terms
of one to three years and prohibit the former owners from competing with the
Company in the business of renting equipment in certain counties located in
the area of the acquired business.
5. BANK DEBT AND LONG TERM OBLIGATIONS
Bank debt and long term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
$200,000,000 Revolving Line of Credit
(Revolver) with a bank, interest, at the
prime rate plus 0.5%, due monthly, or
Eurodollar rate plus 2.0%, due on
demand, at the Company's option,
principal due January 31, 2002. The
interest rate in effect at December 31,
1995 and 1996 and March 31, 1997 was
8.9%, 8.3%, and 7.6%, respectively...... $56,042,000 $67,867,000 $101,005,000
Note payable to bank (Bank Note)......... 10,710,000 -- --
Notes payable, interest at 8%, due in
aggregate monthly installments of $3,400
through 2008............................ 393,000 306,000 301,000
Equipment contracts payable, interest at
7-11%, payable in various monthly
installments through 1998,
collateralized by equipment............. 765,000 353,000 263,000
----------- ----------- ------------
$67,910,000 $68,526,000 $101,569,000
=========== =========== ============
</TABLE>
On January 31, 1997, the Company amended the Revolver to, among other
things, increase the availability to $200 million, decrease the interest rate
margins by 0.5%, increase the advance rates on eligible rental equipment to
100% and extend the maturity date to January 31, 2002. The total amount of
credit available under the Revolver is limited to a borrowing base equal to
the sum of (i) 85% of eligible accounts receivable of the Company's
subsidiaries and (ii) 100% of the value (lower of net book value or market) of
eligible rental equipment. The Revolver also contains provisions to annually
adjust the prime and eurodollar interest rate margins based on the Company's
achievement of specified interest coverage ratios. The obligation of the
lender to make 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
F-12
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investments; (v) engage in certain sales of assets; (vi) merge or consolidate
with or acquire another person or engage in other fundamental changes; (vii)
enter into leases; (viii) engage in certain transactions with affiliates; and
(ix) declare or pay dividends to RSC. As of December 31, 1996 and March 31,
1997, the Company was in compliance with all covenants of the Revolver, and
substantially all of the net consolidated assets of the Company were
restricted under the terms of the Revolver.
Borrowings under the Revolver are secured by all of the real and personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Revolver, and has granted liens on
substantially all of its assets (including the stock of its subsidiaries) to
secure such guaranty. The Revolver also restricts the Company from declaring
or paying dividends on its common stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Revolver. The Revolver includes a $2 million letter of credit facility,
with a fee equal to 2.75% of the face amount of letters of credit payable to
the lenders and other customary fees payable to the issuer of the letter of
credit. A commitment fee equal to 0.5% of the unused commitment, excluding the
face amount of all outstanding and undrawn letters of credit, is also payable
monthly in arrears.
The amounts outstanding under the Revolver at December 31, 1995 and 1996 and
March 31, 1997 were $56,042,000, $67,867,000, and $101,005,000, respectively,
with approximately $6,815,000 and $28,888,000, and $65,974,000 respectively,
available based on the borrowing base. Outstanding letters of credit totaled
$212,000, $0 and $0 at December 31, 1995 and 1996 and March 31, 1997,
respectively.
In connection with the amendment to the Revolver, in January 1997, the
Company wrote-off the related unamortized deferred financing costs and
recorded a loss on extinguishment of debt of $920,000, net of income taxes of
$386,000, which has been classified as an extraordinary item in the
accompanying consolidated statements of operations for the three months ended
March 31, 1997.
The Company utilized proceeds from its initial public offering in September
1996 to reduce the outstanding amounts under the Revolver by $37.7 million. In
connection with the implementation of an 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 for the year ended December 31, 1996.
The Company entered into a redeemable note and warrant purchase agreement
(Bank Note) on September 12, 1995 with a financial institution that provided
$10,000,000 of 13% senior secured notes due September 15, 2005. Interest,
compounded quarterly, for the first two years was to be paid in kind through
the issuance of additional notes, thereafter paid semi-annually in cash. The
principal amount of the Bank Note was to be increased by $1,000,000 on each of
the first three anniversaries, which was being accounted for as interest
expense. Additionally, the financial institution was issued warrants entitling
the purchase of 87,120 shares of common stock at a purchase price of $4.83 per
share (subject to adjustment) through September 15, 2005. On September 24,
1996, the Company repaid the Bank Note and repurchased the related warrants
for $13,000,000, utilizing proceeds from its initial public offering. This
repayment resulted in a reduction of additional paid-in capital of $945,000
and a gain on extinguishment of debt of $362,000, which has been classified as
an extraordinary item, net of income taxes of $142,000, in the accompanying
consolidated statements of operations for the year ended December 31, 1996.
In 1995, the Company paid off the borrowings under 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 for the year ended December 31, 1995.
F-13
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-14
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995 and 1996 and March 31, 1997, there were 144,787, 81,923
and 81,923 of these shares, respectively, which had not yet vested and were
subject to the Company's repurchase option at $.01 per share.
Stock Option Plan
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under 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 the Stock
Option Plan for Key Employees (1995 Plan) whereby under the plan officers,
directors, and key employees may be granted options to purchase the Company's
common stock at a price set by the option committee not to be less than 100%
of the fair market value of such shares on the date such option is granted,
further, not to exceed 110% of the fair market price on the date such option
is granted. If the Company's common stock is not publicly traded on an
exchange or not quoted on NASDAQ or a successor quotation system, the fair
market value established by the option committee acting in good faith may be
used for valuation. The aggregate number of such shares 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.
At March 31, 1997, 1,860 of these shares were available for future stock
option grants.
The options currently outstanding generally become exercisable in various
amounts over either a four or five year period; however, the vesting for
certain portions of the options may be accelerated if the employee and the
Company achieve certain performance targets, as determined by the Company's
option committee.
On February 5, 1997, the Company's stockholders approved and the Company
adopted the 1996 Equity Participation Plan of Rental Service Corporation (1996
Plan). The 1996 Plan authorizes the issuance of not more than 1,000,000 shares
of the Company's common stock (or the equivalent in other equity securities)
upon the exercise of options, stock appreciation rights and other awards, or
upon vesting of restricted or deferred stock awards (Awards). Under the 1996
Plan, awards may be granted to officers, non-employee directors, key employees
and consultants of the Company at a price not to be less than 100% of the fair
market price on the date such award is granted. On February 26, 1997, 425,150
options were granted under the 1996 Plan at an exercise price of $20.25 per
share. These options vest in equal installments over a four year period from
the date of grant. At March 31, 1997, 575,050 shares of Common Stock were
available for future Awards under the 1996 Plan.
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 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
F-15
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, and the three months ended
March 31, 1997 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--1995
Plan..................... 324,000 -- -- --
Grants--1995 Plan......... (129,690) 129,690 .01 .01
--------- ------- ------
Balance at December 31,
1995..................... 194,310 129,690 .01 .01
Grants--1995 Plan......... (209,190) 209,190 7.03-21.00 17.12
Exercises--1995 Plan...... -- (34,290) .01 .01
Forfeitures--1995 Plan.... 16,740 (16,740) .01 .01
Cancellations--1995 Plan.. -- (12,510) .01 .01
--------- ------- ------
Balance at December 31,
1996..................... 1,860 275,340 .01-21.00 13.01
Authorized Shares--1996
Plan..................... 1,000,000 -- -- --
Grants--1996 Plan......... (425,150) 425,150 20.25 20.25
Forfeitures--1996 Plan.... 200 (200) 20.25 20.25
Cancellations--1995 Plan.. -- (3,600) 14.11 14.11
--------- ------- ------
Balance at March 31, 1997. 576,910 696,690 $..01-21.00 $17.42
========= ======= ======
</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
1,000 hours of service during the plan year or six months of continuous
employment.
F-16
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Savings Plan is a defined contribution plan and provides for the Company
to make discretionary contributions as deemed appropriate by the
administrative committee. During the years ended December 31, 1994, 1995 and
1996 and the three months ended March 31, 1996 and 1997, the Company made
discretionary contributions totaling $0, $0, $150,000, $0 and $100,000,
respectively.
8. COMMITMENTS AND CONTINGENCIES
Capital Leases
The Company has capital lease obligations in connection with acquiring
certain rental equipment with aggregate costs and accumulated amortization of
$2,352,000 and $599,000, respectively, at December 31, 1995 and $107,000 and
$67,000, respectively, at December 31, 1996. Future minimum lease payments
under the capital leases and the present value of the minimum lease payments
as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $65,000
1998............................................................. 9,000
-------
Total minimum future lease payments.............................. 74,000
Less amount representing interest................................ 6,000
-------
Present value of net minimum future lease payments............... $68,000
=======
</TABLE>
Operating Leases
The Company leases certain operating premises and equipment under operating
leases. Substantially all of the property leases require the Company to pay
maintenance, insurance, taxes and certain other expenses in addition to the
stated rentals. Certain of the real property leases provide for escalation of
future rental payments based upon increases in the consumer price index.
Rental expense under such operating leases totaled $919,000, $2,397,000,
$3,081,000 $644,000 and $1,060,000 for the years ended December 31, 1994, 1995
and 1996 and the three months ended March 31, 1996 and 1997, respectively.
Future minimum lease payments, by year and in the aggregate, for
noncancellable operating leases with initial or remaining terms of one year or
more are as follows at December 31, 1996:
<TABLE>
<S> <C>
1997.......................................................... $ 4,084,000
1998.......................................................... 3,418,000
1999.......................................................... 2,864,000
2000.......................................................... 2,282,000
2001.......................................................... 1,575,000
Thereafter.................................................... 1,889,000
-----------
$16,112,000
===========
</TABLE>
Purchase Obligations
At December 31, 1996 and March 31, 1997, the Company was obligated, under
noncancellable purchase commitments, to purchase $28,145,000 and $17,753,000,
respectively 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-17
<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, $763,000 and $763,000 at December 31, 1995 and 1996 and
March 31, 1997, respectively, related to the removal of underground tanks at
the Company's locations. The actual costs of remediating these environmental
conditions may be different than that accrued by the Company due to the
difficulty in estimating such costs and due to potential changes in the status
of legislation and state reimbursement programs. The Company does not believe
that such removal and remediation will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash
flows.
Legal Proceedings
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal and financial liability of the Company with
respect to such pending litigation cannot be estimated with certainty, but the
Company believes, based on its examination of such matters, that such ultimate
liability will not have a material adverse effect on the business, or the
consolidated financial position, results of operations or cash flows of the
Company.
9. RELATED PARTY TRANSACTIONS
In July 1992, the Company entered into a five-year management agreement
(Management Agreement) with 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
F-18
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
rental equipment. Such fees paid to the stockholder during the years ended
December 31, 1994, 1995 and 1996 and the three months ended March 31, 1996 and
1997 totaled $0, $663,000, $388,000, $213,000 and $0, respectively. Effective
November 1, 1993, the stockholder also received a monitoring fee, which
equaled 1% of the aggregate amount of debt and equity interest of or by the
stockholder in the Company. Such fees paid to the stockholder during the years
ended December 31, 1994, 1995 and 1996 and three months ended March 31, 1996
and 1997 totaled $235,000, $235,000, $235,000, $59,000 and $0, respectively,
and are included in general and administrative expense. The Company's
obligation to pay such investment banking and monitoring fees terminated in
September 1996, in conjunction with the Company's initial public offering,
however, the Company, at its discretion, can utilize the stockholder's
investment banking services under the same fee arrangement.
On December 31, 1994, RSC Acquisition purchased 37,512 shares of common
stock and 675,000 shares of preferred stock of 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>
For interim periods, the provision for income taxes is based upon the
estimated income tax rate for the full fiscal year.
F-19
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
----------- ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities............................ $ 4,601,000 $ 3,310,000
Inventory reserve.............................. 559,000 677,000
Bad debt reserve............................... 1,161,000 1,245,000
Net operating loss carryforwards............... 7,189,000 6,563,000
Alternative minimum tax credit................. 1,658,000 1,590,000
Valuation allowance............................ (7,858,000) (4,740,000)
----------- ------------
7,310,000 8,645,000
Deferred tax liabilities:
Depreciation................................... (9,815,000) (12,863,000)
----------- ------------
Net deferred tax liability....................... $(2,505,000) $ (4,218,000)
=========== ============
</TABLE>
The Company's effective income tax rate varied from the statutory U.S.
federal income tax rate of 34% as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Expected provision using the statutory tax
rate...................................... $1,072,000 $2,079,000 $2,282,000
State taxes, net of federal tax benefit.... 172,000 290,000 204,000
Permanent differences...................... 80,000 213,000 341,000
Other...................................... (147,000) (181,000) (105,000)
---------- ---------- ----------
$1,177,000 $2,401,000 $2,722,000
========== ========== ==========
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $14,100,000 that expire in years
2005 through 2011. In addition the Company had combined state net operating
loss carryforwards of approximately $11,300,000 that expire in years 1997
through 2011. Approximately $8,500,000 of the federal carryforwards and
$1,100,000 of the state carryforwards are attributable to the Company's
September 12, 1995 acquisition of 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.
F-20
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowances increased $7,831,000 in 1995 and decreased
$3,118,000 in 1996. The decrease in the 1996 valuation allowance is
principally due to a $9,506,000 decrease in the estimated net operating loss
that is not expected to be realized from the Company's discontinued California
operations.
Any tax benefit resulting from the utilization of the net operating loss
carryforwards or the tax credit carryovers obtained in the acquisition of
Holdings will be accounted for as a reduction of the purchase price in the
periods they are realized.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues:
1996.................. $27,197,000 $31,267,000 $34,631,000 $35,259,000 $128,354,000
1995.................. 11,583,000 12,952,000 16,461,000 24,921,000 65,917,000
Gross profit:
1996.................. 6,048,000 7,758,000 8,318,000 9,118,000 31,242,000
1995.................. 3,240,000 3,644,000 4,234,000 6,637,000 17,755,000
Income before
extraordinary items:
1996.................. 330,000 897,000 952,000 1,810,000 3,989,000
1995.................. 899,000 1,019,000 1,021,000 776,000 3,715,000
Net income (loss):
1996.................. 330,000 897,000 (317,000) 1,810,000 2,720,000
1995.................. 899,000 1,019,000 543,000 776,000 3,237,000
Earnings (loss) per
common and common
equivalent share:
1996
Income (loss) before
extraordinary items.. $ (.04) $ .06 $ .07 $ .16 $ .33
Extraordinary items... -- -- (.20) -- (.18)
----------- ----------- ----------- ----------- ------------
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 (UNAUDITED)
On April 25, 1997, the Company reached a definitive agreement to acquire
substantially all of the assets of Brute Equipment Co. d/b/a Foxx Hy-Reach
Company (Foxx) for $32.7 million in cash and 284,250 shares of RSC common
stock, of which 284,250 shares will be paid to the Seller at closing, with the
remaining 51,216 shares to be issued one year from the date of closing. Up to
an additional 89,630 shares of RSC common stock may be paid to the seller over
a three year period if certain performance objectives are met. The purchase
price is subject to adjustment based on levels of accounts receivable,
inventory and equipment. Foxx specializes in the rental and sale of aerial
equipment to construction and industrial customers and operates a total of
four locations in Iowa and Illinois. The transaction is anticipated to close
by June 30, 1997, and will be recorded under the purchase method of
accounting. The closing is subject to a number of closing conditions,
including early termination or expiration of the waiting period under the
Hart-Scott-Rodino Act.
F-21
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 26, 1997, the Company reached a definitive agreement to acquire
substantially all of the assets of Central States Equipment, Inc. and
Equipment Lessors, Inc. (collectively, Central) for approximately
$18.0 million in cash and 204,867 shares of RSC common stock, of which 102,435
shares of RSC common stock will be paid to the sellers over a five year
period, and may be accelerated to three years if certain performance
objectives are met. Central specializes in the rental and sale of aerial
equipment, ladders and scaffolding and operates a total of four locations in
Kansas, Missouri and Oklahoma. The transaction is anticipated to close by June
30, 1997, and will be recorded under the purchase method of accounting. The
closing is subject to a number of closing conditions, including early
termination or expiration of the waiting period under the Hart-Scott-Rodino
Act.
On April 28, 1997, the Company's stockholders approved and the Company
adopted the Employee Qualified Stock Purchase Plan of Rental Service
Corporation (QSP Plan). Under the QSP Plan, the Company has reserved 250,000
shares of common stock for sale to employees. The QSP Plan allows eligible
employees of the Company to purchase shares of common stock at the lesser of
85% of the fair market value of such shares at the beginning of each
semiannual offering period or 85% of the fair market value of such shares on
the date of exercise of an installment of the purchase right. Purchases are
limited to 15% of an employee's eligible compensation, subject to a maximum
purchase of 1,500 shares in any semiannual offering period. The Stock Purchase
Plan is expected to commence on July 1, 1997.
On April 28, 1997, 173,500 options were granted under the 1996 Plan at an
exercise price of $18.00 per share. These options vest in equal installments
over a four year period from the date of grant.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Acme Holdings Inc.
We have audited the accompanying consolidated balance sheets of Acme
Holdings Inc. ("Holdings") as of December 31, 1993 and 1994, and the related
consolidated statements of operations, shareholders' deficit, and cash flows
for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Holdings' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Holdings at
December 31, 1993 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Holdings will continue as a going concern. Holdings has incurred recurring
losses and has a net capital deficiency. In addition, as more fully described
in Note 3, Holdings has not complied with certain covenants of loan agreements
and has not made an interest payment due on December 1, 1994. These conditions
raise substantial doubt about the ability of Acme Holdings Inc. to continue as
a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
As discussed in Note 9 to the consolidated financial statements, in 1993
Acme Holdings Inc. changed its method of accounting for income taxes.
/s/ ERNST & YOUNG LLP
Orange County, California
March 30, 1995
F-23
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
JUNE 30,
1993 1994 1995
------------ ------------ ------------
(UNAUDITED)
ASSETS (NOTE 3)
---------------
<S> <C> <C> <C>
Cash and cash equivalents (Note 1).. $ 599,000 $ 3,183,000 $ 1,627,000
Accounts receivable, net of
allowance for doubtful accounts of
$1,097,000 in 1993, $1,352,000 in
1994 and $1,786,000 in 1995........ 9,025,000 9,145,000 8,829,000
Other receivables................... 164,000 316,000 235,000
Receivables from related parties
(Note 7)........................... 220,000 138,000 298,000
Parts and supplies inventories (Note
1)................................. 1,453,000 1,180,000 1,099,000
Prepaid expenses.................... 609,000 585,000 897,000
Rental equipment, principally
machinery, at cost, net of
accumulated depreciation of
$32,515,000 in 1993, $32,576,000 in
1994 and $33,102,000 in 1995
(Notes 1, 3 and 6)................. 33,027,000 28,277,000 30,049,000
Operating property and equipment, at
cost, net of accumulated
depreciation of $3,505,000 in 1993,
$3,856,000 in 1994 and $4,019,000
in 1995 (Notes 1 and 3)............ 3,931,000 3,067,000 3,698,000
Goodwill, net of accumulated
amortization of $724,000 in 1993,
$869,000 in 1994 and $941,000 in
1995 (Note 1)...................... 3,646,000 3,501,000 3,429,000
Other assets, net (Notes 1 and 6)... 3,830,000 3,001,000 2,682,000
------------ ------------ ------------
$ 56,504,000 $ 52,393,000 $ 52,843,000
============ ============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS'
DEFICIT
-----------------------------
<S> <C> <C> <C>
Accounts payable.................... $ 3,369,000 $ 2,720,000 $ 3,238,000
Unfunded disbursements.............. 1,214,000 1,635,000 3,093,000
Payroll and other accrued expenses.. 7,240,000 8,804,000 8,339,000
Accrued interest payable............ 763,000 5,398,000 10,309,000
Income taxes payable (Note 9)....... 230,000 99,000 81,000
Deferred taxes based on income (Note
9)................................. 425,000 375,000 325,000
Obligations under capital leases
(Note 6)........................... 990,000 685,000 505,000
Senior Notes (Note 3)............... 77,566,000 77,618,000 77,644,000
Senior secured borrowings (Note 3).. 5,839,000 5,058,000 4,353,000
------------ ------------ ------------
Total liabilities................... 97,636,000 102,392,000 107,887,000
Commitments (Note 6)
Shareholders' deficit (Notes 1, 4
and 8):
Preferred stock, $1.00 par value:
Authorized, issued and
outstanding shares at
December 31, 1993 and 1994 and
June 30, 1995--3,000,000....... 3,000,000 3,000,000 3,000,000
Common stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--at
December 31, 1993 and 1994--
112,095 and 104,598, respectively
and 102,596 at June 30, 1995..... 1,000 1,000 1,000
Additional paid-in capital........ 724,000 724,000 724,000
Accumulated deficit............... (44,857,000) (53,724,000) (58,769,000)
------------ ------------ ------------
Total shareholders' deficit......... (41,132,000) (49,999,000) (55,044,000)
------------ ------------ ------------
$ 56,504,000 $ 52,393,000 $ 52,843,000
============ ============ ============
</TABLE>
See accompanying notes.
F-24
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
-------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals
(Note 1)............. $58,423,000 $ 55,504,000 $57,444,000 $28,296,000 $26,772,000
Sales of parts,
supplies and used
equipment............ 10,166,000 7,985,000 10,890,000 4,765,000 5,282,000
----------- ------------ ----------- ----------- -----------
Total revenues.......... 68,589,000 63,489,000 68,334,000 33,061,000 32,054,000
Costs and expenses:
Operating expenses.... 36,134,000 40,454,000 37,912,000 18,569,000 17,516,000
Cost of sales of
parts, supplies and
used equipment....... 7,074,000 6,087,000 8,188,000 3,565,000 3,912,000
General and
administrative
expense.............. 7,106,000 7,338,000 11,180,000 4,631,000 5,648,000
Depreciation and
amortization expense. 10,494,000 11,347,000 9,933,000 5,132,000 4,765,000
Restructure costs
(Note 2)............. -- 1,887,000 -- -- --
Provision for rental
equipment
retirements.......... -- 880,000 -- -- --
----------- ------------ ----------- ----------- -----------
Total costs and
expenses............... 60,808,000 67,993,000 67,213,000 31,897,000 31,841,000
----------- ------------ ----------- ----------- -----------
Operating income (loss). 7,781,000 (4,504,000) 1,121,000 1,164,000 213,000
Interest expense........ 8,422,000 9,279,000 9,927,000 4,897,000 5,198,000
----------- ------------ ----------- ----------- -----------
Loss before income
taxes.................. (641,000) (13,783,000) (8,806,000) (3,733,000) (4,985,000)
Provision for income
taxes (Note 9)......... 427,000 274,000 61,000 124,000 60,000
----------- ------------ ----------- ----------- -----------
Net loss................ $(1,068,000) $(14,057,000) $(8,867,000) $(3,857,000) $(5,045,000)
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ---------- ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1991...... -- $ -- 111,111 $1,000 $724,000 $(29,732,000) $(29,007,000)
Net loss................ -- -- -- -- -- (1,068,000) (1,068,000)
Issuance of preferred
stock, $1.00 par value. 3,000,000 3,000,000 -- -- -- -- 3,000,000
--------- ---------- ------- ------ -------- ------------ ------------
Balance at
December 31, 1992...... 3,000,000 3,000,000 111,111 1,000 724,000 (30,800,000) (27,075,000)
Net loss................ -- -- -- -- -- (14,057,000) (14,057,000)
Issuance of common
stock, $.01 par value.. -- -- 5,985 -- -- -- --
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4)..................... -- -- (5,001) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at December 31,
1993................... 3,000,000 3,000,000 112,095 1,000 724,000 (44,857,000) (41,132,000)
Net loss................ -- -- -- -- -- (8,867,000) (8,867,000)
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4)..................... -- -- (7,497) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at December 31,
1994................... 3,000,000 3,000,000 104,598 1,000 724,000 (53,724,000) (49,999,000)
--------- ---------- ------- ------ -------- ------------ ------------
Net loss (unaudited).... -- -- -- -- -- (5,045,000) (5,045,000)
Forfeiture of common
shares under Restricted
Stock Agreement (Note
4) (unaudited)......... -- -- (2,002) -- -- -- --
--------- ---------- ------- ------ -------- ------------ ------------
Balance at June 30, 1995
(unaudited)............ 3,000,000 $3,000,000 102,596 $1,000 $724,000 $(58,769,000) $(55,044,000)
========= ========== ======= ====== ======== ============ ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(1,068,000) $(14,057,000) $(8,867,000) $(3,857,000) $(5,045,000)
Adjustments to reconcile
net loss to net cash
provided by operating
activities:
Depreciation and
amortization......... 10,327,000 11,394,000 9,985,000 5,157,000 4,792,000
Interest payable
financed through
borrowings........... 2,648,000 421,000 -- -- --
Provision for doubtful
accounts............. 726,000 1,252,000 816,000 400,000 434,000
(Gain) loss on sale of
equipment............ (409,000) 1,666,000 (679,000) (230,000) (333,000)
Increase (decrease) in
deferred taxes....... 233,000 (26,000) (50,000) -- --
Write-off of deferred
financing fees....... -- 329,000 -- -- --
Changes in operating
assets:
(Increase) decrease
in accounts
receivable......... (2,307,000) 51,000 (936,000) (35,000) (119,000)
Decrease in income
tax refund
receivable......... 211,000 -- -- -- --
Increase in other
and related party
receivables........ (153,000) (52,000) (70,000) (440,000) (79,000)
(Increase) decrease
in parts and
supplies
inventories........ (201,000) 367,000 273,000 193,000 81,000
(Increase) decrease
in prepaid
expenses........... (115,000) (97,000) 24,000 47,000 (313,000)
(Increase) decrease
in other assets.... 37,000 (97,000) 259,000 (198,000) 94,000
Increase (decrease)
in accounts payable
and unfunded
disbursements...... (405,000) 83,000 (228,000) (1,016,000) 1,976,000
Increase (decrease)
in payroll and
other accrued
expenses........... (1,205,000) 3,042,000 1,564,000 1,035,000 (471,000)
Increase (decrease)
in accrued interest
payable............ 1,219,000 (1,066,000) 4,635,000 27,000 4,911,000
Increase (decrease)
in income taxes
payable............ 349,000 (119,000) (131,000) (51,000) (66,000)
----------- ------------ ----------- ----------- -----------
Net cash provided by
operating activities... 9,887,000 3,091,000 6,595,000 1,032,000 5,862,000
INVESTING ACTIVITIES
Proceeds from sale of
rental equipment and
operating plant and
equipment.............. 1,500,000 2,194,000 5,122,000 1,866,000 2,204,000
Cash purchases of rental
equipment and operating
plant and equipment.... (3,287,000) (4,219,000) (5,653,000) (1,322,000) (8,737,000)
Financed purchases of
rental equipment and
operating equipment.... (3,163,000) (3,789,000) (2,394,000) (2,535,000) --
----------- ------------ ----------- ----------- -----------
Net cash used in
investing activities... (4,950,000) (5,814,000) (2,925,000) (1,991,000) (6,533,000)
</TABLE>
See accompanying notes.
F-27
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Borrowings under
revolving facility..... $ 71,325,000 $ 40,238,000 $ 55,078,000 $ 23,766,000 $ 36,321,000
Payments under revolving
facility............... (71,840,000) (53,336,000) (55,952,000) (22,182,000) (36,109,000)
Proceeds from secured
borrowings............. 3,015,000 2,765,000 2,242,000 2,409,000 --
Payments on secured
borrowings............. (9,387,000) (28,664,000) (2,149,000) (1,339,000) (917,000)
Payments on subordinated
debt................... -- (33,828,000) -- -- --
Payments of loan
origination costs...... (678,000) (3,074,000) -- -- --
Proceeds from capital
lease borrowings....... 148,000 1,024,000 152,000 126,000 --
Payments on capital
lease obligations...... (324,000) (648,000) (457,000) (266,000) (180,000)
Proceeds from sale of
preferred stock........ 3,000,000 -- -- -- --
Proceeds from issuance
of Senior Notes........ -- 77,544,000 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided (used)
in financing
activities............. (4,741,000) 2,021,000 (1,086,000) 2,514,000 (885,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 196,000 (702,000) 2,584,000 1,555,000 (1,556,000)
Cash and cash
equivalents at
beginning of period.... 1,105,000 1,301,000 599,000 599,000 3,183,000
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 1,301,000 $ 599,000 $ 3,183,000 $ 2,154,000 $ 1,627,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-28
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND JUNE 30, 1995
(THE INFORMATION AS OF JUNE 30, 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1994 AND 1995 IS UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Acme Holdings Inc., a Delaware corporation, and its wholly owned subsidiaries
(together, "Holdings") Acme Rents, Inc. ("Acme Rents"), Acme Duval Inc. ("Acme
Duval") and Acme Dixie Inc. ("Acme Dixie"). All material intercompany accounts
and transactions have been eliminated. Certain reclassifications have been
made to prior years' amounts to conform to the current year presentation.
Holdings operates in a single industry segment: the rental of equipment
through a network of rental center locations in California, Florida, Texas and
Louisiana, including sales of equipment, parts, supplies and used rental
equipment. The nature of Holdings' business is such that short-term
obligations are typically met by cash flow generated from long-term assets.
Consequently, consistent with industry practice, the accompanying balance
sheets are presented on an unclassified basis.
Interim Financial Statements
The accompanying consolidated balance sheet at June 30, 1995 and the
consolidated statements of operations, shareholders' deficit and cash flows
for the six-month periods ended June 30, 1994 and 1995 are unaudited and have
been prepared on the same basis as the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
consolidated financial statements include all adjustments necessary to present
fairly the information set forth therein, which consist solely of normal
recurring adjustments. The results of operations for such interim period are
not necessarily indicative of results for the full year.
Operations
During the years ended December 31, 1992, 1993 and 1994, and six months
ended June 30, 1994 and June 30, 1995 Holdings had operating income (loss) of
$7,781,000, ($4,504,000), $1,121,000, $1,164,000 and $213,000 and net loss of
$1,068,000, $14,057,000, $8,867,000, $3,857,000 and $5,045,000, respectively.
The losses are primarily attributable to the interest expense associated with
Holdings' debt level. The results for the year ended December 31, 1994 and six
months ended June 30, 1995 include expenses related to discussions with
holders of Holdings' 11.75% $78,000,000 Senior Notes due 2000 (the Senior
Notes) regarding a possible recapitalization (Note 3). In the fourth quarter
of 1993, Holdings implemented a restructuring plan and recorded a charge of
$1,887,000 (Note 2).
Effective March 31, 1992, Holdings sold 3,000,000 shares of newly authorized
preferred stock for $3,000,000 cash, and restructured the terms of its
financing agreements with its lenders as more fully described in Notes 3 and
4. The restructured agreements reduced the amounts available to borrow,
accelerated certain bank principal payments, deferred certain subordinated
debt interest payments and modified certain loan terms, conditions and
covenants. The restructured agreements were amended in March and April 1993 to
defer certain principal and interest payments and extend the term of the
revised covenant provisions.
In June 1993, Holdings issued the Senior Notes (Note 3). Proceeds from this
issuance were used to pay off all then existing bank debt, senior subordinated
notes payable and junior subordinated notes payable.
Holdings did not make an interest payment on the Senior Notes in the amount
of $4,582,500 which was due December 1, 1994 and another payment due June 1,
1995 for the accrued interest on the Senior Notes since
F-29
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 1, 1994. The failure to make such payments constitutes an event of
default under the terms of the indenture to the Senior Notes (Note 3).
Simultaneously with the offering of Senior Notes, Holdings established a
revolving credit facility (the New Credit Facility) with Citicorp USA Inc. and
other lenders (Citicorp). As of December 31, 1994 and June 30, 1995 Holdings
was not in compliance with the interest coverage ratio, fixed charges ratio,
leverage ratio, and capital expenditure limits in the covenant provisions
contained in the New Credit Facility agreement. In addition, Holdings' failure
to make the December 1, 1994 and June 1, 1995 interest payments on the Senior
Notes constitute an event of default under the terms of the New Credit
Facility. As of June 30, 1995, and July 12, 1995, Citicorp was making
discretionary advances to Holdings under the terms of the New Credit Facility
without any assurance that it would make such discretionary advances in the
future.
In August 1994, Holdings hired Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") as its financial advisor to help Holdings explore
alternatives for restructuring the Senior Notes and to identify long term
solutions to strengthen Holdings' financial position (Note 3). Also, in August
1994, certain holders of the Senior Notes formed an unofficial committee (the
"Unofficial Committee") to evaluate and respond to proposals.
On April 28, 1995, Holdings reached an agreement in principle with the
Unofficial Committee of the holders of the Senior Notes on a financial
restructuring of Holdings. On July 11, 1995, Holdings received and accepted
the requisite number of votes from holders of the Senior Notes approving the
contemplated financial restructuring plan. As part of the plan, on July 13,
1995, Holdings filed a prepackaged joint plan of reorganization involving
Holdings and its wholly-owned subsidiaries under Chapter 11 of the Bankruptcy
Code ("Chapter 11 Filing"). Simultaneous with the Chapter 11 Filing, the
Bankruptcy Court approved and Holdings established a $5,000,000 DIP Facility
with Citicorp USA, Inc. The DIP Facility paid off the $1,835,000 outstanding
under Holdings' New Credit Facility.
An order confirming the Plan was entered by the Court on August 24, 1995 and
the Plan became effective September 11, 1995 (the "Effective Date"). For each
$1,000.00 principal amount of Holdings' 11% Senior Notes, holders received a
total of $525.75 consisting of $497.81 as payment for the Senior Notes and
$28.94 as payment for the Releases solicited with the Plan. All of the notes
were canceled pursuant to the Plan. The Plan provided that the holders of
Holdings' Preferred Stock, Common Stock, warrants and all other options to
acquire Holdings' stock and securities claims were not entitled to receive or
retain any property under the Plan and were deemed to reject the Plan, which
was approved by the Court. All applicable shares were canceled, annulled and
extinguished on the Effective Date. The other classes of claims and interests
were unimpaired under the Plan. The Plan provided for the payment of 100% of
their claims in the ordinary course of business, with the exception of two
rejected real estate leases.
On September 12, 1995, Holdings was merged into a subsidiary of Rental
Service Corporation, and the Senior Notes, DIP Facility and certain equipment
financing were paid off.
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the consolidated statements of operations include
revenues earned on fuel sales and equipment delivery fees. Revenue from the
sale of parts, supplies and equipment are recorded at the time of delivery to
or pick-up by the customer.
F-30
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, supplies and
small- to medium-sized equipment for sale. All inventories are valued at the
lower of cost (first-in, first-out) or market.
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
for financial statement purposes primarily using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................. 3-7 years
Operating property and equipment............................. 3-7 years
Leasehold improvements....................................... Term of lease
</TABLE>
Rental equipment costing less than $400 is immediately expensed at date of
purchase.
Goodwill
Goodwill represents the excess of purchase price over fair market value of
net assets acquired and is amortized using the straight-line method over the
estimated periods to be benefited, ranging from five to thirty years. Included
in depreciation and amortization expense for the years ended December 31,
1992, 1993 and 1994 and the six months ended June 30, 1994 and 1995 is
$175,000, $167,000, $145,000, $73,000 and $72,000, respectively, of such
amortization expense. It is Holdings' policy to account for goodwill and all
other intangible assets at the lower of amortized cost or fair value. The
carrying value of goodwill is reviewed periodically (at least annually) based
on the undiscounted cash flows of the entity over the remaining amortization
period. Should this review indicate that goodwill will not be recoverable,
Holdings' carrying value of goodwill will be reduced by the estimated short
fall of undiscounted cash flows. In addition, management reviews the valuation
and amortization of other intangible assets, taking into consideration any
events and circumstances which might have diminished fair value.
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
JUNE 30,
1993 1994 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Recapitalization and deferred finance costs,
net of accumulated amortization of
$277,000, $726,000 and $955,000 in 1993,
1994 and 1995 respectively................. $2,813,000 $2,364,000 $2,135,000
Noncompetition and consulting agreements,
net of accumulated amortization of
$1,951,000 in 1993......................... 121,000 -- --
Other, primarily deposits................... 896,000 637,000 547,000
---------- ---------- ----------
$3,830,000 $3,001,000 $2,682,000
========== ========== ==========
</TABLE>
In March 1992 Holdings entered into revised credit agreements (Note 3), and
amended the terms of the subordinated notes (the Refinancing). Costs incurred
in connection with the Refinancing were being amortized over two years, the
estimated benefit period. In June 1993 Holdings issued Senior Notes (Note 3),
therefore unamortized costs of $320,000 in connection with the 1992
refinancing were written off in 1993. Noncompetition and consulting agreements
are amortized ratably over the terms of the agreements (two to five years).
Included
F-31
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in depreciation and amortization expense for the years ended December 31,
1992, 1993 and 1994 and the six months ended June 30, 1994 and 1995 is
$919,000, $1,217,000, $574,000, $344,000 and $229,000, respectively, of other
assets' amortization expense.
Statements of Cash Flows
For purposes of the statements of cash flows, Holdings considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Supplemental disclosures of cash flow information:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- -------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the
year for:
Interest.............. $4,550,000 $9,924,000 $5,240,000 $4,876,000 $297,000
Income taxes.......... 160,000 282,000 381,000 324,000 54,000
</TABLE>
Concentration of Credit Risk
Holdings extends credit to its commercial customers based on evaluations of
their financial condition and generally no collateral is required, although in
many cases mechanics' liens are filed to protect Holdings' interests. Holdings
has diversified its customer base by operating rental center locations in
California, Florida, Texas and Louisiana. Customers of the Texas and Louisiana
and certain California rental center locations are primarily large
petrochemical companies or the maintenance contractors working therein.
Holdings maintains adequate reserves for potential credit losses and such
losses have been within management's estimates.
2. RESTRUCTURING PLAN
In the fourth quarter of 1993, Holdings implemented a restructuring plan
which focused on critical aspects of its business. As a result, Holdings
recorded a charge to operations of $1,887,000. Costs applied against the
reserve in the fourth quarter were $466,000, resulting in a reserve balance at
December 31, 1993 of $1,421,000. The restructuring charge includes $356,000 of
noncash items and $1,531,000 of cash items, of which $112,000 of noncash items
and $354,000 of cash items were realized in 1993. The primary components of
the restructuring charge are as follows:
<TABLE>
<S> <C>
Closure and realignment of rental center locations (includes
future lease commitments and the write down to net realizable
value of owned locations)...................................... $1,398,000
Severance or relocation of 19 employees......................... 489,000
----------
$1,887,000
==========
</TABLE>
For the year ended December 31, 1994, Holdings applied $1,166,000 of costs
against the restructuring reserve of which $866,000 related to cash items and
$300,000 related to noncash items. As of December 31, 1994 and June 30, 1995,
the restructuring reserve was $255,000 and $195,000 respectively, which
related to the incremental costs associated with the sublet of the Hollywood,
California location, which is a future cash item.
F-32
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. FINANCING AGREEMENTS
Secured and unsecured debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
JUNE 30,
1993 1994 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Bank debt under revolving advances.... $ 1,919,000 $ 1,045,000 $ 1,257,000
Equipment contracts payable........... 3,920,000 4,013,000 3,096,000
----------- ----------- -----------
Senior secured borrowings............. 5,839,000 5,058,000 4,353,000
11.75% senior notes due 2000.......... 77,566,000 77,618,000 77,644,000
----------- ----------- -----------
$83,405,000 $82,676,000 $81,997,000
=========== =========== ===========
</TABLE>
Bank Debt
On March 30, 1992, Holdings entered into a revised credit agreement (the
1992 Credit Agreement) with its banks which consisted of $20 million available
($18 million at December 31, 1992) through a revolving line of credit, a $22
million acquisition note and an $8.9 million equipment note; the amounts
available decreased over the term of the agreement. Amounts outstanding under
the 1992 Credit Agreement bore interest, due monthly, at the bank's prime rate
plus 2.25% or LIBOR plus 3.50% (8.25% or 7.5%, effective rate at December 31,
1992), provided that not more than 80% of such amounts outstanding could be at
LIBOR plus 3.50%. The bank debt was paid off in June 1993 with proceeds from
the issuance of the Senior Notes.
Simultaneous with the issuance of Senior Notes in June 1993, Holdings
established the $10,000,000 New Credit Facility with a financial institution.
Holdings may borrow, on a revolving basis, up to the amount of a borrowing
base calculated as a percentage of eligible accounts receivable and a
percentage of resale inventory. The financial institution has a security
interest in all of Holdings' accounts receivable, inventory, and proceeds
thereof. The New Credit Facility is available for general corporate purposes,
including working capital requirements. Interest is due monthly at a rate of
1.25% over the financial institution's prime rate or 2.50% over the LIBOR rate
(9.75% or 9.0%, effective rate at December 31, 1994 and 10.25% or 9.0%,
effective rate at June 30, 1995), at Holdings' option. Availability on the
revolving facility and principal borrowings outstanding were $5,027,000 and
$1,045,000, respectively, at December 31, 1994 and $4,134,000 and $1,257,000,
respectively, at June 30, 1995. Commitment fees on the unused portion of the
revolving credit facility at the rate of one-half of 1% per annum, payable in
arrears on March 1, June 1, September 1, and December 1, are due commencing
September 1, 1993. Principal is due in its entirety on June 2, 1998, unless
accelerated prior thereto.
Up to $1,000,000 of letters of credit may be issued under the New Credit
Facility. Outstanding letters of credit totaled $114,000 and $14,000 at
December 31, 1994 and June 30, 1995, respectively. Fees at the rate of 2.5%
per annum are paid upon issuance of letters of credit.
Certain financial covenants and other affirmative and negative covenants are
required to be maintained as called for by the New Credit Facility agreement.
The financial covenants were amended in 1993 and again on March 29, 1994. As
of December 31, 1994 and June 30, 1995, Holdings was not in compliance with
the interest coverage ratio, fixed charges ratio, leverage ratio and capital
expenditure limits of the covenant provisions. Holdings' failure to make the
interest payment on the Senior Notes is also an event of default under the
terms of its New Credit Facility. As of March 15, 1995, Citicorp acknowledged
all the covenant non-compliance and defaults, did not waive such defaults and
reserved any and all rights and remedies under or with respect to the New
Credit Facility and the Loan Documents (as defined in the credit agreement)
resulting from such event of
F-33
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
default. Moreover, because the covenants are based on the trailing 12 months'
earnings, pursuant to Management's estimates for 1995, Holdings anticipates
not being in compliance with covenant provisions of the New Credit Facility at
the end of any quarter during 1995. As of June 30, 1995 and July 12, 1995,
Citicorp was making discretionary advances under the New Credit Facility
without assurance that it would make discretionary advances or issue a waiver
or continue to preserve their rights for any future defaults. If Holdings is
not able to obtain an advance or a waiver in the future and a default is
declared and demand is made for the payment of all amounts outstanding under
the New Credit Facility, Holdings does not believe it will be able to satisfy
such demand. In this event, Citicorp under the New Credit Facility would also
be entitled to exercise their rights and remedies under the related Security
Agreement, which include all rights and remedies of a secured party upon
default under the New York Uniform Commercial Code.
There can be no assurance that demand for payment of all amounts outstanding
under the New Credit Facility will not be made or how much longer Citicorp
will continue to make discretionary advances under the New Credit Facility or
that funds will otherwise be available under the New Credit Facility.
Subordinated Notes Payable
In 1990, Holdings issued $25 million in senior subordinated notes to a
financial institution for cash, and granted a warrant to purchase 27,778
shares of Holdings' common stock at an exercise price of $146.25 per share
(the Original Warrant); the Original Warrant was valued at $500,000. On April
1, 1993, the senior subordinated note agreement was amended to allow Holdings
to issue 13.5% senior subordinated interest notes (the Interest Notes) in lieu
of its July 15, 1991, January 15, 1992 and July 15, 1992 interest payments.
In conjunction with amending the senior subordinated note agreement and in
exchange for the Original Warrant, Holdings issued to the holder of the senior
subordinated notes a warrant to purchase 27,778 shares of Holdings' common
stock at an exercise price of $0.10 per share (Replacement Warrant) for the
Original Warrant. The exercise price of the Replacement Warrant was based on
the estimated fair market value of Holdings' common stock at the date of the
amendment as determined by Holdings' Board of Directors. If exercised, the
related shares would represent 21% of the outstanding shares of common stock
at December 31, 1994. The warrant is fully exercisable, in whole or in part,
and expires on January 15, 2000.
Holdings also had unsecured promissory notes payable, principally to its
shareholders, aggregating $2,250,000 at December 31, 1992 bearing simple
interest at 10% to 12%. The notes were subordinated to obligations outstanding
under the 1992 Credit Agreement with the bank and the amended senior
subordinated note agreement. In accordance with a subordination agreement
dated as of March 31, 1992, the principal and interest on the junior
subordinated notes could not be paid until all obligations outstanding under
the 1992 Credit Agreement and the amended senior subordinated note agreement
were paid in full.
All Senior and Junior subordinated notes payable were paid off with proceeds
from the issuance of the Senior Notes.
11.75% Senior Notes Due 2000
On June 1, 1993, Holdings sold $78,000,000 of 11.75% Senior Notes due 2000
less a discount of $455,000 in a public debt offering. Each of Holdings'
wholly owned subsidiaries guarantee the Senior Notes on a full, unconditional,
and joint and several basis. The Senior Notes are senior obligations of
Holdings and rank pari passu with all unsubordinated indebtedness of Holdings.
Proceeds of the Senior Notes were used for the repayment of all bank debt,
senior subordinated notes payable, and junior subordinated notes payable
outstanding at June 1, 1993. The Senior Notes are redeemable, in whole or in
part, at the option of Holdings, at any time on or after June 1, 1996, at
certain agreed upon redemption prices. In addition, until June 1, 1996, upon
an Initial
F-34
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Public Offering of Holdings' stock, up to 20% of the originally issued
aggregate principal amount of Senior Notes may be redeemed at the option of
Holdings at a certain agreed upon price. The indenture relating to the Senior
Notes (Indenture) contains certain covenants that, among other things, limit
the type and amount of additional indebtedness that may be incurred by
Holdings and certain of its subsidiaries and imposes limitation on
investments, loans, advances, the payment of dividends and the making of
certain other payments, the creation of liens, certain transactions with
affiliates and certain mergers.
Interest, at a rate of 11.75%, is due semiannually on June 1 and December 1.
The interest payments on the Senior Notes are in the amount of $4,582,500. To
date, Holdings has not made the interest payment on the Senior Notes due
December 1, 1994 and is in default with the terms of the Senior Notes
Indenture. Since an event of default under the Indenture has occurred and is
continuing, the holders of at least 25 percent in aggregate principal amount
of the outstanding Senior Notes may, by written notice to Holdings and the
Trustee under the Indenture, and the Trustee upon the written request of such
holders, can declare the principal amount of and accrued interest on all of
the outstanding Senior Notes due and payable immediately. If an event of
default under the Indenture occurs related to the bankruptcy of Holdings or
any Holdings subsidiary of Holdings, then the principal of and accrued
interest on the Senior Notes shall become immediately due and payable. If the
indebtedness under the Senior Notes is accelerated, Holdings would not be able
to pay such amounts. In such event, the Trustee is entitled to pursue any
available remedy by proceeding at law or in equity to collect the payment of
principal of or interest on the Senior Notes or to enforce the performance of
any provision of the Senior Notes or the Indenture. If not accelerated before
such date, principal under the Senior Notes, in its entirety, is due June 1,
2000.
Equipment Contracts Payable
The equipment contracts bear interest at rates ranging from 7% to 14%, are
secured by equipment purchased and are payable in various monthly principal
installments.
Debt Maturities
The aggregate annual maturities of debt as of December 31, 1994, are as
follows:
<TABLE>
<CAPTION>
BANK EQUIPMENT SENIOR
DEBT(A) CONTRACTS NOTES(B) TOTAL
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
1995......................... $ -- $1,708,000 $ -- $ 1,708,000
1996......................... -- 1,399,000 -- 1,399,000
1997......................... -- 797,000 -- 797,000
1998......................... 1,045,000 109,000 -- 1,154,000
1999......................... -- -- -- --
Thereafter................... -- -- 77,618,000 77,618,000
---------- ---------- ----------- -----------
$1,045,000 $4,013,000 $77,618,000 $82,676,000
========== ========== =========== ===========
</TABLE>
- --------
(A) Currently, the New Credit Facility is in default and if the outstanding
principal is not accelerated, then the principal in its entirety is due
June 2, 1998.
(B) Currently, the Senior Notes are in default and if not accelerated, then
the principal in its entirety is due June 1, 2000.
F-35
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SHAREHOLDERS' DEFICIT
On March 31, 1992, in connection with the 1992 Credit Agreement (Note 3)
Holdings issued and sold 3,000,000 shares of Series A preferred stock, par
value $1.00, (the Preferred Stock) for $3,000,000 cash. Each share of the
Preferred Stock is entitled to .005 (five one-thousandths) of one vote. No
dividends may be paid on common stock in any fiscal year unless Holdings has
first paid to the Preferred Stock shareholders a dividend of not less than
$0.06 per share, which is noncumulative. Any additional dividends declared
shall be declared on the common stock only. Upon liquidation, the Preferred
Stock carries a liquidation preference of $1.00 per share, plus an amount
equal to all declared and unpaid dividends thereon. After the payment or
distribution to the Preferred Stock shareholders of the full preferential
amounts, the common shareholders are entitled to all remaining assets of
Holdings to be distributed. Concurrent with the issuance of the Preferred
Stock, Holdings' Board of Directors declared a one-for-ten reverse stock split
of Holdings' stock outstanding on such date. The authorized shares of
Holdings' common stock was changed to 500,000 shares, $.01 par value.
Additionally, Holdings entered into a restricted stock agreement with its
former Chairman and Chief Executive Officer subjecting 25,005 shares of
Holdings' common stock owned by him to forfeiture. The restrictions on 10,002
of such shares were to lapse based on ratable monthly vesting over 36 months.
The restrictions on the remaining 15,003 shares were to lapse ratably each
year if certain earnings levels were achieved for fiscal years 1992, 1993 and
1994. At December 31, 1993, restrictions on 10,839 of the shares had lapsed
and 5,001 shares were forfeited and returned to Holdings. As of December 31,
1994, restrictions on 12,507 of the shares had lapsed and 12,498 were
forfeited and returned to Holdings. On December 31, 1994, AAC purchased all of
the former Chairman's outstanding common and preferred shares in Holdings for
a total consideration of $10.
On December 28, 1993, Holdings entered into a stock purchase agreement with
the former President (Management Participant) whereby the Management
Participant purchased 5,985 shares of Holdings' authorized but unissued common
stock at $.01 per share. One-half of the shares are referred to as Employment
Stock and the remaining one-half of the shares are referred to as Eligible
Time Accelerated Stock (ETA Stock). The shares of common stock subject to this
agreement are held in escrow until such time as the shares vest. The
Employment Stock vests at the rate of 25% on December 31, 1993, 1994, 1995 and
1996. The ETA Stock vests at the rate of 25% on December 31, 1993, 1997, 1998
and 1999, however, the vesting may be accelerated if Holdings achieves certain
performance targets, as determined by Holdings' Board of Directors. As of
December 31, 1994, 1,496 shares of Employment Stock and 748 shares of ETA
Stock had vested.
5. EMPLOYEE BENEFIT PLANS
Holdings has a Section 401(k) employees savings plan (the Savings Plan)
covering substantially all full-time employees upon completion of at least 500
hours of service and six-months of continuous employment. The Savings Plan is
a defined contribution plan and provides for Holdings to make discretionary
contributions as deemed appropriate by the Savings Plan administrative
committee. No contributions were made by Holdings to the Savings Plan during
the years ended December 31, 1992, 1993 or 1994 or the six months ended June
30, 1995.
Holdings also has a group medical and dental insurance plan (the Health
Plan) covering substantially all full time employees (and their eligible
dependents) as defined, who have completed a minimum of three months of
continuous service (12 months of service to qualify for dental benefits).
Holdings is insured for individual and aggregate claims in excess of defined
stop-loss limits and has provided reserves for amounts it believes are
sufficient to cover claims which have been incurred but not reported as of
December 31, 1994 and June 30, 1995.
F-36
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS
Obligations Under Capital Leases
Holdings has entered into capital lease obligations in connection with
acquiring certain rental equipment with aggregate costs and accumulated
amortization of $1,463,000 and $230,000 at December 31, 1993, and $1,553,000
and $355,000 at December 31, 1994, respectively. Future minimum lease payments
under the capital leases and the present value of the minimum lease payments
as of December 31, 1994 are as follows:
<TABLE>
<S> <C>
1995............................................................ $482,000
1996............................................................ 251,000
1997............................................................ 23,000
1998............................................................ 7,000
1999............................................................ --
Thereafter...................................................... --
--------
Total minimum future lease payments............................. 763,000
Less amount representing interest............................... 73,000
--------
Present value of net minimum future lease payments.............. $690,000
========
</TABLE>
Obligations Under Operating Leases
At December 31, 1994, Holdings had minimum annual lease commitments for
property and equipment under noncancelable operating leases as follows:
<TABLE>
<S> <C>
1995.......................................................... $ 3,686,000
1996.......................................................... 2,997,000
1997.......................................................... 2,045,000
1998.......................................................... 1,141,000
1999.......................................................... 948,000
Thereafter.................................................... 2,649,000
-----------
$13,466,000
===========
</TABLE>
The property leases require Holdings to pay certain property taxes and
insurance costs. Certain of the real property leases provide for escalation of
future rental payments based upon increases in the consumer price index.
Rental expense under all operating leases totaled $3,631,000, $4,022,000,
$4,380,000, $2,224,000 and $2,110,000 for the years ended December 31, 1992,
1993, 1994, and six months ended June 30, 1994 and 1995, respectively.
Holdings leases all or a portion of one of its California locations from a
partnership that is comprised of certain present and former shareholders and
directors of Holdings and leases property which is part of a second California
location from certain present and former shareholders and directors of
Holdings. The corporate offices in California are leased from a former officer
and director of Holdings. Two locations in Louisiana are leased from a former
officer of Acme Dixie. The leases require monthly lease payments aggregating
approximately $43,000. Total rent expense attributable to these leases and
included in operations was $421,000, $532,000 and $533,000 for the years ended
December 31, 1992, 1993 and 1994, respectively and $231,000 and $231,000 for
the six months ended June 30, 1994 and 1995, respectively.
Purchase Commitments
As of December 31, 1994 and June 30, 1995, Holdings had commitments to
purchase equipment of approximately $2,395,000 and $1,977,000, respectively.
F-37
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Noncompetition Agreements
Holdings in the past has entered into noncompetition and/or consulting
agreements with the former owners of certain businesses it has acquired, some
of which require cash payments in future periods. The agreements are for terms
of two to five years and prohibit the former owners from competing with
Holdings in the business of renting equipment in certain California, Texas and
Louisiana counties. The present values of these future cash payments have been
capitalized and included in other assets (Note 1) with the corresponding
liabilities included in other accrued expenses in the accompanying balance
sheets.
Any breach of the agreements by the former owners terminates Holdings'
obligations. Amounts charged to expense, including amortization expense on
capitalized costs, were approximately $546,000, $376,000, $121,000, $121,000
and $0, for the years ended December 31, 1992, 1993 and 1994, and the six
months ended June 30, 1994 and 1995, respectively.
7. RELATED PARTY TRANSACTIONS
In July 1992, Holdings entered into a five-year management agreement
(Management Agreement) with a company owned by certain shareholders of
Holdings (AAC) that is acquiring equipment rental businesses. Under the
Management Agreement, Holdings locates potential acquisition opportunities,
provides administrative assistance in connection with acquisitions and
manages, supervises and provides administrative and accounting support for the
operation of AAC's rental locations. Pursuant to the Management Agreement,
Holdings has agreed, until April 1, 1995, to make available first to such
company any opportunities which come to its attention for acquiring additional
rental locations. During 1992, 1993 and 1994, Holdings assisted AAC in making
six acquisitions. AAC reimburses Holdings for any costs incurred by Holdings
to acquire the companies. Additionally, AAC pays Holdings a management fee
based on a percentage of the acquisition cost for each acquisition and the
performance of the companies acquired. As of December 31, 1993, the
miscellaneous receivable and the management fee receivable were $45,000 and
$146,000, respectively and as of December 31, 1994, the net miscellaneous
payable and the management fee receivable were $117,000 and $255,000,
respectively, and as of June 30, 1995, the net miscellaneous payable and the
management fee receivable were $82,000 and $381,000, respectively. As a result
of the chairman's resignation in June 1994, AAC at its discretion may
terminate the Management Agreement between AAC and Holdings. AAC has not
notified Holdings as to its intentions with respect to the termination or
continuation of the Management Agreement. Total management fee revenue,
included as a reduction in general and administrative expense, was $162,000,
$1,082,000, $1,496,000, $718,000 and $524,000, for the years ended December
31, 1992, 1993 and 1994, and the six months ended June 30, 1994 and 1995,
respectively.
In addition, Holdings and AAC have agreed to rerent equipment to each other
in the event the other party does not have sufficient rental equipment at a
given rental center location to meet a customer's requirements. The party
making such equipment available receives 70% of the gross rental receipts
received by the other party related to such rerental. For the years ended
December 31, 1992, 1993 and 1994 and the six months ended June 30, 1994 and
1995, rerent revenue received by Holdings from AAC was $13,000, $151,000,
$39,000, $6,000 and $16,000, respectively, and rerent expense paid by Holdings
to AAC was $37,000, $111,000, $230,000, $62,000 and $35,000, respectively.
Holdings also leases certain facilities owned by certain of Holdings'
present and former officers, directors and shareholders (Note 6).
F-38
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTION PLAN
In May 1990, Holdings' Board of Directors approved the Acme Holdings Inc.
1990 Stock Option Plan which authorizes the granting of options to various
directors, officers, employees and outside consultants to purchase, within a
period of 10 years from date of grant, up to 7,310 shares of common stock at
an exercise price to be determined at the time of grant by Holdings' Board of
Directors. The exercise price shall be not less than fair market value on the
date of grant for incentive stock options (ISOs), and not less than 85% of the
fair market value on the date of grant for nonstatutory stock options (NSOs).
Any otherwise eligible participant who owns more than 10% of the total
combined voting power of all classes of outstanding stock of Holdings is not
eligible to receive options under the plan unless the exercise price is at
least 110% of the fair market value of such shares on the date of grant and
the options are exercisable for a term of only five years from the date of
grant. Options vest in such increments as determined by Holdings' Board of
Directors.
ISOs to purchase 3,290 shares of common stock at $.10 per share were granted
in March 1992 to replace previously issued and canceled options. In January
1993, 1,097 ISOs to purchase shares of common stock at $2.69 per share were
granted. Such ISOs become exercisable at various dates commencing July 1993.
ISOs covering 1,097 shares are exercisable at December 31, 1994. On March 31,
1992, NSOs to purchase 365 shares of common stock at $27.00 per share were
granted to replace previously issued and canceled options; such exercise price
was based upon isolated negotiations with a single option holder and bore no
relationship to the fair market value of the common stock. The NSOs were fully
exercisable at date of grant. No options were granted during 1994.
9. INCOME TAXES
Effective January 1, 1993, Holdings changed its method of accounting for
income taxes from the deferred method to the liability method required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (Statement No. 109). Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
As permitted under Statement No. 109, Holdings has elected not to restate
the financial statements of any prior years. There was no effect from this
change on net income for the year ended December 31, 1993 or on the deferred
tax balance at December 31, 1992.
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1992 1993 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $ -- $ -- $ --
State....................................... 400,000 300,000 111,000
-------- -------- --------
400,000 300,000 111,000
Deferred:
Federal..................................... -- -- --
State....................................... 27,000 (26,000) (50,000)
-------- -------- --------
27,000 (26,000) (50,000)
-------- -------- --------
$427,000 $274,000 $ 61,000
======== ======== ========
</TABLE>
F-39
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994, deferred income taxes reflect the tax effects of temporary
differences between the value of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Holdings' net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1994
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 8,614,000 $ 11,899,000
Alternative minimum tax credit.................. 754,000 754,000
Allowance for doubtful accounts................. 384,000 501,000
Accrued health & general insurance.............. 1,298,000 1,257,000
State taxes, net................................ 297,000 123,000
Other accruals.................................. 1,733,000 1,183,000
----------- ------------
Total deferred tax assets....................... 13,080,000 15,717,000
Valuation allowance for deferred tax assets..... (7,396,000) (11,596,000)
----------- ------------
Net deferred tax assets........................... 5,684,000 4,121,000
Deferred tax liabilities:
Depreciation, tax over book..................... (5,904,000) (4,146,000)
Other accruals.................................. (205,000) (350,000)
----------- ------------
Total deferred tax liabilities.................... (6,109,000) (4,496,000)
----------- ------------
Net deferred tax liabilities...................... $ (425,000) $ (375,000)
=========== ============
</TABLE>
A reconciliation between the provision for income taxes computed by applying
the federal statutory tax rate to loss before taxes for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1992 1993 1994
--------- ----------- -----------
<S> <C> <C> <C>
Federal tax benefit at statutory rate. $(218,000) $(4,686,000) $(2,994,000)
Losses without benefit................ 218,000 4,686,000 2,994,000
State taxes........................... 427,000 274,000 61,000
--------- ----------- -----------
$ 427,000 $ 274,000 $ 61,000
========= =========== ===========
</TABLE>
At December 31, 1994, Holdings has approximately $29,300,000 of net
operating loss carryforwards for federal income tax purposes that expire
$9,500,000 in 2005, $6,000,000 in 2006, $1,700,000 in 2007 and $6,800,000 in
2008 and $5,300,000 in 2009. In addition, Holdings has net operating loss
carryforwards for California income tax purposes of approximately $17,800,000
which are available to offset taxable income starting in 1993 and expire
$4,300,000 in 1996, $5,800,000 in 1997, $3,900,0000 in 1998 and $3,800,000 in
1999. The ultimate realization of the benefit of these loss carryforwards is
dependent on Holdings achieving proper levels of operating profits in the
future.
Holdings also has alternative minimum tax credit carryovers of approximately
$590,000 for federal income tax purposes and $164,000 for California income
tax purposes which are available to offset future regular income tax that is
in excess of the alternative minimum tax in such year. The credits carry over
indefinitely.
Pursuant to the Tax Reform Act of 1986, use of Holdings' net operating loss
carryforwards and other tax attributes may be substantially limited if a
cumulative change in ownership of more than 50% occurs within any three year
period. As of December 31, 1994, a cumulative change of more than 50% occurred
which could
F-40
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
significantly impact the future benefit of the federal and state net operating
loss carryforwards under Internal Revenue Service Code Section 382.
10. SUBSEQUENT EVENT
Holdings has decided to relocate its corporate office to Scottsdale, Arizona
during the second and third quarters of 1995.
F-41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying combined balance sheets of the corporations
and partnerships listed in Note 1 (the Company) as of March 31, 1997 and 1996
and the related combined statements of operations, redeemable stock and other
stockholders' and partners' equity and cash flows for the years then ended.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
corporations and partnerships listed in Note 1 at March 31, 1997 and 1996, and
the combined results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
May 6, 1997
F-42
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash and cash equivalents............................. $ 1,816,726 $ 7,164,847
Investments, at market value (cost of $2,687,731)..... 2,813,546 --
Accounts receivable, net of allowance for doubtful
accounts of $120,000 at March 31, 1996 and 1997...... 7,482,984 6,993,000
Inventory............................................. 6,843,218 6,663,676
Prepaid expenses and other assets..................... 306,003 217,400
Rental equipment, at cost, net of accumulated
depreciation of $2,086,440 and $1,835,658 at March
31, 1996 and 1997.................................... 1,103,985 1,010,027
Operating property and equipment, at cost, net of
accumulated depreciation............................. 1,350,901 1,377,166
Other assets.......................................... 764,371 716,238
----------- -----------
$22,481,734 $24,142,354
=========== ===========
<CAPTION>
LIABILITIES, REDEEMABLE STOCK, AND OTHER
STOCKHOLDERS' AND PARTNERS' EQUITY
----------------------------------------
<S> <C> <C>
Accounts payable...................................... $ 2,717,936 $ 2,513,777
Payroll and other accrued expenses.................... 1,120,553 1,232,929
Notes payable to stockholders......................... 705,127 705,127
----------- -----------
Total liabilities..................................... 4,543,616 4,451,833
Commitments and contingencies
Class B common stock--redeemable, at liquidation
value................................................ 11,399,437 10,774,506
Other stockholders' and partners' equity:
Unrealized gain on investments available for sale... 125,815 --
Preferred stock, at liquidation value............... 890,800 890,800
Class A common stock................................ 10,000 10,000
Common stock--Bayview............................... 2,500 2,500
Partners' equity.................................... 6,021,363 7,781,958
Retained earnings (deficit)......................... (511,797) 230,757
----------- -----------
Total other stockholders' and partners' equity........ 6,538,681 8,916,015
----------- -----------
$22,481,734 $24,142,354
=========== ===========
</TABLE>
See accompanying notes.
F-43
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues:
Sales of parts, supplies and equipment............. $38,159,436 $41,694,541
Equipment rentals.................................. 6,848,704 7,318,643
----------- -----------
Total revenues....................................... 45,008,140 49,013,184
Cost of revenues:
Cost of sales of parts, supplies and equipment..... 30,377,393 33,306,804
Cost of equipment rentals, excluding equipment
rental depreciation............................... 4,624,537 5,169,571
Depreciation, equipment rentals.................... 528,926 445,504
----------- -----------
Total cost of revenues............................... 35,530,856 38,921,879
----------- -----------
Gross profit......................................... 9,477,284 10,091,305
Selling, general and administrative expenses......... 6,366,204 7,107,647
Depreciation and amortization, excluding equipment
rental depreciation................................. 205,742 164,243
----------- -----------
Operating income..................................... 2,905,338 2,819,415
Other income (expense):
Interest income.................................... 159,477 204,263
Gain on sale of investments........................ -- 251,540
Interest expense................................... (48,661) (67,070)
Other, net......................................... 10,496 (82,379)
----------- -----------
3,026,650 3,125,769
Provision for income taxes........................... 100,000 150,000
----------- -----------
Net income........................................... $ 2,926,650 $ 2,975,769
=========== ===========
</TABLE>
See accompanying notes.
F-44
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF REDEEMABLE STOCK AND OTHER STOCKHOLDERS' AND PARTNERS'
EQUITY
<TABLE>
<CAPTION>
COMTECT, INC. BAYVIEW
------------------------------ -------------
REDEEMABLE
CLASS B CLASS A
COMMON STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------ --------------- -------------- ------------- PARTNERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ----------- ------ -------- ------ ------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1995........ 10,000 $11,158,316 8,908 $890,800 10,000 $10,000 2,500 $2,500 $3,889,279
Net income...... -- -- -- -- -- -- -- -- 2,638,684
Change in
liquidation
value of
redeemable
stock........... -- 241,121 -- -- -- -- -- -- --
Unrealized
appreciation on
investments..... -- -- -- -- -- -- -- -- --
Distributions to
stockholders and
partners........ -- -- -- -- -- -- -- -- (506,600)
------ ----------- ----- -------- ------ ------- ----- ------ ----------
Balance at March
31, 1996........ 10,000 11,399,437 8,908 890,800 10,000 10,000 2,500 2,500 6,021,363
Net income...... -- -- -- -- -- -- -- -- 2,657,487
Change in
liquidation
value of
redeemable
stock........... -- (624,931) -- -- -- -- -- -- --
Liquidation of
investment
portfolio....... -- -- -- -- -- -- -- -- --
Distributions to
stockholders and
partners........ -- -- -- -- -- -- -- -- (896,892)
------ ----------- ----- -------- ------ ------- ----- ------ ----------
Balance at March
31, 1997........ 10,000 $10,774,506 8,908 $890,800 10,000 $10,000 2,500 $2,500 $7,781,958
====== =========== ===== ======== ====== ======= ===== ====== ==========
<CAPTION>
UNREALIZED TOTAL
GAINS (LOSSES) OTHER
ON INVESTMENTS RETAINED STOCKHOLDERS'
AVAILABLE FOR EARNINGS AND PARTNERS'
SALE (DEFICIT) EQUITY
-------------- ---------- -------------
<S> <C> <C> <C>
Balance at March
31, 1995........ $(159,812) $(159,643) $ 4,473,124
Net income...... -- 287,966 2,926,650
Change in
liquidation
value of
redeemable
stock........... -- (241,121) (241,121)
Unrealized
appreciation on
investments..... 285,627 -- 285,627
Distributions to
stockholders and
partners........ -- (398,999) (905,599)
-------------- ---------- -------------
Balance at March
31, 1996........ 125,815 (511,797) 6,538,681
Net income...... -- 318,282 2,975,769
Change in
liquidation
value of
redeemable
stock........... -- 624,931 624,931
Liquidation of
investment
portfolio....... (125,815) -- (125,815)
Distributions to
stockholders and
partners........ -- (200,659) (1,097,551)
-------------- ---------- -------------
Balance at March
31, 1997........ $ -- $ 230,757 $ 8,916,015
============== ========== =============
</TABLE>
See accompanying notes.
F-45
<PAGE>
INDUSTRIAL AIR TOOL
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 2,926,650 $ 2,975,769
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 734,668 609,747
Gain on sale of investments available for sale.... -- (251,540)
Provision for deferred taxes...................... (105,000) 60,000
Changes in operating assets and liabilities:
Accounts receivable............................. (1,760,654) 489,984
Prepaid expenses and other assets............... (68,793) 76,736
Inventory....................................... (748,832) 179,542
Accounts payable ............................... (159,262) (204,159)
Payroll and other accrued expenses.............. 502,565 112,376
----------- -----------
Net cash provided by operating activities........... 1,321,342 4,048,455
INVESTING ACTIVITIES
Proceeds from the sale of investments available for
sale, net.......................................... 321,927 2,939,271
Acquisition of property and equipment .............. (871,473) (542,054)
----------- -----------
Net cash provided by (used in) investing activities. (549,546) 2,397,217
FINANCING ACTIVITIES
Distributions to stockholders and partners.......... (905,599) (1,097,551)
Principal repayments of notes payable............... (284,873) --
----------- -----------
Net cash used by financing activities............... (1,190,472) (1,097,551)
----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (418,676) 5,348,121
Cash and cash equivalents at beginning of year...... 2,235,402 1,816,726
----------- -----------
Cash and cash equivalents at end of year............ $ 1,816,726 $ 7,164,847
=========== ===========
</TABLE>
See accompanying notes.
F-46
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the accounts of the
following companies (collectively, Industrial Air Tool or IAT):
. Comtect Inc. (Comtect), a Nevada Corporation, and its wholly owned
subsidiaries:
-- IAT interests of Nevada, Inc., a Nevada corporation.
-- RNJB, Inc., a Nevada corporation.
-- CFTSIJC., Inc., a Nevada corporation.
-- Industrial Air Tool Pasadena, Inc., a Texas corporation.
-- Industrial Air Tool Texas City, Inc., a Texas corporation.
-- PST, Inc. of Louisiana, A Louisiana corporation.
-- LRB Supply, Inc., a Texas corporation.
. GT Financial Ltd., a Texas limited partnership
. Shield Pt., Ltd. (Shield), a Texas limited partnership
. Bayview Interests, Inc. (Bayview), a Nevada Corporation
Each of these companies and partnerships are owned by substantially the same
shareholders and partners. All material intercompany accounts and transactions
have been eliminated.
Comtect sells maintenance, repair, and operations (MRO) equipment and
supplies, and rents equipment to customers throughout the world from its
locations in Texas and Louisiana. Comtect grants credit to customers, the
majority of whom are in the petrochemical or construction industries. GT
Financial purchases certain accounts receivable from Comtect. Shield owns land
and buildings which are leased to Comtect. Bayview is a domestic international
sales corporation which has received a commission of 4 percent (to a maximum
commission of $400,000) on all export sales.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenue from the sale of parts, supplies and equipment are recorded at the
time of delivery to or pick-up by the customer. Equipment rental revenue is
recorded as earned under the operating method.
Cash and Cash Equivalents.
IAT considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.
F-47
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Credit Policy
IAT extends credit to its customers based on evaluations of their financial
condition. Collateral generally is not required. IAT maintains reserves which
it believes are adequate for potential credit losses.
Inventories
Inventories consist principally of equipment, parts, and supplies. All
inventories are valued at the lower of cost or market using the specific
identification last-in, first-out (LIFO) method of accounting, which
approximates the first-in, first-out method of accounting.
Depreciation and Amortization
Rental equipment and operating property and equipment are stated at cost and
are depreciated using the straight-line method over the following estimated
useful lives:
<TABLE>
<S> <C>
Rental equipment............................................... 5-7 years
Operating property and equipment............................... 5 years
Buildings and leasehold improvements........................... 28-40 years
</TABLE>
All rental equipment costing more than $500 and greater than one year useful
life is capitalized at the date of purchase.
Income Taxes
Comtect utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, deferred taxes are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured based on the likelihood of realization of the related tax benefits in
the future.
GT Financial Ltd. and Shield are Texas limited liability partnerships, and,
accordingly, taxes related to their income are the responsibility of the
individual partners.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense was $46,057
and $88,912 for the years ended March 31, 1996 and 1997, respectively.
F-48
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Land and building........................................ $1,424,593 $1,424,593
Vehicles, machinery and equipment........................ 618,069 607,631
Office equipment......................................... 272,747 298,585
---------- ----------
Total................................................ 2,315,409 2,330,809
Less accumulated depreciation............................ 964,508 953,643
---------- ----------
$1,350,901 $1,377,166
========== ==========
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
Notes payable at March 31, 1996 and 1997 are payable by GT Financial Ltd. to
two shareholders with interest at 10 percent, and due on demand. No interest
was paid in the years ended March 31, 1996 and 1997.
4. EMPLOYEE BENEFIT PLANS
IAT maintains the ERISA qualified IAT Interests, Inc. Profit Sharing Plan
(the Plan) covering substantially all employees who complete 1,000 hours of
service annually. The Plan allows IAT to make discretionary contributions.
Contributions are allocated to employee accounts based upon individual wages
as compared to total IAT wages. Employees are not permitted or required to
make contributions to the Plan. Vesting of an employee's interest in the Plan
occurs over a seven year period. Contributions to the Plan were $543,065 and
$617,824 for the years ended March 31, 1996 and 1997, respectively.
5. REDEEMABLE STOCK AND OTHER STOCKHOLDERS' EQUITY
Comtect has 20,000 shares of preferred stock authorized, $10 par value, with
8,908 shares issued and outstanding at March 31, 1996 and 1997. The preferred
stock is nonvoting and is entitled to receive, when and as declared by the
board of directors, a noncumulative dividend of $9.00 per share. The preferred
stock has a liquidation preference of $100 per share plus any declared and
unpaid dividends.
Comtect has 20,000 shares of Class A voting common stock authorized, $1.00
par value, with 10,000 shares issued and outstanding at March 31, 1996 and
1997. Comtect also has 20,000 shares of Class B nonvoting common stock, $1.00
par value, with 10,000 shares issued and outstanding at March 31,1997. The
Class B common stock is subordinate to the preferred stock and Class A common
stock with respect to dividends and upon liquidation.
Bayview has 5,000 shares of common stock authorized, $1.00 par value, with
2,500 shares issued and outstanding at March 31, 1996 and 1997.
Pursuant to a buy-sell agreement dated March 31, 1992, Comtect has agreed
with the holders of it's Class B common stock to purchase such shares upon the
shareholder's termination of employment, death, disability, or at the
shareholder's option, at its estimated fair value at the date of purchase, as
defined in the agreement. The shareholders have agreed not to sell their
shares except to Comtect.
F-49
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Environmental
IAT and its operations are subject to a variety of federal, state and local
laws and regulations governing, among other things, worker safety, air
emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. IAT incurs ongoing expenses associated with
the performance of appropriate remediation at certain of its locations. IAT
does not believe that such remediation will have a material adverse effect on
IAT's combined financial position, results of operations or cash flows.
Legal Proceedings
IAT is party to various litigation matters, in most cases involving ordinary
and routine claims incidental to the business of IAT. The ultimate legal and
financial liability of IAT with respect to such pending litigation cannot be
estimated with certainty, but IAT believes, based on its examination of such
matters, that such ultimate liability will not have a material adverse effect
on the business, or the combined financial position, results of operations or
cash flows of IAT.
7. INCOME TAXES
Income tax expense differs from the amount computed by applying the
statutory federal income tax to the income before income taxes due to the
effect of state taxes and the portion of IAT's income which is attributable to
limited partnerships, which are not subject to income taxes.
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Nondeductible reserves and accruals................... $156,000 $131,000
Uniform capitalization adjustment..................... 90,000 86,000
Depreciation and other................................ 104,000 73,000
-------- --------
Total deferred tax assets........................... $350,000 $290,000
======== ========
</TABLE>
The tax provision is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------------
1996 1997
--------- --------
<S> <C> <C>
Federal:
Current.............................................. $ 135,000 $ 30,000
Deferred............................................. (105,000) 60,000
--------- --------
30,000 90,000
State:
Current.............................................. 70,000 60,000
Deferred............................................. -- --
--------- --------
70,000 60,000
--------- --------
Total.............................................. $ 100,000 $150,000
========= ========
</TABLE>
F-50
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. SIGNIFICANT CUSTOMERS
A single customer represented 10% and 12% of IAT's revenues for the years
ended March 31, 1996 and 1997, respectively.
Export sales, primarily to offshore petrochemical operators, totaled
$10,801,000 and $13,107,000 during the years ended March 31, 1996 and 1997,
respectively.
A significant portion of the Company's revenues are generated based on
manufacturers' distribution agreements. The loss of any such distributorships
could have a material adverse effect on the Company's business. Sales of one
manufacturer's products under a distribution arrangement represented 21% and
25% of revenues in the years ended March 31, 1996 and 1997, respectively.
9. SUBSEQUENT EVENTS
Pursuant to a Purchase Agreement signed March 14, 1997, all of the
outstanding common and preferred stock of Comtect was purchased on April 25,
1997 by Rental Service Corporation effective March 1, 1997. Under the terms of
the Purchase Agreement all previously factored accounts receivable sold to GT
Financial Ltd. were repurchased by Comtect, and all real estate owned by
Shield and leased to Comtect was purchased by Comtect, effective March 31,
1997, and Bayview ceased its affiliation with Comtect.
F-51
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Brute Equipment Co.
d/b/a Foxx Hy-Reach, Inc.
Moline, Illinois
We have audited the accompanying balance sheets of Brute Equipment Co. d/b/a
Foxx Hy-Reach, Inc. as of December 31, 1995 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brute Equipment Co. d/b/a
Foxx Hy-Reach, Inc. as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ GLADREY & PULLEN, LLP
Moline, Illinois
April 26, 1997
F-52
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1995 1996 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (NOTE 4)
Cash...................................... $ 27,250 $ 3,350 $ 3,350
Accounts receivables, less allowance for
doubtful accounts December 31, 1995
$20,000; December 31, 1996 $40,475;
March 31, 1997 $40,475................... 2,002,199 2,649,607 2,453,143
Parts and supplies inventories............ 142,796 405,161 404,783
Other receivables and prepaid expense..... 42,737 23,986 51,397
Investment, life insurance................ 205,034 230,399 236,740
Rental equipment, net of accumulated
depreciation December 31, 1995
$3,826,500; December 31, 1996 $5,098,656;
March 31, 1997 $5,368,193................ 11,277,363 14,226,511 13,841,221
Operating equipment and leasehold
improvements, net of accumulated
depreciation December 31, 1995 $625,695;
December 31, 1996 $718,709; March 31,
1997 $717,093 (Note 3)................... 590,759 492,441 421,874
----------- ----------- -----------
$14,288,138 $18,031,455 $17,412,508
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................... $ 68,850 $ 560,202 $ 235,905
Accrued expenses.......................... 260,084 338,251 321,961
Litigation judgment liability (Note 9).... -- 2,320,000 2,320,000
Notes payable, including notes to related
parties December 31, 1995 $1,567,635;
December 31, 1996 $579,355; March 31,
1997 $551,839 (Note 4)................... 4,426,776 3,991,157 2,420,408
----------- ----------- -----------
Total liabilities..................... 4,755,710 7,209,610 5,298,274
----------- ----------- -----------
Commitments (Notes 5, 6 and 11)
Stockholders' Equity:
Common stock, no par value; authorized
100,000 shares issued 1,000 shares, at
amounts paid in........................ 100,000 100,000 100,000
Retained earnings....................... 9,432,428 10,721,845 12,014,234
----------- ----------- -----------
9,532,428 10,821,845 12,114,234
----------- ----------- -----------
$14,288,138 $18,031,455 $17,412,508
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-53
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------------
1995 1996 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Equipment rentals.............. $ 9,465,624 $11,842,440 $2,473,235 $2,856,078
Sales of parts, supplies and
equipment..................... 7,774,425 7,976,069 1,961,169 2,241,285
----------- ----------- ---------- ----------
17,240,049 19,818,509 4,434,404 5,097,363
----------- ----------- ---------- ----------
Cost of revenues:
Cost of equipment rentals,
excluding equipment rental
depreciation.................. 3,969,880 4,228,171 951,111 1,007,432
Depreciation, equipment
rentals....................... 1,940,332 2,718,397 593,398 781,806
Cost of sales of parts,
supplies and equipment........ 5,250,625 5,308,453 1,351,574 1,482,261
----------- ----------- ---------- ----------
Total cost of revenues....... 11,160,837 12,255,021 2,896,083 3,271,499
----------- ----------- ---------- ----------
Gross profit................. 6,079,212 7,563,488 1,538,321 1,825,864
Selling, general and
administrative expense........ 3,107,090 3,461,510 352,700 417,299
Depreciation, excluding
equipment rental depreciation. 225,877 257,723 63,718 51,840
Litigation judgment expense
(Note 9)...................... -- 2,320,000 -- --
----------- ----------- ---------- ----------
Operating income............. 2,746,245 1,524,255 1,121,903 1,356,725
Interest expense, including
amounts paid to related parties
December 31, 1995 $57,045;
December 31, 1996 $73,840;
March 31, 1996 $27,246
March 31, 1997 $11,260.......... 141,539 234,838 68,079 64,336
----------- ----------- ---------- ----------
Net income................... $ 2,604,706 $ 1,289,417 $1,053,824 $1,292,389
=========== =========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-54
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS
-------- -----------
<S> <C> <C>
Balance, December 31, 1994................................ $100,000 $ 6,827,722
Net income.............................................. -- 2,604,706
-------- -----------
Balance, December 31, 1995................................ 100,000 9,432,428
Net income.............................................. -- 1,289,417
-------- -----------
Balance, December 31, 1996................................ 100,000 10,721,845
Net income (unaudited).................................. -- 1,292,389
-------- -----------
Balance, March 31, 1997 (unaudited)....................... $100,000 $12,014,234
======== ===========
</TABLE>
See Notes to Financial Statements.
F-55
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ------------------------
1995 1996 1996 1997
------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating Activities:
Net income............. $ 2,604,706 $ 1,289,417 $ 1,053,824 $ 1,292,389
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation......... 2,166,209 2,976,120 657,116 833,646
Gain on sale of
rental equipment ... (1,866,525) (2,019,108) (457,612) (535,731)
Changes in operating
assets and
liabilities:
Accounts
receivables ...... (543,772) (647,408) 255,106 196,464
Parts and supplies
inventories....... (22,620) (262,365) 394 378
Other receivables
and prepaid
expense........... (20,702) 18,751 (502) (27,411)
Accounts payable
and accrued
expenses.......... 26,902 569,519 (86,334) (340,587)
Litigation judgment
liability......... -- 2,320,000 -- --
------------ ------------ ----------- -----------
Net cash provided
by operating
activities...... 2,344,198 4,244,926 1,421,992 1,419,148
------------ ------------ ----------- -----------
Investing Activities:
Proceeds from sale of
equipment............. 7,225,096 7,350,903 1,831,976 2,076,763
Purchase of equipment.. (11,520,436) (11,158,745) (1,520,970) (1,918,821)
Purchase of investment
in life insurance..... (25,365) (25,365) (6,341) (6,341)
------------ ------------ ----------- -----------
Net cash provided
by (used in)
investing
activities...... (4,320,705) (3,833,207) 304,665 151,601
------------ ------------ ----------- -----------
Financing Activities:
Borrowings from
stockholders.......... 1,833,024 -- -- --
Payments to
stockholders.......... (1,122,509) (988,280) (251,444) (27,516)
Net borrowings
(payments) from note
payable............... 1,266,392 (947,339) (1,475,213) (1,543,233)
Proceeds from long-term
obligations........... -- 1,500,000 -- --
------------ ------------ ----------- -----------
Net cash provided
by (used in)
financing
activities...... 1,976,907 (435,619) (1,726,657) (1,570,749)
------------ ------------ ----------- -----------
Net increase
(decrease) in
cash............ 400 (23,900) -- --
Cash balance, beginning
of period............... 26,850 27,250 27,250 3,350
------------ ------------ ----------- -----------
Cash balance, end of
period.................. $ 27,250 $ 3,350 $ 27,250 $ 3,350
============ ============ =========== ===========
Supplemental Disclosure
of Cash Flow
Information,
Cash paid for interest. $ 145,501 $ 215,184 $ 53,885 $ 61,477
</TABLE>
See Notes to Financial Statements.
F-56
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Basis of presentation: Brute Equipment Co. was incorporated in the state of
Iowa in May 1984 and qualified to do business under the assumed name of Foxx
Hy-Reach, Inc. in the same month. During 1986, the Company, with the consent
of its stockholders, elected to be taxed as an S-Corporation. The Company's
operations consist principally of the short-term rental and the sale of
equipment to the construction industry primarily in the midwest United States.
The nature of the Company's business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying balance sheets are
presented on an unclassified basis.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts for 1995 have been reclassified to conform with the
classifications used in 1996, with no effect on net income or stockholders'
equity.
Revenue recognition: Equipment rental revenue is recorded as earned under
the operating method. Equipment rentals in the statements of operations
include revenues earned on equipment rentals, fuel sales and rental equipment
delivery fees. Revenue from the sale of parts, supplies and equipment is
recorded at the time of delivery to or pick-up by the customer.
Credit policy: Substantially all of the Company's business is on a credit
basis. The Company extends credit to its commercial customers based on
evaluations of their financial condition and generally no collateral is
required, although in many cases, mechanics' liens are filed to protect the
Company's interests. The Company maintains reserves it believes are adequate
for potential credit losses.
Parts and supplies inventories: Inventories are stated at the lower of cost
(first-in, first-out method) or market.
Equipment and leasehold improvements: Equipment and leasehold improvements
are stated at cost. Depreciation is computed by the straight-line method over
the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Rental equipment..................................................... 6-7
Office and computer equipment........................................ 5-7
Transportation equipment............................................. 3-5
Leasehold improvements............................................... 10
</TABLE>
Advertising costs: Advertising costs are expensed as incurred and totaled
$35,320 and $36,101 for the years ended December 31, 1995 and 1996,
respectively, and $10,030 and $12,217 for the three-months ended March 31,
1996 and 1997 (unaudited), respectively.
Concentrations of credit risk: Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of accounts receivable which is limited due to the large number of
customers.
Fair value of financial instruments: The carrying amount of cash, accounts
receivables, litigation judgment liability and accounts payable approximates
fair value because of the short maturity of these instruments. The
F-57
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
carrying amount of notes payable which carry current interest rates and have
short maturities approximates fair value.
NOTE 2. UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited condensed financial
information of the Company contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly the Company's financial
position as of March 31, 1997, and the results of its operations and its cash
flows for the three-months ended March 31, 1996 and 1997. These results are
not necessarily indicative of the results to be expected for the full fiscal
year.
NOTE 3. OPERATING EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Operating equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment......... $1,086,270 $1,003,294 $ 922,770
Leasehold improvements.................... 73,494 73,494 73,494
Furniture, fixtures and computer
equipment................................ 56,690 134,362 142,703
---------- ---------- ----------
1,216,454 1,211,150 1,138,967
Less accumulated depreciation and
amortization............................. 625,695 718,709 717,093
---------- ---------- ----------
$ 590,759 $ 492,441 $ 421,874
========== ========== ==========
</TABLE>
NOTE 4. PLEDGED ASSETS AND NOTES PAYABLE
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Revolving credit agreement with a bank, $2,000,000,
($3,000,000 as of December 31, 1995) interest at 3/8%
under the bank's prime rate, (8.5% as of December 31,
1996), due June 30, 1997, collateralized by
substantially all assets of the Company and the
personal guarantees of the officer-stockholders and
the spouse of one of the officer-stockholders. ...... $2,859,141 $1,911,802
Note payable, bank, due in annual installments of
$300,000 plus interest at 7.84%, due April 1999,
collateralized by substantially all assets of the
Company and the personal guarantees of the officer-
stockholders and the spouse of one of the officer-
stockholders. ....................................... -- 1,500,000
Note payable, officer-stockholders, due on demand,
unsecured. The interest rate in effect as of December
31, 1995 and 1996 was 7% and 8%, respectively. ...... 1,567,635 579,355
---------- ----------
$4,426,776 $3,991,157
========== ==========
</TABLE>
F-58
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company also has an unused $1,500,000 line-of-credit agreement with a
bank that pays interest at 3/8% under the bank's prime rate (8.5% as of
December 31, 1996), due April 30, 1997, collateralized by substantially all
assets of the Company and the personal guarantees of the officer-stockholders
and the spouse of one of the officer-stockholders.
NOTE 5. STOCKHOLDERS' AGREEMENT
The stockholders of the Company have entered into an agreement which places
restrictions on the transfer of their stock during their lifetime. The
agreement also contains provisions for the mandatory purchase of shares, by
the surviving stockholder, upon the death or disability of a stockholder under
the terms and conditions set forth in the agreement.
NOTE 6. LEASE COMMITMENTS AND RENTAL EXPENSE
The Company leases its Morton, Illinois facility from an officer-
stockholder. The agreement expires July 24, 1997 and requires monthly rentals
of $2,500 plus the payment of all property taxes, utilities, insurance and
maintenance on the property.
The Company leases its Moline, Illinois facility from an officer-
stockholder. The agreement expires June 30, 1997 and requires monthly rentals
of $5,500 plus the payment of all property taxes, utilities, insurance and
maintenance on the property.
The Company leases a facility in Des Moines, Iowa. The agreement expires May
14, 2000 and requires monthly rentals of $3,500 plus the payment of all
property taxes, utilities, insurance and maintenance on the property.
The Company also leases a facility in Cedar Rapids, Iowa. The agreement
expires May 31, 1998 and requires monthly rentals of $3,000 plus the payment
of all property taxes, utilities, insurance and maintenance on the property.
The total rental expense for the years ended December 31, 1995 and 1996 was
$165,400 and $179,600, respectively, and $45,600 and $44,700 for the three-
months ended March 31, 1996 and 1997 (unaudited), respectively. Of the total
rent expense, $96,000 was paid to an officer-stockholder for each of the years
ended December 31, 1995 and 1996, respectively, and $24,000 for each of the
three-months ended March 31, 1996 and 1997 (unaudited).
The total minimum rental commitment under these leases as of December 31,
1996 is $242,500 which is due as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997......................................................... $126,000
1998......................................................... 57,000
1999......................................................... 42,000
2000......................................................... 17,500
--------
$242,500
========
</TABLE>
F-59
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. DISCRETIONARY BONUSES AND MANAGEMENT FEE
The Company pays discretionary bonuses to its officers and key employees.
The amount of these bonuses totaled $1,198,500 and $1,107,500 for the years
ended December 31, 1995 and 1996, respectively. There were no discretionary
bonuses paid to officers or key employees during each of the three-months
ended March 31, 1996 and 1997 (unaudited).
The Company purchases management services from Knox Rental Stores, Inc. The
principal stockholder of Knox Rental Stores, Inc. is also a stockholder of
Brute Equipment Co. The amount of these management services purchased totaled
$1,000,000 for each of the years ended December 31, 1995 and 1996.
NOTE 8. EMPLOYEE BENEFITS AND RETIREMENT PLANS
The Company has a group health insurance plan for all of its employees. The
plan qualifies as a "cafeteria plan" under Section 125 of the Internal Revenue
Code of 1986. The Company has elected to self-insure claims ranging from $100
to $500 whereby the Company pays 80% of all claims within this range. Expenses
relating to the plan totaled $10,345 and $9,346 for the years ended December
31, 1995 and 1996, respectively, and $2,050 and $2,320 for the three-months
ended March 31, 1996 and 1997 (unaudited), respectively.
Effective January 1, 1995, the Company established a 401(k) retirement plan.
Employees are eligible to participate in the Plan after completing one year of
full-time service and attaining age 21. Eligible employees are allowed to
defer up to 15% of their salary. The Company makes matching contributions of
25% of the employee's contribution with a maximum Company contribution of 6%
of eligible employee wages. The employee vests in the employer matching
contribution at a rate of 20% per year after two years of service. Employees
are 100% vested in the employer contribution after six years of service. The
Company's contributions to the Plan for the years ended December 31, 1995 and
1996 was $19,734 and $29,534, respectively, and $1,336 and $1,045 for the
three-months ended March 31, 1996 and 1997 (unaudited), respectively.
NOTE 9. LITIGATION JUDGMENT LIABILITY
In November 1996, a $3,200,000 judgment was awarded by a jury to a
construction worker injured while using equipment owned by the Company. The
Company has insurance coverage for $1,000,000 of this liability and may also
have a claim against its insurance provider for the remaining $2,200,000, plus
accrued interest.
NOTE 10. INCOME TAXES
The Company, with the consent of its stockholders has elected to be taxed
under sections of the federal and state income tax laws as an S-Corporation.
This election provides, that in lieu of corporate income taxes, the
stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. Therefore, these financial
statements do not include any provision for corporate income taxes.
F-60
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net book value of the Company's assets and liabilities exceeded their tax
basis by $2,800,837 and $1,561,420 as of December 31, 1995 and 1996,
respectively. The differences between net book value and tax basis as of
December 31, 1995 and 1996, by major asset and liability, are as follows:
<TABLE>
<CAPTION>
1995 1996
----------------------- -----------------------
NET BOOK NET BOOK
VALUE TAX BASIS VALUE TAX BASIS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Trade receivables........... $ 2,002,199 $ 2,022,199 $ 2,737,045 $ 2,757,045
Rental equipment............ 11,277,363 8,475,684 14,226,511 10,311,157
Operating equipment and
leasehold improvements..... 590,759 571,601 492,441 506,375
----------- ----------- ----------- -----------
13,870,321 11,069,484 17,455,997 13,574,577
Litigation judgment
liability.................. -- -- 2,320,000 --
----------- ----------- ----------- -----------
$13,870,321 $11,069,484 $15,135,997 $13,574,577
=========== =========== =========== ===========
</TABLE>
NOTE 11. SUBSEQUENT EVENT
On April 25, 1997 the Company agreed to sell substantially all of its
operating assets to Rental Service Corporation at an amount greater than their
net book value. The closing of this transaction is expected to occur on or
before June 30, 1997 and is subject to a number of closing conditions.
F-61
<PAGE>
Every rental location has on-line
access to centralized systems which
provide real-time transaction
processing, extensive fleet
management tools and daily financial
management reports. These systems
also allow an employee at any
location to identify and reserve a [Photo of employee using the
specific piece of equipment anywhere Company's advanced information
in a region and schedule delivery to systems to assist customer]
a customer's job site.
Depending upon market needs, RSC
offers value-added services to its
customers such as radio-dispatched
transportation fleet and 24 hours-a-
day, seven days-a-week support
[Photo of employee delivering rental services, including on-site
equipment] maintenance and repair.
The Company's information systems
track each individual rental asset
and automatically schedule [Photo of employee performing
preventative maintenance. As a rental equipment maintenance]
result, the Company is able to
enhance the reliability and extend
the useful life of its rental
equipment fleet.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT ANY INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Consolidated Financial Information and Operating Data............. 5
Risk Factors.............................................................. 7
Recent Developments....................................................... 12
Use of Proceeds........................................................... 13
Price Range of Common Stock............................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Unaudited Pro Forma Consolidated Financial Information.................... 16
Selected Consolidated Financial Information and Operating Data............ 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 36
Management................................................................ 44
Principal and Selling Stockholders........................................ 52
Certain Relationships and Related Transactions............................ 54
Description of Capital Stock.............................................. 55
Shares Available for Future Sale.......................................... 57
Underwriting.............................................................. 59
Legal Matters............................................................. 60
Experts................................................................... 60
Additional Information.................................................... 61
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION]
COMMON STOCK
-----------------
PROSPECTUS
, 1997
-----------------
WILLIAM BLAIR & COMPANY
MORGAN STANLEY & CO.
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereby. All the amounts
shown are estimates, except for the Commission Registration Fee.
<TABLE>
<S> <C>
Commission Registration Fee...................................... $ 26,833
NASD Filing Fee.................................................. 9,355
Accounting Fees and Expenses..................................... 330,000
Legal Fees and Expenses (other than Blue Sky).................... 300,000
Printing and Engraving Expenses.................................. 300,000
Miscellaneous Expenses........................................... 33,812
----------
Total........................................................... $1,000,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") gives Delaware corporations broad powers to
indemnify their present and former directors and officers against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with threatened, pending or
completed actions, suits or proceedings to which they are parties or are
threatened to be made parties by reason of being or having been such directors
or officers, subject to specified conditions and exclusions; gives a director
or officer who successfully defends an action the right to be so indemnified;
and permits a corporation to buy directors' and officers' liability insurance.
Such indemnification is not exclusive of any other rights to which those
indemnified may be entitled under any by-law, agreement, vote of stockholders
or otherwise.
As permitted by Section 145 of the Delaware Corporation Law, Article VI of
the Bylaws of the Company provides for the indemnification by the Company of
its directors, officers, employees and agents against liabilities and expenses
incurred in connection with actions, suits or proceeds brought against them by
a third party or in the right of the corporation, by reason of the fact that
they were or are such directors, officers, employees or agents.
Article Twelfth of the Company's Certificate of Incorporation, which is
incorporated by reference in this Registration Statement, provides that to the
fullest extent permitted by the Delaware Corporation Law as the same exists or
may hereafter be amended, a director of the Company shall not be liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director.
The Company has entered into, or intends to enter into, agreements to
indemnify its directors and executive officers in addition to the
indemnification provided for in the Certificate of Incorporation and Bylaws.
These agreements, among other things, will indemnify the Company's directors
and executive officers for certain expenses (including attorneys' fees), and
all losses, claims, liabilities, judgments, fines and settlement amounts
incurred by such person arising out of or in connection with such person's
service as a director or officer of the Company to the fullest extent
permitted by applicable law.
Policies of insurance may be obtained and maintained by the Company under
which its directors and officers will be insured, within the limits and
subject to the limitations of the policies, against certain expenses in
connection with the defense of, and certain liabilities which might be imposed
as a result of, actions, suits or proceedings to which they are parties by
reason of being or having been such directors or officers.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following table and text specifies securities sold by the Registrant
within the last three years and not registered under the Securities Act of
1933, the date of each sale, the title and amount of securities sold, and the
nature and aggregate amount of consideration received by the issuer in
connection with each sale.
<TABLE>
<CAPTION>
TITLE OF NUMBER OF
DATE SECURITIES SHARES(1) PURCHASER CONSIDERATION
- ---- ---------- --------- ------------------- -------------
<S> <C> <C> <C> <C>
July 25, 1995......... Common Stock 4,741 Martin R. Reid 47.41
July 25, 1995......... Common Stock 1,210 Douglas A. Waugaman 12.10
October 9, 1995....... Common Stock 242 Douglas A. Waugaman 2.42
</TABLE>
- --------
(1) Does not reflect 45-for-1 stock split effective August 21, 1996.
(2) Securities acquired pursuant to a Stock Purchase Agreement, which gave the
security holders the right to acquire shares over time and as such,
acquisitions occurred at various times from June 29, 1993 through April,
1994. The consideration for these shares consisted of stock of another
entity and cash.
Since July 25, 1995, the Registrant has sold and issued the following
securities which were not registered under the Securities Act (items (a)
through (g) do not reflect 45-for-1 stock split effective August 21, 1996):
a. Pursuant to the Preferred Stock and Common Stock Purchase Agreement
dated as of January 4, 1996 by and between UST Private Equity Investors
Fund, Inc. and the Registrant, the Registrant sold and issued: (1) 10,000
shares of the Redeemable Preferred Stock at a cash purchase price of $100
per share, or $1,000,000 in the aggregate and (2) 3,160 shares of the
Common Stock at a cash purchase price of $316.44 per share, or $1,000,000
in the aggregate.
b. Pursuant to the Preferred Stock and Common Stock Purchase Agreement
dated as of January 4, 1996 by and among the purchasers listed on Schedule
I thereto and the Registrant, the Registrant sold and issued: (1) 15,000
shares of the Redeemable Preferred Stock at a cash purchase price of $100
per share, or $1,500,000 in the aggregate and (2) 4,740 shares of the
Common Stock at a cash purchase price of $316.44 per share, or $1,500,000
in the aggregate.
c. Pursuant to the Preferred Stock and Common Stock Purchase Agreement
dated as of January 4, 1996 by and among Nassau Capital Partners L.P. and
NAS Partners I L.L.C., and the Registrant, the Registrant sold and issued:
(1) 49,730 shares and 270 shares, respectively of the Redeemable Preferred
Stock at a cash purchase price of $100 per share, or $4,973,000 and
$27,000, respectively, in the aggregate and (2) 15,716 shares and 85
shares, respectively, of the Common Stock at a cash purchase price of
$316.44 per share, or $4,973,000 and $27,000, respectively, in the
aggregate. All of the Redeemable Preferred Stock listed in items (a)
through (c) was redeemed by the Registrant in September 1996 at the
redemption price of $100 per share, plus accrued and unpaid dividends to
the redemption date.
d. In July 1995, pursuant to its Stock Option Plan for Key Employees (the
"1995 Plan"), the Registrant granted 16 employees options to purchase an
aggregate of 2,882 shares of Common Stock at a price of $.01 per share. In
April 1996, pursuant to the 1995 Plan, the Registrant granted 23 employees
options to purchase an aggregate of 1,360 shares of Common Stock at a price
of $635.00 per share. In January 1996, pursuant to the 1995 Plan, the
Registrant granted two employees and one director options to purchase an
aggregate of 622 shares of Common Stock at a price of $316.44 per share.
All such options are not transferable, and complete exercisability is not
available prior to various dates from April 2000 through July 2001. Options
covering 762 such shares were exercised prior to December 23, 1996, when
the issuance of further shares pursuant to the 1995 Plan was registered
under the Securities Act of 1933.
g. Pursuant to a Note and Warrant Purchase Agreement by and between Acme
Acquisition Holdings Corp. and Citicorp USA, Inc., on September 12, 1995,
the Company issued and sold to Citicorp USA, Inc. (i) a Senior Secured
Promissory Note in the aggregate principal amount of $10,000,000, which
note bears interest at the rate of 13% per annum and is due and payable on
September 15, 2005 and (ii) a Warrant to purchase shares of the
Registrant's Common Stock at $217.35 per share. In September 1996, the
Registrant repaid the Senior Secured Promissory Note in full and
repurchased the Warrant.
II-2
<PAGE>
h. Pursuant to the Stock Purchase Agreement dated as of March 14, 1997 by
and among certain Sellers, Acme Dixie, Inc., the Registrant, Comtect, Inc.
and certain subsidiaries of Comtect, Inc., the Registrant issued 189,189
shares of the Common Stock on April 25, 1997 as partial consideration for
the acquisition by the Registrant of all the outstanding capital stock of
Comtect, Inc.
Any sale of securities described herein were carried out in reliance on the
exemptions from registration contained in Sections 3(a)(9), 3(a)(11) and 4(2)
of the Securities Act of 1933 as transactions not involving any public
offering, except that transactions involving the stock option plan were
carried out in reliance upon Rule 701 of the Securities Act of 1933. The
recipients in each case represented their intention to acquire the securities
for investment only and not with a view of the distribution thereof. All
recipients had adequate access, through employment or other relationships, to
information about the Registrant.
ITEM 16. EXHIBITS.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Amended and Restated Certificate of Incorporation of the Company.
++++3.2 Form of Amended and Restated Bylaws of the Company.
5.1 Opinion of Latham & Watkins as to the validity of the securities
being registered hereby.
*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.
Second Amendment and Consent to Credit Agreement dated as of December
*10.3 21, 1995.
Amended and Restated Credit Agreement, dated as of September 24,
+10.4 1996.
First Amendment to Amended and Restated Credit Agreement, dated as of
++10.5 January 31, 1997.
10.6 Letter Agreement dated April 30, 1997, between the Company's
subsidiaries and BT Commercial Corporation relating to a proposed
amendment to the Amended and Restated Credit Agreement.
*10.7 Stock Purchase Agreement dated as of July 25, 1995, between Acme
Acquisition Holdings Corp. and Martin R. Reid.
*10.8 Stock Purchase and Severance Agreement dated as of July 25, 1995,
between Acme Acquisition Holdings Corp. and Douglas A. Waugaman.
*10.9 Stock Purchase and Severance Agreement dated as of October 4, 1995
between Rental Service Corporation and Douglas A. Waugaman.
*10.10 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.
*10.11 Amendment to Corporate Development and Administrative Services
Agreement effective
October 31, 1993.
*10.12 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.
*10.13 Letter Agreement dated June 7, 1996 between Nassau Capital Partners
L.P. and NAS Partners I L.L.C., and Rental Service Corporation.
*10.14 Stockholders' Agreement dated as of January 4, 1996 by and among the
parties listed on the signature page thereto and Rental Service
Corporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*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 June 1, 1996 between Rental Service
Corporation and David G. Ledlow.
*10.24 Form of Amendment to Amended Incentive Stock Option Agreement for
Region Managers.
*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
Corporate Office Personnel.
**10.28 1996 Equity Participation Plan of Rental Service Corporation.
10.29 Form of Incentive Stock Option Agreement for Employees.
10.30 Form of Non-Qualified Stock Option Agreement for Directors.
++10.31 Employee Qualified Stock Purchase Plan of Rental Service Corporation.
***10.32 Stock Purchase Agreement by and among Andy G. Gessner; Larry R. Bush;
Stacy K. Bush; Larry R. Bush; Trustee of the Stacy K. Bush Trust and
Roy B. Bush as "Sellers," Acme Dixie Inc., as "Buyer," Rental Service
Corporation as "Parent" and Comtect, Inc. and Comtect, Inc.'s
subsidiaries as the "Company," dated March 14, 1997.
***10.33 Asset Purchase Agreement by and among Brute Equipment Co. d/b/a "Foxx
Hy-Reach Company" as "Seller," Rental Service Corporation, Walker
Jones Equipment Company as "Buyer" and Thomas H. Foster, dated April
25, 1997.
***10.34 Asset Purchase Agreement by and among Central States Equipment, Inc.
and Equipment Lessors, Inc. as "Sellers," Walker Jones Equipment
Company as "Buyer" and the stockholders of Sellers, dated April 26,
1997.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of Rental Service Corporation.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of McGladrey & Pullen, LLP
23.5 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included on page II-6).
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.
+ 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. 22403) dated February 26, 1997, and incorporated herein
by reference.
++ Filed with the Company's Proxy Statement on Schedule 14A filed March 26,
1997, and incorporated herein by reference.
+++Filed+as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
*** Filed as an Exhibit to the Company's Current Report on Form 8-K dated
April 14, 1997, and incorporated herein by reference.
II-4
<PAGE>
(b) Financial Statement Schedules
Report of Independent Auditors
Schedule I--Condensed Financial Information of Registrant
Condensed Balance Sheets--December 31, 1995 and 1996
Condensed Statements of Operations--for the years ended December 31,
1994, 1995 and 1996
Condensed Statements of Cash Flows--for the years ended December 31,
1994, 1995 and 1996
Notes to Condensed Financial Statements--December 31, 1996
Schedule II--Valuation and Qualifying Accounts--as of and for the years
ended December 31, 1994, 1995 and 1996
Other schedules are not included because the required information is not
present or is included in the consolidated financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnifications for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act shall be deemed to be a part of
this Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Scottsdale, State of Arizona, on May 7, 1997.
RENTAL SERVICE CORPORATION
By: /s/ Martin R. Reid
__________________________________
Martin R. Reid
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Martin R.
Reid and Robert M. Wilson and each or any of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing necessary to be done in and about the premises, as fully
to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in their
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Martin R. Reid Chairman of the Board and May 7, 1997
____________________________________ Chief Executive Officer
Martin R. Reid (Principal Executive
Officer)
/s/ Robert M. Wilson Chief Financial Officer, May 7, 1997
____________________________________ Secretary and Treasurer
Robert M. Wilson (Principal Financial and
Accounting Officer)
/s/ William M Barnum, Jr. Director May 7, 1997
____________________________________
William M. Barnum, Jr.
/s/ James R. Buch Director May 7, 1997
____________________________________
James R. Buch
/s/ Christopher A. Laurence Director May 7, 1997
____________________________________
Christopher A. Laurence
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eric L. Mattson Director May 7, 1997
____________________________________
Eric L. Mattson
/s/ Britton H. Murdoch Director May 7, 1997
____________________________________
Britton H. Murdoch
/s/ John G. Quigley Director May 7, 1997
____________________________________
John G. Quigley
/s/ Frederick J. Warren Director May 7, 1997
____________________________________
Frederick J. Warren
</TABLE>
II-7
<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
Registration Statement. Our audits also included the financial statement
schedules listed in Item 16(b) of this Registration Statement. 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) (3,000) (121,000)
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 for the year
ended December 31, 1996.
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
-----------------------
CHARGED TO
BALANCE AT COSTS AND DEDUCTIONS -- BALANCE AT
DESCRIPTION BEGINNING OF YEAR EXPENSES ACQUISITIONS DESCRIBE END OF YEAR
- ------------------------ ----------------- ---------- ------------ ------------- -----------
<S> <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 INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
-------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
Amended and Restated Certificate of Incorporation of
*3.1 the Company.
++++3.2 Form of Amended and Restated Bylaws of the Company.
5.1 Opinion of Latham & Watkins as to the validity of the
securities being registered hereby.
*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.
First Amendment to Credit Agreement dated as of
*10.2 September 26, 1995.
Second Amendment and Consent to Credit Agreement dated
*10.3 as of December 21, 1995.
Amended and Restated Credit Agreement, dated as of
+10.4 September 24, 1996.
++10.5 First Amendment to Amended and Restated Credit
Agreement, dated as of January 31, 1997.
10.6 Letter Agreement dated April 30, 1997, between the
Company's subsidiaries and BT Commercial Corporation
relating to a proposed amendment to the Amended and
Restated Credit Agreement.
*10.7 Stock Purchase Agreement dated as of July 25, 1995,
between Acme Acquisition Holdings Corp. and Martin R.
Reid.
*10.8 Stock Purchase and Severance Agreement dated as of
July 25, 1995, between Acme Acquisition Holdings Corp.
and Douglas A. Waugaman.
*10.9 Stock Purchase and Severance Agreement dated as of
October 4, 1995 between Rental Service Corporation and
Douglas A. Waugaman.
*10.10 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.
*10.11 Amendment to Corporate Development and Administrative
Services Agreement effective
October 31, 1993.
*10.12 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.
*10.13 Letter Agreement dated June 7, 1996 between Nassau
Capital Partners L.P. and NAS Partners I L.L.C., and
Rental Service Corporation.
*10.14 Stockholders' Agreement dated as of January 4, 1996 by
and among the parties listed on the signature page
thereto and Rental Service Corporation.
*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 June 1, 1996 between Rental
Service Corporation and David G. Ledlow.
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBITS DESCRIPTION PAGE
-------- ----------- ------------
<C> <S> <C>
*10.24 Form of Amendment to Amended Incentive Stock Option
Agreement for Region Managers.
*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 Corporate Office Personnel.
**10.28 1996 Equity Participation Plan of Rental Service
Corporation.
10.29 Form of Incentive Stock Option Agreement for
Employees.
10.30 Form of Non-Qualified Stock Option Agreement for
Directors.
++10.31 Employee Qualified Stock Purchase Plan of Rental
Service Corporation.
***10.32 Stock Purchase Agreement by and among Andy G. Gessner;
Larry R. Bush; Stacy K. Bush; Larry R. Bush; Trustee
of the Stacy K. Bush Trust and Roy B. Bush as
"Sellers," Acme Dixie Inc., as "Buyer," Rental Service
Corporation as "Parent" and Comtect, Inc. and Comtect,
Inc.'s subsidiaries as the "Company," dated March 14,
1997.
***10.33 Asset Purchase Agreement by and among Brute Equipment
Co. d/b/a "Foxx Hy-Reach Company" as "Seller," Rental
Service Corporation, Walker Jones Equipment Company as
"Buyer" and Thomas H. Foster, dated April 25, 1997.
***10.34 Asset Purchase Agreement by and among Central States
Equipment, Inc. and Equipment Lessors, Inc. as
"Sellers," Walker Jones Equipment Company as "Buyer"
and the stockholders of Sellers, dated April 26, 1997.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of Rental Service Corporation.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Ernst & Young LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of McGladrey & Pullen, LLP
23.5 Consent of Latham & Watkins (included in Exhibit 5.1).
24.1 Powers of Attorney (included on page II-6).
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.
+ 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. 22403) dated February 26, 1997, and incorporated herein
by reference.
++ Filed with the Company's Proxy Statement on Schedule 14A filed March 26,
1997, and incorporated herein by reference.
+++Filed+as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated herein by reference.
*** Filed as an Exhibit to the Company's Current Report on Form 8-K dated
April 14, 1997, and incorporated herein by reference.
<PAGE>
Draft 5/5/97
EXHIBIT 1.1
RENTAL SERVICE CORPORATION
4,000,000 Shares Common Stock/1/
UNDERWRITING AGREEMENT
___________, 1997
William Blair & Company, L.L.C.
Morgan Stanley & Co
Donaldson, Lufkin & Jenrette Securities Corporation
As Representatives of the Several
Underwriters Named in Schedule A
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Section 1. Introductory. Rental Service Corporation ("Company") a
Delaware corporation, will have, as of the First Closing Date hereinafter
defined, an authorized capital stock consisting of 350,000 shares of Redeemable
Preferred Stock, $.01 par value, of which no shares were outstanding as of
_________, 1997, 500,000 shares of Preferred Stock, $.01 par value, of which no
shares were outstanding as of _________, 1997 and 20,000,000 shares, $.01 par
value, of Common Stock ("Common Stock"), of which _________ shares were
outstanding as of such date. The Company proposes to issue and sell 3,000,000
shares of its authorized but unissued Common Stock, and certain stockholders of
the Company (collectively referred to as the "Selling Stockholders" and named in
Schedule B) propose to sell 1,000,000 shares of the Company's issued and
outstanding Common Stock to the several underwriters named in Schedule A as it
may be amended by the Pricing Agreement hereinafter defined ("Underwriters"),
who are acting severally and not jointly. Collectively, such total of 5,500,000
shares of Common Stock proposed to be sold by the Company and the Selling
Stockholders is hereinafter referred to as the "Firm Shares." In addition,
certain Selling Stockholders propose to grant to the Underwriters an option to
purchase up to 600,000 additional shares of Common Stock ("Option Shares") as
provided in Section 5 hereof. The Firm Shares and, to the extent such option is
exercised, the Option Shares, are hereinafter collectively referred to as the
"Shares."
You have advised the Company and the Selling Stockholders that the
Underwriters propose to make a public offering of their respective portions of
the Shares as soon as you deem advisable after the registration statement
hereinafter referred to becomes effective, if it has not yet become effective,
and the Pricing Agreement hereinafter defined has been executed and delivered.
Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company, the Selling Stockholders and the Representatives,
acting on behalf of the several Underwriters, shall enter into an agreement
substantially in the form of Exhibit A hereto ("Pricing Agreement"). The Pricing
Agreement may take the form of an exchange of any standard form of written
telecommunication between the Company, the Selling Stockholders and the
Representatives and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Shares will be governed by this Agreement,
as supplemented by the Pricing
- ---------------------
/1/Plus an option to acquire up to 600,000 additional shares to cover over
allotments.
<PAGE>
Agreement. From and after the date of the execution and delivery of the Pricing
Agreement, this Agreement shall be deemed to incorporate the Pricing Agreement.
The Company and each of the Selling Stockholders hereby confirm their
agreements with the Underwriters as follows:
Section 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters and the Selling Stockholders
that:
(a) A registration statement on Form S-1 (File No. 333-______) and a
related preliminary prospectus with respect to the Shares have been
prepared and filed with the Securities and Exchange Commission
("Commission") by the Company in conformity with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "1933 Act;" unless indicated to
the contrary, all references herein to specific rules are rules promulgated
under the 1933 Act); and the Company has so prepared and has filed such
amendments thereto, if any, and such amended preliminary prospectuses as
may have been required to the date hereof and will file such additional
amendments thereto and such amended prospectuses as may hereafter be
required. There have been or will promptly be delivered to you three signed
copies of such registration statement and amendments, three copies of each
exhibit filed therewith, and conformed copies of such registration
statement and amendments (but without exhibits) and of the related
preliminary prospectus or prospectuses and final forms of prospectus for
each of the Underwriters in such amounts as you shall reasonably request.
Such registration statement (as amended, if applicable) at the
time it becomes effective and the prospectus constituting a part thereof
(including the information, if any, deemed to be part thereof pursuant to
Rule 430A(b) and/or Rule 434), as from time to time amended or
supplemented, are hereinafter referred to as the "Registration Statement,"
and the "Prospectus," respectively, except that if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection
with the offering of the Shares which differs from the Prospectus on file
at the Commission at the time the Registration Statement became or becomes
effective (whether or not such revised prospectus is required to be filed
by the Company pursuant to Rule 424(b)), the term Prospectus shall refer to
such revised prospectus from and after the time it was provided to the
Underwriters for such use. If the Company elects to rely on Rule 434 of the
1933 Act, all references to "Prospectus" shall be deemed to include,
without limitation, the form of prospectus and the term sheet, taken
together, provided to the Underwriters by the Company in accordance with
Rule 434 of the 1933 Act ("Rule 434 Prospectus"). Any registration
statement (including any amendment or supplement thereto or information
which is deemed part thereof) filed by the Company under Rule 462(b) ("Rule
462(b) Registration Statement") shall be deemed to be part of the
"Registration Statement" as defined herein, and any prospectus (including
any amendment or supplement thereto or information which is deemed part
thereof) included in such registration statement shall be deemed to be part
of the "Prospectus", as defined herein, as appropriate. The Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder are hereinafter collectively referred to as the
"Exchange Act."
(b) The Commission has not issued any order preventing or suspending
the use of any preliminary prospectus, and each preliminary prospectus has
conformed in all material respects with the requirements of the 1933 Act
and, as of its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading; and when the Registration Statement became or becomes
effective, and at all times subsequent thereto, up to the First Closing
Date or the Second Closing Date hereinafter defined, as the case may be,
the Registration Statement, including the
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information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable, and the Prospectus
and any amendments or supplements thereto, contained or will contain all
statements that are required to be stated therein in accordance with the
1933 Act and in all material respects conformed or will in all material
respects conform to the requirements of the 1933 Act, and neither the
Registration Statement nor the Prospectus, nor any amendment or supplement
thereto, included or will include any untrue statement of a material fact
or omitted or will omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation or warranty as to
information contained in or omitted from any preliminary prospectus, the
Registration Statement, the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to
the Company by or on behalf of (x) any Underwriter through the
Representatives expressly for use in the preparation thereof (it being
understood and agreed by the parties hereto that the only written
information furnished to the Company by or on behalf of the Underwriters
through the Representatives is the written information described in Section
4 hereof) or (y) any Selling Stockholder expressly for use in the
preparation thereof.
(c) The Company and its subsidiaries have been duly incorporated and
are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation, with corporate power and
authority to own their properties and conduct their business as described
in the Prospectus; the Company and each of its subsidiaries are duly
qualified to do business as foreign corporations under the corporation law
of, and are in good standing as such in, each jurisdiction in which they
own or lease substantial properties, have an office, or in which
substantial business is conducted and such qualification is required except
in any such case where the failure to so qualify or be in good standing
would not have a material adverse effect upon the business, condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries taken as a whole (a "Material Adverse Effect"); and no
proceeding of which the Company has knowledge has been instituted in any
such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification.
(d) Except as disclosed in the Registration Statement (including,
but not limited to, contracts filed as exhibits to the Registration
Statement), the Company owns directly or indirectly 100 percent of the
issued and outstanding capital stock of each of its subsidiaries, free and
clear of any claims, liens, encumbrances or security interests and all of
such capital stock has been duly authorized and validly issued and is fully
paid and nonassessable.
(e) The issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid and
nonassessable, and conform to the description thereof contained in the
Prospectus.
(f) The Shares to be sold by the Company have been duly authorized
and when issued, delivered and paid for pursuant to this Agreement, will be
validly issued, fully paid and nonassessable, and will conform to the
description thereof contained in the Prospectus.
(g) The making and performance by the Company of this Agreement and
the Pricing Agreement have been duly authorized by all necessary corporate
action and will not violate any provision of the Company's charter or
bylaws, each as amended to date, and will not result in the breach, or be
in contravention, of any provision of any agreement, franchise, license,
indenture, mortgage, deed of trust, or other instrument to which the
Company or any subsidiary is a party or by which the Company, any
subsidiary or the property of any of them may be bound or affected, or any
order, rule or regulation applicable to the Company or any subsidiary of
any court or regulatory body, administrative agency or
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other governmental body having jurisdiction over the Company or any
subsidiary or any of their respective properties, or any order of any court
or governmental agency or authority entered in any proceeding to which the
Company or any subsidiary was or is now a party or by which it is bound,
except for any breach or contravention which, singly or in the aggregate,
would not have a Material Adverse Effect. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and
delivery of this Agreement or the Pricing Agreement or the consummation of
the transactions contemplated herein or therein, except for compliance with
the 1933 Act, the Exchange Act and blue sky laws applicable to the public
offering of the Shares by the several Underwriters and clearance of such
offering with the National Association of Securities Dealers, Inc.
("NASD"). This Agreement has been duly executed and delivered by the
Company.
(h) Ernst & Young LLP are independent accountants with respect to
the Company and its subsidiaries as required by the 1933 Act.
(i) The consolidated financial statements together with the related
notes and schedules of the Company included in the Registration Statement
present fairly the consolidated financial position of the Company as of the
respective dates of such financial statements, and the consolidated results
of operations and cash flows of the Company for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed in the Prospectus, and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. The financial information set forth in the Prospectus under
"Selected Consolidated Financial Information and Operating Data" presents
fairly on the basis stated in the Prospectus, the information set forth
therein.
The unaudited pro forma consolidated financial statements and
other unaudited pro forma information included in the Prospectus present
fairly in all material respects the information shown therein, have been
prepared in accordance with generally accepted accounting principles and
the Commission's rules and guidelines with respect to pro forma financial
statements and other pro forma information, have been properly compiled on
the pro forma basis described therein, and, in the opinion of the Company,
the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate under the circumstances.
(j) (x) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or in default under any consent decree,
or in default with respect to any material provision of any lease, loan
agreement, franchise, license, permit or other contract obligation to which
it is a party; and (y) to the Company's knowledge, there does not exist any
state of facts which constitutes an event of default as defined in such
documents or which, with notice or lapse of time or both, would constitute
such an event of default, except in the case of clauses (x) and (y) for
defaults, events of default and violations which neither singly nor in the
aggregate are material to the Company and its subsidiaries taken as a
whole.
(k) There are no legal or governmental proceedings pending
(including, without limitation, proceedings related to environmental or
discrimination matters) or, to the Company's knowledge, threatened to which
the Company or any subsidiary is a party or of which property owned or
leased by the Company or any subsidiary is the subject, or which are not
disclosed in the Prospectus and which, if decided adversely to the Company
or such subsidiaries, are reasonably expected to have a Material Adverse
Effect or which question the validity of this Agreement or the Pricing
Agreement or any action taken or to be taken pursuant hereto or thereto.
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(l) There are no holders of securities of the Company having rights
to registration thereof or preemptive rights to purchase Common Stock
except as disclosed in the Prospectus. Holders of registration rights who
are not Selling Stockholders received proper notice from the Company with
respect to such rights and have not exercised such rights with respect to
the offering being made by the Prospectus.
(m) The Company and each of its subsidiaries have good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or elsewhere in the
Registration Statement), subject to no lien (except liens for taxes not yet
due and payable), mortgage, pledge, charge or encumbrance of any kind
except those, if any, reflected in such financial statements (or elsewhere
in the Registration Statement (including, but not limited to, contracts
filed as exhibits to the Registration Statement)) or which are not material
to the Company and its subsidiaries taken as a whole. The Company and each
of its subsidiaries hold their respective leased properties which are
material to the Company and its subsidiaries taken as a whole under valid
and binding leases.
(n) The Company has not taken and will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares.
(o) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
contemplated by the Registration Statement, the Company and its
subsidiaries, taken as a whole, have not incurred any material liabilities
or obligations, direct or contingent, nor entered into any material
transactions not in the ordinary course of business and there has not been
any material adverse change in their condition (financial or otherwise) or
results of operations nor any material adverse change in their capital
stock, short-term debt or long-term debt.
(p) The Company agrees not to sell, contract to sell or otherwise
dispose of any Common Stock or securities convertible into Common Stock
(except Common Stock issued pursuant to currently outstanding options,
warrants or convertible securities) for a period of 90 days after the
effective date of the Registration Statement without the prior written
consent of William Blair & Company, L.L.C. Notwithstanding the foregoing,
during such 90 day period the Company may (i) grant stock options pursuant
to the Company's existing stock option plan, (ii) issue shares of common
stock upon the conversion or exercise of options and warrants which are
outstanding as of the date hereof and (iii) register shares of common stock
underlying the Company's existing stock option plan.
(q) There is no material document of a character required to be
described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required by the 1933 Act.
(r) The Company together with its subsidiaries owns and possesses
all right, title and interest in and to, or has duly licensed from third
parties, all patents, patent rights, trade secrets, inventions, know-how,
trademarks, trade names, copyrights, service marks and other proprietary
rights ("Trade Rights"), if any, which are material to the business of the
Company and its subsidiaries taken as a whole. Neither the Company nor any
of its subsidiaries has received any notice of infringement,
misappropriation or conflict from any third party as to such material Trade
Rights which has not been resolved or disposed of and, to the knowledge of
the Company, neither the Company nor any of its subsidiaries has infringed,
misappropriated or otherwise conflicted with material Trade Rights of any
third parties, which infringement, misappropriation or conflict would have
a Material Adverse Effect.
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(s) The conduct of the business of the Company and each of its
subsidiaries is in compliance in all respects with applicable federal,
state, local and foreign laws and regulations, except where the failure to
be in compliance would not, singly or in the aggregate, have a Material
Adverse Effect.
(t) All sales of the Company's capital stock prior to the date
hereof were either (1) made pursuant to a registration statement filed by
the Company with the Commission under the 1933 Act or (2) at all relevant
times exempt from the registration requirements of the 1933 Act and in case
(1) and (2) duly registered with or the subject of an available exemption
from the registration requirements of the applicable state securities or
blue sky laws.
(u) The Company has filed all necessary federal and state income and
franchise tax returns and has paid all taxes shown as due thereon other
than those (i) currently payable without penalty or interest or (ii) the
failure of which to pay would not have a Material Adverse Effect; and there
is no tax deficiency that has been asserted against the Company or any of
its properties or assets that would have a Material Adverse Effect.
(v) A registration statement relating to the Common Stock has been
declared effective by the Commission pursuant to the Exchange Act and the
Common is duly registered thereunder. The Share have been listed on the
Nasdaq National Market subject to notice of issuance of sale, as the case
may be.
(w) The Company is not an "investment company" as defined in Section
3(a) of the Investment Company Act of 1940, as amended ("Investment Company
Act").
(x) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 517.075, Florida Statutes
(Chapter 92-198, Laws of Florida).
Section 3. Representations, Warranties and Covenants of the Selling
Stockholders.
(a) Each Selling Stockholder severally, and not jointly, represents
and warrants to, and agrees with, the Company and the Underwriters that:
(i) Such Selling Stockholder has, and on the First Closing Date
or the Second Closing Date, as the case may be, will have, valid
marketable title to the Shares proposed to be sold by such Selling
Stockholder hereunder on such date and full right, power and authority
to enter into this Agreement and the Pricing Agreement and to sell,
assign, transfer and deliver such Shares hereunder, free and clear of
all voting trust arrangements, liens, encumbrances, equities, claims
and community property rights; and upon delivery of and payment for
such Shares hereunder, the Underwriters will acquire valid marketable
title thereto, free and clear of any voting trust arrangement, lien,
encumbrance, equity, claim and community property right other than
imposed upon or consented to in writing by an Underwriter.
(ii) The making and performance by such Selling Stockholder of
this Agreement and the Pricing Agreement (A), if such Selling
Stockholder is not an individual, have been duly authorized by all
necessary action and (B), if such Selling Stockholder is not an
individual, will not violate any provision of such Selling
Stockholder's charter, bylaws, partnership agreement or trust
agreement, as the case may be and (C) will not result in the breach,
or be in contravention, of any provision of any trust agreement,
franchise, license, indenture, mortgage, deed of trust, or other
instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder or the property of such Selling Stockholder
may be bound or affected, or any order, rule or regulation applicable
to such Selling Stockholder of any court or regulatory body,
administrative agency or
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<PAGE>
other governmental body having jurisdiction over such Selling
Stockholder or any of such Selling Stockholder's properties, or any
order of any court or governmental agency or authority entered in any
proceeding to which such Selling Stockholder was or is now a party or
by which it is bound, and which would have a material adverse effect
on such Selling Stockholder's ability to perform its obligations under
this Agreement. No consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other government
body is required for the execution and delivery of this Agreement or
the Pricing Agreement or the consummation of the transactions
contemplated herein or therein, except for compliance with the 1933
Act and blue sky laws applicable to the public offering of the Shares
by the several Underwriters and clearance of such offering with the
NASD. This Agreement has been duly executed and delivered by or on
behalf of such Selling Stockholder.
(iii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which might be
reasonably expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Shares.
(iv) Such Selling Stockholder has executed and delivered a Power
of Attorney ("Power of Attorney") among the Selling Stockholder,
Martin R. Reid and Douglas A. Waugaman (the "Agents"), naming the
Agents as such Selling Stockholder's attorneys-in-fact for the purpose
of entering into and carrying out this Agreement and the Pricing
Agreement on behalf of such Selling Stockholder, and the Power of
Attorney has been duly executed by such Selling Stockholder and a copy
thereof has been delivered to you.
(v) Such Selling Stockholder further represents, warrants and
agrees that such Selling Stockholder has deposited in custody, under a
Custody Agreement ("Custody Agreement") with ChaseMellon Shareholder
Services, L.L.C., as custodian ("Custodian"), certificates in
negotiable form for the Shares to be sold hereunder by such Selling
Stockholder, for the purpose of further delivery pursuant to this
Agreement. Such Selling Stockholder agrees that the Shares to be sold
by such Selling Stockholder on deposit with the Custodian are subject
to the interests of the Company, the Underwriters and the other
Selling Stockholders, that the arrangements made for such custody, and
the appointment of the Agents pursuant to the Power of Attorney, are
to that extent irrevocable, and that the obligations of such Selling
Stockholder hereunder and under the Power of Attorney and the Custody
Agreement shall not be terminated except as provided in this
Agreement, the Power of Attorney or the Custody Agreement by any act
of such Selling Stockholder, by operation of law, whether, in the case
of an individual Selling Stockholder, by the death or incapacity of
such Selling Stockholder or, in the case of a trust or estate, by the
death of the trustee or trustees or the executor or executors or the
termination of such trust or estate, or, in the case of a partnership
or corporation, by the dissolution, winding-up or other event
affecting the legal life of such entity, or by the occurrence of any
other event. If any individual Selling Stockholder, trustee or
executor should die or become incapacitated, or any such trust,
estate, partnership or corporation should be terminated, or if any
other event should occur before the delivery of the Shares hereunder,
the documents evidencing Shares then on deposit with the Custodian
shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such death, incapacity, termination
or other event had not occurred, regardless of whether or not the
Custodian shall have received notice thereof. Each Agent has been
authorized by such Selling Stockholder to execute and deliver this
Agreement and the Pricing Agreement and the Custodian has been
authorized to receive and acknowledge receipt of the proceeds of sale
of the Shares to be sold by such Selling Stockholder against delivery
thereof and otherwise act on behalf of such Selling Stockholder. The
Custody
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<PAGE>
Agreement has been duly executed by such Selling Stockholder and a
copy thereof has been delivered to you.
(vi) As to each Selling Stockholder named in Schedule B hereto
as a Principal Selling Stockholder (collectively, the "Principal
Selling Stockholders") each preliminary prospectus, insofar as it has
related to such Principal Selling Stockholder and, to the knowledge of
such Principal Selling Stockholder in all other respects, as of its
date, has conformed in all material respects with the requirements of
the 1933 Act and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and with
respect to the Registration Statement at the time of effectiveness,
and at all times subsequent thereto, up to the First Closing Date or
the Second Closing Date hereinafter defined, as the case may be, (1)
such parts of the Registration Statement and the Prospectus and any
amendments or supplements thereto as relate to such Principal Selling
Stockholder, and the Registration Statement and the Prospectus and any
amendments or supplements thereto, to the knowledge of such Principal
Selling Stockholder in all other respects, contained or will contain
all statements that are required to be stated therein in accordance
with the 1933 Act and in all material respects conformed or will in
all material respects conform to the requirements of the 1933 Act, and
(2) neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as it relates to such Principal
Selling Stockholder, and, to the knowledge of such Principal Selling
Stockholder in all other respects, included or will include any untrue
statement of a material fact or omitted or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided that neither clause (1)
nor (2) shall have any effect if information has been given by such
Selling Stockholder to the Company and the Representatives in writing
which would eliminate or remedy any such untrue statement or omission.
(vii) As to each Selling Stockholder that is not a Principal
Selling Stockholder (collectively, the "Non-Principal Selling
Stockholders"), each preliminary prospectus, solely with respect to
information provided in writing by such Non-Principal Selling
Stockholder for inclusion therein as of its date, has not included any
untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; and with
respect to the Registration Statement at the time of effectiveness,
and at all times subsequent thereto, up to the First Closing Date or
the Second Closing Date, as the case may be, neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto,
solely with respect to information provided in writing by such Non-
Principal Selling Stockholder for inclusion therein, included or will
include any untrue statement of a material fact or omitted or will
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading;
provided that the foregoing clause shall not have any effect if
information has been given by such Non-Principal Selling Stockholder
to the Company and the Representatives in writing which would
eliminate or remedy any such untrue statement or omission. It is
agreed that the only information provided with respect to each Non-
Principal Selling Stockholder is such information as set forth in the
Prospectus under the caption "Principal and Selling Stockholders"
which specifically relates to such Non-Principal Selling Stockholder.
(b) Each Selling Stockholder agrees with the Company and the
Underwriters not to sell, contract to sell or otherwise dispose of any Common
Stock for a period of 90 days after this Agreement becomes effective without the
prior written consent of William Blair & Company, L.L.C.
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In order to document the Underwriter's compliance with the reporting and
withholding provisions of the Internal Revenue Code of 1986, as amended, with
respect to the transactions herein contemplated, each of the Selling
Stockholders agrees to deliver to you prior to or on the First Closing Date, as
hereinafter defined, a properly completed and executed United States Treasury
Department Form W-8 or W-9 (or other applicable form of statement specified by
Treasury Department regulations in lieu thereof).
Section 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and the Selling Stockholders that the information set forth (a) on
the cover page of the Prospectus with respect to price, underwriting discount
and terms of the offering and (b) under "Underwriting" in the Prospectus and (c)
on the inside front cover of the Prospectus with respect to the stabilization
legend was furnished to the Company by and on behalf of the Underwriters for use
in connection with the preparation of the Registration Statement and is correct
and complete in all material respects. The Company and the Selling Stockholders
hereby acknowledge and agree that the information described in this Section 4
was the only written information furnished to the Company by or on behalf of any
Underwriters through the Representatives for use in the preparation of the
Registration Statement and Prospectus.
Section 5. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders,
severally and not jointly, agree to sell to the Underwriters named in Schedule A
hereto, and the Underwriters agree, severally and not jointly, to purchase from
the Company and the Selling Stockholders, respectively, 3,000,000 Firm Shares
from the Company and the respective number of Firm Shares set forth opposite the
names of the Selling Stockholders in Schedule B hereto at the price per share
set forth in the Pricing Agreement. The obligation of each Underwriter to the
Company shall be to purchase from the Company that number of full shares which
(as nearly as practicable, as determined by you) bears to 3,000,000 the same
proportion as the number of Shares set forth opposite the name of such
Underwriter in Schedule A hereto bears to the total number of Firm Shares to be
purchased by all Underwriters under this Agreement. The obligation of each
Underwriter to each Selling Stockholder shall be to purchase from such Selling
Stockholder the number of full shares which (as nearly as practicable, as
determined by you) bears to that number of Firm Shares set forth opposite the
name of such Selling Stockholder in Schedule B hereto, the same proportion as
the number of Shares set forth opposite the name of such Underwriter in Schedule
A hereto bears to the total number of Firm Shares to be purchased by all
Underwriters under this Agreement. The initial public offering price and the
purchase price shall be set forth in the Pricing Agreement.
At 9:00 A.M., Chicago Time, on the fourth business day, if permitted under
Rule 15c6-1 under the Exchange Act, (or the third business day if required under
Rule 15c6-1 under the Exchange Act or unless postponed in accordance with the
provisions of Section 12) following the date the Registration Statement becomes
effective (or, if the Company has elected to rely upon Rule 430A, the fourth
business day, if permitted under Rule 15c6-1 under the Exchange Act, (or the
third business day if required under Rule 15c6-1 under the Exchange Act) after
execution of the Pricing Agreement), or such other time not later than ten
business days after such date as shall be agreed upon by the Representatives and
the Company, the Company and the Custodian will deliver to you at the offices of
counsel for the Underwriters or through the facilities of The Depository Trust
Company for the accounts of the several Underwriters, certificates representing
the Firm Shares to be sold by the Company and for the benefit of the Selling
Stockholders, respectively, against payment of the purchase price therefor by
delivery of federal or other immediately available funds, by wire transfer or
otherwise, to the Company and the Custodian. Such time of delivery and payment
is herein referred to as the "First Closing Date." The certificates for the Firm
Shares so to be delivered will be in such denominations and registered in such
names as you request by notice to the Company and the Custodian prior to 10:00
A.M., Chicago Time, on the second business day preceding the First Closing Date,
and will be made available at the Company's expense for checking and packaging
by the Representatives at 10:00 A.M., Chicago Time, on the business day
preceding the First Closing Date. Payment for the Firm Shares so to be delivered
shall be made at the time and in the manner described above at the offices of
counsel for the Underwriters.
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In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
certain of the Selling Stockholders designated on Schedule B to be offering
Option Shares hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 600,000 Option Shares, at the
same purchase price per share to be paid for the Firm Shares, for use solely in
covering any over allotments made by the Underwriters in the sale and
distribution of the Firm Shares. The option granted hereunder may be exercised
at any time (but not more than once) within 30 days after the date of the
initial public offering upon notice by you to the Company and the Agents setting
forth the aggregate number of Option Shares as to which the Underwriters are
exercising the option, the names and denominations in which the certificates for
such shares are to be registered and the time and place at which such
certificates will be delivered. Such time of delivery (which may not be earlier
than the First Closing Date), being herein referred to as the "Second Closing
Date," shall be determined by you, but if at any time other than the First
Closing Date, shall not be earlier than three nor later than 10 full business
days after delivery of such notice of exercise. The number of Option Shares to
be purchased from each such Selling Stockholder are set forth in Schedule B
hereto. The number of Option Shares to be purchased by each Underwriter shall be
determined by multiplying the number of Option Shares to be sold by the Selling
Stockholders pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Shares to be purchased by such Underwriter as set
forth opposite its name in Schedule A and the denominator of which is the total
number of Firm Shares (subject to such adjustments to eliminate any fractional
share purchases as you in your absolute discretion may make). Certificates for
the Option Shares will be made available at the Company's expense for checking
and packaging at 10:00 A.M., Chicago Time, on the business day preceding the
Second Closing Date. The manner of payment for and delivery of the Option Shares
shall be the same as for the Firm Shares as specified in the preceding
paragraph.
You have advised the Company and the Selling Stockholders that each
Underwriter has authorized you to accept delivery of its Shares, to make payment
and to receipt therefor. You, individually and not as the Representatives of the
Underwriters, may make payment for any Shares to be purchased by any Underwriter
whose funds shall not have been received by you by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such Underwriter,
but any such payment shall not relieve such Underwriter from any obligation
hereunder.
Section 6. Covenants of the Company. The Company covenants and
agrees that:
(a) The Company will advise you and the Selling Stockholders
promptly of its notice of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose, or of any notification to
it of the suspension of qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceedings for that
purpose, and will also advise you and the Selling Stockholders promptly of
any request of the Commission for amendment or supplement of the
Registration Statement, of any preliminary prospectus or of the Prospectus,
or for additional information.
(b) The Company will give you and the Selling Stockholders notice of
its intention to file or prepare any amendment to the Registration
Statement (including any post-effective amendment) or any Rule 462(b)
Registration Statement or any amendment or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs
from the prospectus on file at the Commission at the time the Registration
Statement became or becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) and any term
sheet as contemplated by Rule 434) and will furnish you and the Selling
Stockholders with copies of any such amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file any such amendment or supplement or use any such
prospectus to which you or counsel for the Underwriters shall reasonably
object on a timely basis.
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(c) If the Company elects to rely on Rule 434 of the 1933 Act, the
Company will prepare a term sheet that complies with the requirements of
Rule 434. If the Company elects not to rely on Rule 434, the Company will
provide the Underwriters with copies of the form of prospectus, in such
numbers as the Underwriters may reasonably request, and file with the
Commission such prospectus in accordance with Rule 424(b) of the 1933 Act
by the close of business in New York City on the second business day
immediately succeeding the date of the Pricing Agreement. If the Company
elects to rely on Rule 434, the Company will provide the Underwriters with
copies of the form of Rule 434 Prospectus, in such numbers as the
Underwriters may reasonably request, by the close of business in New York
on the business day immediately succeeding the date of the Pricing
Agreement.
(d) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act any event occurs as a result of
which the Prospectus, including any amendments or supplements, would
include an untrue statement of a material fact, or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it is necessary at any time to amend the
Prospectus, including any amendments or supplements thereto and including
any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs
from the prospectus on file with the Commission at the time of
effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with
the 1933 Act, the Company promptly will advise you thereof and will
promptly prepare and file with the Commission an amendment or supplement
which will correct such statement or omission or an amendment which will
effect such compliance; and, in case any Underwriter is required to deliver
a prospectus nine months or more after the effective date of the
Registration Statement, the Company upon request, but at the expense of
such Underwriter, will prepare promptly such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section
10(a)(3) of the 1933 Act.
(e) Without the prior written consent of the Representatives,
neither the Company nor any of its subsidiaries will, prior to the earlier
of the Second Closing Date or termination or expiration of the related
option, incur any material liability or obligation, direct or contingent,
or enter into any material transaction, other than in the ordinary course
of business, except as contemplated by the Prospectus.
(f) Except for repurchase by the Company of its capital stock from
employees whose employment may terminate, neither the Company nor any of
its subsidiaries will acquire any capital stock of the Company prior to the
earlier of the Second Closing Date or termination or expiration of the
related option nor will the Company declare or pay any dividend or make any
other distribution upon the Common Stock payable to stockholders of record
on a date prior to the earlier of the Second Closing Date or termination or
expiration of the related option, except in either case as contemplated by
the Prospectus.
(g) The Company will make generally available to its security
holders as soon as reasonably practicable, and in any event not later than
August 15, 1998, a consolidated earnings statement (which need not be
audited) covering a period of at least 12 months beginning after the
effective date of the Registration Statement, which will satisfy the
provisions of the last paragraph of Section 11(a) of the 1933 Act and Rule
158.
(h) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an
Underwriter or dealer, the Company will furnish to you at its expense,
subject to the provisions of subsection (d) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and all
amendments and supplements to any such documents in each case
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as soon as available and in such quantities as you may reasonably request,
for the purposes contemplated by the 1933 Act.
(i) The Company will cooperate with the Underwriters in qualifying
or registering the Shares for sale under the blue sky laws of such
jurisdictions as you reasonably designate, and will continue such
qualifications in effect so long as reasonably required for the
distribution of the Shares. The Company shall not be required to qualify as
a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not currently qualified or where it would
be subject to taxation as a foreign corporation.
(j) The Company will use the net proceeds received by it from the
sale of the Shares being sold by it in the manner specified in the
Prospectus in all material respects.
(k) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule
430A and/or Rule 434, then following the execution of the Pricing
Agreement, the Company will prepare, and file or transmit for filing with
the Commission in accordance with such Rule 430A, Rule 424(b) and/or Rule
434, copies of an amended prospectus, or, if required by such Rule 430A
and/or Rule 434, a post-effective amendment to the Registration Statement
(including an amended prospectus), containing all information so omitted.
If required, the Company will prepare and file, or transmit for filing, a
Rule 462(b) Registration Statement not later than the date of the execution
of the Pricing Agreement. If a Rule 462(b) Registration Statement is filed,
the Company shall make payment of, or arrange for payment of, the
additional registration fee owing to the Commission required by Rule 111.
(l) The Company will comply with all applicable registration, filing
and reporting requirements of the Exchange Act and the Nasdaq National
Market.
Section 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective as to
all of its provisions or is terminated, the Company agrees to pay (i) all costs,
fees and expenses (other than legal fees and disbursements of counsel for the
Underwriters and the expenses incurred by the Underwriters) incurred in
connection with the performance of the Company's obligations hereunder,
including without limiting the generality of the foregoing, all fees and
expenses of legal counsel for the Company and of the Company's independent
accountants, all costs and expenses incurred in connection with the preparation,
printing, filing and distribution of the Registration Statement, each
preliminary prospectus and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided for herein, this
Agreement, the Pricing Agreement and the Blue Sky Memorandum, (ii) all costs,
fees and expenses (including reasonable legal fees not to exceed $18,000)
incurred by the Underwriters in connection with qualifying or registering all or
any part of the Shares for offer and sale under blue sky laws and under the laws
of certain Provinces of Canada, including the preparation of a blue sky
memorandum relating to the Shares, the attainment of NASD clearance for offering
of the Shares, and the payment of any NASD filing fee; and (iii) all fees and
expenses of the Company's transfer agent, printing of the certificates for the
Shares and all transfer taxes, if any, with respect to the sale and delivery of
the Shares to the several Underwriters.
The provisions of this Section shall not affect any agreement which the
Company and the Selling Stockholders may make for the allocation or sharing of
such expenses and costs.
Section 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the First Closing Date and the Option Shares on the Second Closing Date shall
be subject to the accuracy of the representations and warranties on the part of
the Company and the Selling Stockholders herein set forth as of the date hereof
and as of the First Closing Date or
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the Second Closing Date, as the case may be, to the accuracy of the statements
contained in the certificate of the Company delivered pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 1:00 P.M.,
Chicago Time, on the first full business day after the date of this
Agreement, or such later time as shall have been consented to by you but in
no event later than 1:00 P.M., Chicago Time, on the third full business day
following the date hereof; and prior to the First Closing Date or the
Second Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or shall be pending
or, to the knowledge of the Company, the Selling Stockholders or you, shall
be contemplated by the Commission. If the Company has elected to rely upon
Rule 430A and/or Rule 434, the information concerning the initial public
offering price of the Shares and price-related information shall have been
transmitted to the Commission for filing pursuant to Rule 424(b) within the
prescribed period and the Company will provide evidence satisfactory to the
Representatives of such timely filing (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rules 430A and 424(b)). If a Rule
462(b) Registration Statement is required, such Registration Statement
shall have been transmitted to the Commission for filing and become
effective within the prescribed time period and, prior to the First Closing
Date, the Company shall have provided evidence of such filing and
effectiveness in accordance with Rule 462(b).
(b) The Shares shall have been qualified for sale under the blue sky
laws of such states as shall have been specified by the Representatives.
(c) The legality and sufficiency of the authorization, issuance and
sale or transfer and sale of the Shares hereunder, the validity and form of
the certificates representing the Shares, the execution and delivery of
this Agreement and the Pricing Agreement, and all corporate proceedings and
other legal matters incident thereto, and the form of the Registration
Statement and the Prospectus (except financial statements) shall have been
approved by counsel for the Underwriters exercising reasonable judgment.
(d) You shall not have advised the Company that the Registration
Statement or the Prospectus or any amendment or supplement thereto,
contains an untrue statement of fact, which, in the reasonable opinion of
counsel for the Underwriters, is material or omits to state a fact which,
in the opinion of such counsel, is material and is required to be stated
therein or necessary in order to make the statements therein not
misleading.
(e) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any material adverse change, or any material
adverse development involving a prospective material adverse change, in or
affecting particularly the business or properties of the Company or its
subsidiaries, taken as a whole, whether or not arising in the ordinary
course of business, which, in the reasonable judgment of the
Representatives, makes it impractical or inadvisable to proceed with the
public offering or purchase of the Shares as contemplated hereby.
(f) There shall have been furnished to you, as Representatives of the
Underwriters, on the First Closing Date or the Second Closing Date, as the
case may be, except as otherwise expressly provided below:
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<PAGE>
(i) An opinion of Latham & Watkins, counsel for the Company,
addressed to the Underwriters and dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:
(1) the Company has been duly incorporated and is validly
existing and in good standing under the laws of the State of
Delaware with corporate power and authority to own its properties
and conduct its business as described in the Registration
Statement and Prospectus; and, based solely on certificates from
public officials, counsel shall confirm that the Company is
qualified to do business in each state set forth in Schedule I to
such opinion;
(2) an opinion to the same general effect as clause (1) of
this subparagraph (i) in respect of RSC Holdings Inc., RSC
Acquisition Corp., Acme Dixie Inc., Acme Duval Inc. and Acme
Rents, Inc., the direct and indirect Delaware and California
subsidiaries of the Company (collectively, the "Identified
Subsidiaries" and each an "Identified Subsidiary");
(3) the issued and outstanding shares of capital stock of
each Identified Subsidiary are as set forth in Schedule II to
such opinion (the "Subsidiary Shares"). The Subsidiary Shares
have been duly authorized, validly issued and are fully paid and
nonassessable. Except as disclosed in the Registration Statement
(including contracts filed as exhibits to the Registration
Statement), the Company owns of record directly or indirectly all
of the Subsidiary Shares and all of the outstanding shares of
capital stock of each of Acme Alabama, Inc., The Air & Pump
Company, Inc. and Walker Jones Equipment, Inc. (collectively with
the Identified Subsidiaries, the "Subsidiaries"), and to the
knowledge of such counsel, owns such stock of the Subsidiaries
free and clear of any adverse claim (as defined in Section 8-302
of the Uniform Commercial Code);
(4) the authorized capital stock of the Company consists of
20,000,000 shares of Common Stock, 500,000 shares of preferred
stock, par value $0.01 per share, and 350,000 shares of
redeemable preferred stock, par value $0.01 per share, of which,
based solely upon a review of a certificate of the transfer agent
and registrar of the Company and upon issuance, delivery and
payment by you and the other Underwriters for shares of Common
Stock to be issued pursuant to and in accordance with the terms
of the Underwriting Agreement and the Pricing Agreement, ________
shares of Common Stock are outstanding as of the date hereof (the
"Capital Stock"); and such Capital Stock conforms as to legal
matters in all material respects to the description thereof in
the Prospectus under the caption "Description of Capital Stock";
(5) the Capital Stock (including the Shares), upon issuance,
delivery and payment by you and the other Underwriters for the
Shares to be issued pursuant to and in accordance with the terms
of the Underwriting Agreement and the Pricing Agreement, has been
duly authorized and validly issued and is fully paid and
nonassessable;
(6) the form of certificates for the Shares to be delivered
hereunder are in due and proper form under the Delaware General
Corporation Law (the "DGCL");
(7) the Registration Statement has become effective under
the 1933 Act and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the
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<PAGE>
Registration Statement has been issued under the 1933 Act and no
proceedings therefor have been initiated by the Commission.
(8) the Registration Statement and the Prospectus comply as
to form in all material respects with the requirements for
registration statements on Form S-1 under the 1933 Act; it being
understood, however, that such counsel need express no opinion
with respect to the financial statements, the notes thereto, and
the related schedules and other financial, numerical, statistical
or accounting data included in the Registration Statement or the
Prospectus; and to such counsel's knowledge there are no leases,
contracts or documents of a character required to be described in
the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described or
filed, as required. In passing upon the compliance as to form of
the Registration Statement and the Prospectus, such counsel may
assume that the statements made therein are correct and complete;
(9) the statements under the captions "Management - Stock
Option Plan," "Certain Relationships and Related Transactions,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a
summary of the terms of the Company's capital stock, legal
matters or documents referred to therein, are accurate in all
material respects;
(10) this Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by the Company; and to such
counsel's knowledge, no consent, approval, authorization or order
of, or filing with, any federal or Illinois or Delaware court or
governmental agency or body is required for the consummation of
the issuance and sale of the Shares by the Company pursuant to
this Agreement and the Pricing Agreement, except such as have
been obtained under the federal securities laws and such as may
be required under state securities laws in connection with the
purchase and distribution of such Shares by the Underwriters; and
(11) the execution of this Agreement and the issuance of the
Shares by the Company pursuant to this Agreement will not result
in a breach of or a default under, any agreement, franchise,
license, indenture, mortgage, deed of trust, or other instrument
of the Company or any of its subsidiaries or by which the
property of any of them is bound which is filed as an exhibit to
the Registration Statement; or violate any of the provisions of
the Company's Amended and Restated Certificate of Incorporation
or Bylaws or the DGCL or any federal or Illinois statute, rule or
regulation known to such counsel to be applicable to the Company
(other than federal securities laws).
In rendering such opinion, such counsel may state that they are
relying upon the certificate of the transfer agent for the Common Stock, as
to the number of shares of Common Stock at any time or times outstanding.
Such counsel may also rely upon the opinions of other competent counsel
and, as to factual matters, on certificates of the Selling Stockholders and
of officers of the Company and of state officials, in which case their
opinion is to state that they are so doing and copies of said opinions or
certificates are to be attached to the opinion unless said opinions or
certificates (or, in the case of certificates, the information therein)
have been furnished to the Representatives in other form.
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company,
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<PAGE>
and representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel need not pass upon, and need not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus (other than as
expressly set forth above in paragraphs 4 and 9) and need not make any
independent check or verification thereof, during the course of such
participation (relying as to materiality to a large extent upon the statements
of officers and other representatives of the Company), no facts have come to
such counsel's attention that causes such counsel to believe either the
Registration Statement (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule 430A(b)
and/or Rule 434, if applicable) at the time it became effective contained an
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
or that the Prospectus, as amended or supplemented, if applicable, as of its
date and as of the First Closing Date or the Second Closing Date, as the case
may be, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, it being understood
that such counsel need not express any belief with respect to the financial
statements, the notes thereto and the related schedules and other financial,
numerical, statistical or accounting data included in the Registration Statement
or Prospectus.
(ii) an opinion of counsel for each of the Selling Stockholders addressed
to the Underwriters and dated the First Closing Date or the Second Closing Date,
to the effect that;
(1) this Agreement and the Pricing Agreement, if such Selling
Stockholder is not an individual, have been duly authorized, executed and
delivered by or on behalf of each such Selling Stockholder, if such Selling
Stockholder is not an individual, the Agents and the Custodian for each
such Selling Stockholder have been duly and validly authorized to carry out
all transactions contemplated herein on behalf of each such Selling
Stockholder; and the performance of this Agreement and the Pricing
Agreement and the consummation of the transactions herein contemplated by
such Selling Stockholders will not result in a breach or violation of any
of the terms and provisions of, or constitute a default under, any statute,
any indenture, mortgage, deed of trust, note agreement or other agreement
or instrument known to such counsel to which any of such Selling
Stockholders is a party or by which any are bound or to which any of the
property of such Selling Stockholders is subject, or any order, rule or
regulation known to such counsel of any court or governmental agency or
body having jurisdiction over any of such Selling Stockholders or any of
their properties; and no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation of
the transactions contemplated by this Agreement and the Pricing Agreement
in connection with the sale of Shares to be sold by such Selling
Stockholders hereunder, except such as have been obtained under the 1933
Act and such as may be required under applicable blue sky laws in
connection with the purchase and distribution of such Shares by the
Underwriters and the clearance of such offering with the NASD;
(2) each Selling Stockholder has full right, power and
authority to enter into this Agreement and the Pricing Agreement and
to sell, transfer and deliver the Shares to be sold on the First
Closing Date or the Second Closing Date, as the case may be, by such
Selling Stockholder hereunder and good and marketable title to such
Shares so sold, free and clear of all voting trust arrangements,
liens, encumbrances, equities, claims and community property rights
whatsoever, has been transferred to the Underwriters (who counsel may
assume to be bona fide purchasers) who have purchased such Shares
hereunder.
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In addition, although such counsel need not pass upon, and need not
assume any responsibility for, the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus
and need not make any independent check or verification thereof, during the
course of such participation (relying as to materiality to a large extent
upon the statements of officers and other representatives of the Company),
no facts have come to such counsel's attention that causes such counsel to
believe either the Registration Statement (including the information deemed
to be part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b) and/or Rule 434, if applicable) at the time it
became effective, insofar as it relates to such Selling Stockholder,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as amended or
supplemented, if applicable, as of its date and as of the First Closing
Date or the Second Closing Date, as the case may be, insofar as it relates
to such Selling Stockholder, contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(iii) Such opinion or opinions of Sidley & Austin, counsel for the
Underwriters, dated the First Closing Date or the Second Closing Date, as
the case may be, with respect to the incorporation of the Company, the
validity of the Shares to be sold by the Company, the Registration
Statement and the Prospectus and other related matters as you may
reasonably require, and the Company shall have furnished to such counsel
such documents and shall have exhibited to them such papers and records as
they request for the purpose of enabling them to pass upon such matters.
(iv) A certificate of the Company executed on its behalf by the
chief executive officer and the principal financial officer of the Company,
dated the First Closing Date or the Second Closing Date, as the case may
be, to the effect that:
(1) the representations and warranties of the Company set forth
in Section 2 of this Agreement are true and correct as of the date of
this Agreement and as of the First Closing Date or the Second Closing
Date, as the case may be, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such date; and
(2) to the best knowledge of the respective signers, the
Commission has not issued an order preventing or suspending the use of
the Prospectus or any preliminary prospectus filed as a part of the
Registration Statement or any amendment thereto; no stop order
suspending the effectiveness of the Registration Statement has been
issued; and no proceedings for that purpose have been instituted or
are pending or contemplated under the 1933 Act.
The delivery of the certificate provided for in this subparagraph shall be
and constitute a representation and warranty of the Company as to the facts
required in the immediately foregoing clauses (1) and (2) of this subparagraph
to be set forth in said certificate.
(v) A certificate of each Selling Stockholder dated the First Closing
Date or the Second Closing Date, as the case may be, to the effect that the
representations and warranties of such Selling Stockholder set forth in
Section 3 of this Agreement are true and correct as of such date and such
Selling Stockholder has complied with all the agreements and satisfied all
the conditions on the part of such Selling Stockholder to be performed or
satisfied at or prior to such date.
(vi) At the time the Pricing Agreement is executed and also on the
First Closing Date or the Second Closing Date, as the case may be, there
shall be delivered to you a letter addressed to you, as
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Representatives of the Underwriters, from Ernst & Young LLP, independent
accountants, the first one to be dated the date of the Pricing Agreement,
the second one to be dated the First Closing Date and the third one (in the
event of a second closing) to be dated the Second Closing Date, to the
effect set forth in Schedule C. There shall not have been any material
adverse change specified in the letters referred to in this subparagraph
which makes it impractical or inadvisable in the reasonable judgment of the
Representatives to proceed with the public offering or purchase of the
Shares as contemplated hereby.
(vii) Such further certificates and documents as you may reasonably
request.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
to you and to Sidley & Austin, counsel for the Underwriters, which approval
shall not be unreasonably withheld. The Company shall furnish you with such
manually signed or conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the Company and the Selling
Stockholders without liability on the part of any Underwriter or the Company or
any Selling Stockholder, except for the expenses to be paid or reimbursed by the
Company pursuant to Sections 7 and 9 hereof and except to the extent provided in
Section 11 hereof.
Section 9. Reimbursement of Underwriters' Expenses. If the sale to
the Underwriters of the Shares on the First Closing Date is not consummated
because any condition of the Underwriters' obligations hereunder is not
satisfied or because of any refusal, inability or failure on the part of the
Company or the Selling Stockholders to perform any agreement herein or to comply
with any provision hereof, unless such failure to satisfy such condition or to
comply with any provision hereof is due to the default or omission of any
Underwriter, the Company agrees to reimburse you and the other Underwriters upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been reasonably incurred by you and
them in connection with the proposed purchase and the sale of the Shares. Any
such termination shall be without liability of any party to any other party
except that the provisions of this Section, Section 7 and Section 11 shall at
all times be effective and shall apply.
Section 10. Effectiveness of Registration Statement. You, the
Company and the Selling Stockholders will use your, its and their best efforts
to cause the Registration Statement to become effective, if it has not yet
become effective, and to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
Section 11. Indemnification. (a) The Company and each Principal
Selling Stockholder, severally and not jointly agrees, to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the 1933 Act or the Exchange Act against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the 1933 Act, the Exchange Act
or other federal or state statutory law or regulation, at common law or
otherwise (including in settlement of any litigation if such settlement is
effected with the written consent of the Company), insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any preliminary prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
and will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that neither the Company
nor any Principal Selling Stockholder will be liable in any such case to the
extent that (i) any such loss,
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claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives, specifically for use therein; or (ii) if such statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus and (1) any such loss, claim, damage or liability suffered or
incurred by any Underwriter (or any person who controls any Underwriter)
resulted from an action, claim or suit by any person who purchased Shares which
are the subject thereof from such Underwriter in the offering and (2) such
Underwriter failed to deliver or provide a copy of the Prospectus to such person
at or prior to the confirmation of the sale of such Shares in any case where
such delivery is required by the 1933 Act; and further provided, that, without
limitation of the Company's obligations under this Agreement, no Principal
Selling Stockholder will be liable in any such case in respect of any such
losses, claims, damages, liabilities or expenses unless the Underwriter or
controlling person seeking indemnification from such Principal Selling
Stockholder shall have previously sought indemnification from the Company in
respect thereof and the Company shall have failed to honor and pay such
Underwriter's or controlling person's claim for indemnification within 30
calendar days of the date such indemnification is first sought against the
Company (except that the foregoing condition precedent requiring an Underwriter
or a controlling person to so seek indemnification from the Company shall not be
applicable if an Underwriter or controlling person has previously sought
indemnification from the Company with respect to such matters or if such
Underwriter or controlling person is prohibited from being indemnified by the
Company (or from seeking such indemnification) by the effect of any order,
decree, stay, injunction, statute, legal process or other matter of law and
except that the foregoing condition precedent shall not limit the right of an
Underwriter or controlling person at any time to notify a Principal Stockholder
of a claim for indemnification or otherwise initiate a claim or proceeding
against a Principal Selling Stockholder for indemnification prior to the
expiration of such 30 calendar days, but only, in the case of such initiation of
a claim or proceeding, if, and solely to the extent, necessary to prevent any
applicable statute of limitations from expiring). In addition to their other
obligations under this Section 11(a), the Company and each Principal Selling
Stockholder agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 11(a), they will reimburse the Underwriters on a monthly basis for
all reasonable legal and other expenses of one counsel incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of the Company's and each Principal Selling
Stockholder's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. This indemnity agreement will be in addition to
any liability which the Company and the Principal Selling Stockholders may
otherwise have.
Each Selling Stockholder who is a Non-Principal Selling Stockholder,
severally and not jointly agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of the
1933 Act or the Exchange Act against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject under the 1933 Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise (including in settlement
of any litigation if such settlement is effected with the written consent of the
Company), to the same extent as the foregoing indemnity to each Underwriter set
forth in the immediately preceding paragraph, but only with reference to
information provided in writing by such Non-Principal Selling Stockholder to the
Company specifically for use in the preparation of the documents referred to in
the preceding paragraph.
Without limiting the full extent of the Company's agreement to indemnify
each Underwriter, as herein provided, each Selling Stockholder shall be liable
under the indemnity agreements contained in this Section 11(a) only for an
amount not exceeding the proceeds received by such Selling Stockholder from the
sale of Shares hereunder.
-19-
<PAGE>
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, and each Selling Stockholder and each person, if any, who controls
the Company within the meaning of the 1933 Act or the Exchange Act, against any
losses, claims, damages or liabilities to which the Company, or any such
director, officer, Selling Stockholder or controlling person may become subject
under the 1933 Act, the Exchange Act or other federal or state statutory law or
regulation, at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue or alleged untrue
statement of any material fact contained in the Registration Statement, any
preliminary prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus, or any amendment or supplement thereto in reliance
upon and in conformity with Section 4 of this Agreement or any other written
information furnished to the Company by such Underwriter through the
Representatives specifically for use in the preparation thereof; and will
reimburse any legal or other expenses reasonably incurred by the Company, or any
such director, officer, Selling Stockholder or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. In addition to their other obligations under this Section 11(b), the
Underwriters agree that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 11(b), they will reimburse the Company and the Selling Stockholders
on a monthly basis for all reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and the Selling Stockholders
for such expenses and the possibility that such payments might later be held to
have been improper by a court of competent jurisdiction. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party except to the extent that
the indemnifying party was prejudiced by such failure to notify. In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
all other indemnifying parties similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party; provided, however,
if the defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, or the indemnified and indemnifying parties may have
conflicting interests which would make it inappropriate for the same counsel to
represent both of them, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defense and otherwise to
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defense in accordance with the proviso
to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
counsel, approved by the Representatives in the case of paragraph (a)
representing all Underwriters and related persons that are indemnified parties,
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action or (iii) the indemnifying
-20-
<PAGE>
party has authorized in writing the employment of counsel for the indemnified
party at the expense of the indemnifying party. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability arising out
of such proceeding.
(d) If the indemnification provided for in this Section is unavailable to
an indemnified party under paragraphs (a) or (b) hereof in respect of any
losses, claims, damages or liabilities referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, the
Selling Stockholders and the Underwriters from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, the Selling Stockholders and the Underwriters in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company, the Selling Stockholders
and the Underwriters shall be deemed to be in the same proportion in the case of
the Company and the Selling Stockholders, as the total price paid to the Company
and the Selling Stockholders for the Shares by the Underwriters (net of
underwriting discount but before deducting expenses), and in the case of the
Underwriters as the underwriting discount received by them bears to the total of
such amounts paid to the Company and the Selling Stockholders and received by
the Underwriters as underwriting discount in each case as contemplated by the
Prospectus. The relative fault of the Company and the Selling Stockholders and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the Company
or by the Selling Stockholders or by the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages and liabilities referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim.
The Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution pursuant to this Section were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section,
no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute pursuant to this Section are several in proportion to their
respective underwriting commitments and not joint.
(e) The provisions of this Section shall survive any termination of this
Agreement.
Section 12. Default of Underwriters. It shall be a condition to the
agreement and obligation of the Company and the Selling Stockholders to sell and
deliver the Shares hereunder, and of each Underwriter to purchase the Shares
hereunder, that, except as hereinafter in this paragraph provided, each of the
Underwriters shall purchase and pay for all Shares agreed to be purchased by
such Underwriter hereunder upon tender to the Representatives of all such Shares
in accordance with the terms hereof. If any Underwriter or Underwriters default
in their obligations to purchase Shares hereunder on the First Closing Date and
the aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed 10 percent of the total number of
Shares which the Underwriters are obligated to purchase on the First Closing
Date, the
-21-
<PAGE>
Representatives may make arrangements satisfactory to the Company and the
Selling Stockholders for the purchase of such Shares by other persons, including
any of the Underwriters, but if no such arrangements are made by such date the
nondefaulting Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the Shares which such defaulting
Underwriters agreed but failed to purchase on such date. If any Underwriter or
Underwriters so default and the aggregate number of Shares with respect to which
such default or defaults occur is more than the above percentage and
arrangements satisfactory to the Representatives and the Company and the Selling
Stockholders for the purchase of such Shares by other persons are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any nondefaulting Underwriter or the Company or the
Selling Stockholders, except for the expenses to be paid by the Company pursuant
to Section 7 hereof and except to the extent provided in Section 11 hereof.
In the event that Shares to which a default relates are to be purchased by
the nondefaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be effected. As used in this Agreement, the
term "Underwriter" includes any person substituted for an Underwriter under this
Section. Nothing herein will relieve a defaulting Underwriter from liability for
its default.
Section 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11 and 14 and as to all other provisions at
10:00 A.M., Chicago Time, on the day following the date upon which the Pricing
Agreement is executed and delivered, unless such a day is a Saturday, Sunday or
holiday (and in that event this Agreement shall become effective at such hour on
the business day next succeeding such Saturday, Sunday or holiday); but this
Agreement shall nevertheless become effective at such earlier time after the
Pricing Agreement is executed and delivered as you may determine on and by
notice to the Company and the Selling Stockholders or by release of any Shares
for sale to the public. For the purposes of this Section, the Shares shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Shares or upon the release by you of
telegrams (i) advising Underwriters that the Shares are released for public
offering, or (ii) offering the Shares for sale to securities dealers, whichever
may occur first.
Section 14. Termination. Without limiting the right to terminate
this Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholders or by you by notice to the Company and the
Selling Stockholders at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company, or the Selling
Stockholders to any Underwriter (except for the expenses to be paid or
reimbursed pursuant to Section 7 hereof and except to the extent provided
in Section 11 hereof) or of any Underwriter to the Company, or the Selling
Stockholders.
(b) This Agreement may also be terminated by you prior to the First
Closing Date, and the option referred to in Section 5, if exercised, may be
canceled at any time prior to the Second Closing Date, if (i) trading in
securities on the New York Stock Exchange shall have been suspended or
minimum prices shall have been established on such exchange, or (ii) a
banking moratorium shall have been declared by Illinois, New York, or
United States authorities, or (iii) there shall have been any change in
financial markets or in political, economic or financial conditions which,
in the opinion of the Representatives, materially and adversely affects the
market for the Shares, or (iv) there shall have been an outbreak of major
armed hostilities between the United States and any foreign power which in
the reasonable opinion of the Representatives makes it impractical or
inadvisable to offer or sell the Shares. Any termination pursuant to this
paragraph (b) shall be without liability on the part of any Underwriter to
the Company or the Selling Stockholders or on the part of the Company to
any Underwriter or the
-22-
<PAGE>
Selling Stockholders (except for expenses to be paid or reimbursed pursuant
to Section 7 hereof and except to the extent provided in Section 11
hereof).
Section 15. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of the Selling Stockholders and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, principals, members,
officers or directors or any controlling person, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Shares sold
hereunder.
Section 16. Notices. All communications hereunder will be in writing
and, if sent to the Underwriters will be mailed, delivered or telegraphed and
confirmed to you c/o William Blair & Company, L.L.C., 222 West Adams Street,
Chicago, Illinois 60606, with a copy to Sidley & Austin, One First National
Plaza, Chicago, Illinois, Attention: Larry Barden, Esq.; if sent to the Company
will be mailed, delivered or telegraphed and confirmed to the Company at its
corporate headquarters with a copy to Latham & Watkins, 633 West Fifth Street,
Suite 4000, Los Angeles, California 90071, Attention: Elizabeth A. Blendell,
Esq.; and if sent to the Selling Stockholders will be mailed, delivered or
telegraphed and confirmed to the Agents and the Custodian at such address as
they have previously furnished to the Company and the Representatives, with a
copy to Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles,
California 90071, Attention: Elizabeth A. Blendell, Esq.
Section 17. Successors. This Agreement and the Pricing Agreement
will inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representatives and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section 11,
and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any of
the Underwriters merely by reason of such purchase.
Section 18. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with this financing,
and any action under or in respect of this Agreement taken by you will be
binding upon all the Underwriters and as such may be relied upon by the Company.
Section 19. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.
Section 20. Counterparts. This Agreement may be executed in one or
more counterparts, and all counterparts so executed shall constitute one
agreement.
Section 21. Applicable Law. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
Illinois.
* * * *
-23-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company, the Selling Stockholders and the
several Underwriters including you, all in accordance with its terms.
Very truly yours,
RENTAL SERVICE CORPORATION
By
--------------------------------------
Chief Executive Officer
By:
--------------------------------------
Attorney-in-Fact
By:
--------------------------------------
Attorney-in-Fact
[Underwriting Agreement Signature Page]
The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.
William Blair & Company, L.L.C.
Morgan Stanley & Co.
Donaldson Lufkin & Jenrette Securities Corporation
Acting as Representatives of the
several Underwriters named in
Schedule A
By: William Blair & Company, L.L.C.
By:
------------------------------
Principal
-24-
<PAGE>
[Underwriting Agreement Signature Page]
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriter To Be Purchased
- ----------- ---------------
<S> <C>
William Blair & Company, L.L.C.
Morgan Stanley
Donaldson Lufkin & Jenrette Securities Corporation..............
Total 4,000,000
=========
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Option Shares
to be Sold to be Sold
---------- ----------
<S> <C> <C>
Company 3,000,000 0
Principal Selling Stockholders:
- ------------------------------
Non-Principal Selling Stockholders:
- ----------------------------------
Total 4,000,000 600,000
========= =======
</TABLE>
<PAGE>
SCHEDULE C
Comfort Letter of Ernst & Young LLP
(1) They are independent public accountants with respect to the Company
and its subsidiaries within the meaning of the 1933 Act.
(2) In their opinion the consolidated financial statements and schedules
of the Company and its subsidiaries included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act.
(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and its subsidiaries responsible for financial
and accounting matters as to transactions and events subsequent to December 31,
1995, a reading of minutes of meetings of the stockholders and directors of the
Company and its subsidiaries since December 31, 1995, a reading of the latest
available interim unaudited consolidated financial statements of the Company and
its subsidiaries (with an indication of the date thereof) and other procedures
as specified in such letter, nothing came to their attention which caused them
to believe that (i) the unaudited consolidated financial statements of the
Company and its subsidiaries included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act or that such unaudited financial statements are not
fairly presented in accordance with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited financial
statements included in the Registration Statement, (ii) the unaudited pro forma
financial statements included in the Registration Statement do not comply in
form in all material respects with the applicable accounting requirements of
Rule 11-02 of Regulation S-X and the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of such statements
and (iii) at a specified date not more than five days prior to the date thereof
in the case of the first letter and not more than two business days prior to the
date thereof in the case of the second and third letters, there was any change
in the capital stock or long-term debt or short-term debt (other than normal
payments) of the Company and its subsidiaries on a consolidated basis or any
decrease in consolidated total assets or consolidated stockholders' equity as
compared with amounts shown on the latest unaudited balance sheet of the Company
included in the Registration Statement or for the period from the date of such
balance sheet to a date not more than five days prior to the date thereof in the
case of the first letter and not more than two business days prior to the date
thereof in the case of the second and third letters, there were any decreases,
as compared with the corresponding period of the prior year, in equipment
rentals or sales of parts, supplies and equipment, consolidated operating income
or in the total or per share amounts of consolidated net income except, in all
instances, for changes or decreases which the Prospectus discloses have occurred
or may occur or which are set forth in such letter.
(4) They have carried out specified procedures, which have been agreed to
by the Representatives, with respect to certain information in the Prospectus
specified by the Representatives, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company and its subsidiaries.
<PAGE>
Exhibit A
RENTAL SERVICE CORPORATION
4,000,000 Shares Common Stock/2/
PRICING AGREEMENT
_____________, 1997
William Blair & Company, L.L.C.
Morgan Stanley & Co.
Donaldson Lufkin & Jenrette Securities Corporation
As Representatives of the Several
Underwriters
c/o William Blair & Company, L.L.C.
222 West Adams Street
Chicago, Illinois 60606
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement dated ___________, 1997
(the "Underwriting Agreement") relating to the sale by the Company and the
Selling Stockholders and the purchase by the several Underwriters for whom
William Blair & Company, L.L.C., Morgan Stanley & Co. and Donaldson Lufkin &
Jenrette Securities Corporation are acting as representatives (the
"Representatives"), of the above Shares. All terms herein shall have the
definitions contained in the Underwriting Agreement except as otherwise defined
herein.
Pursuant to Section 5 of the Underwriting Agreement, the Company and each
of the Selling Stockholders agree with the Representatives as follows:
1. The initial public offering price per share for the Shares shall be
$__________.
2. The purchase price per share for the Shares to be paid by the several
Underwriters shall be $_____________, being an amount equal to the initial
public offering price set forth above less $____________ per share.
- ------------------
/2/ Plus an option to acquire up to 600,000 additional shares to cover over
allotments
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company, the Selling Stockholders and the
several Underwriters, including you, all in accordance with its terms.
Very truly yours,
RENTAL SERVICE CORPORATION
By
----------------------------
Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
William Blair & Company, L.L.C.
Donaldson Lufkin & Jenrette Securities Corporation
Morgan Stanley & Co.
Acting as Representatives of the
Several Underwriters
By William Blair & Company, L.L.C.
By
--------------------------
Principal
[Pricing Agreement Signature Page]
<PAGE>
EXHIBIT 5.1
LATHAM & WATKINS
Attorneys At Law
633 West Fifth Street, Suite 4000
Los Angeles, California 90071-2007
Telephone (213) 485-1234
Fax (213) 891-8763
May 9, 1997
Rental Service Corporation
14505 N. Hayden Road, Suite 322
Scottsdale, Arizona 85260
Re: Registration Statement on Form S-1 (File No. 333- )
4,600,000 Shares of Common Stock, par value $.01 per share
----------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of 4,600,000 shares of common
stock, par value $.01 per share (the "Shares") of Rental Service Corporation, a
Delaware corporation (the "Company"), under the Securities Act of 1933, as
amended, pursuant to a Registration Statement on Form S-1 (File No. 333- )
filed with the Securities and Exchange Commission (the "Commission") on May 9,
1997 (the "Registration Statement"), you have requested our opinion with respect
to the matters set forth below.
<PAGE>
LATHAM & WATKINS
Rental Service Corporation
May 9, 1997
Page 2
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization, issuance and sale of the Shares,
and for the purposes of this opinion, have assumed such proceedings will be
timely completed in the manner presently proposed. In addition, we have made
such legal and factual examinations and inquiries, including an examination of
originals or copies certified or otherwise identified to our satisfaction of
such documents, corporate records and instruments, as we have deemed necessary
or appropriate for purposes of this opinion.
In our examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, and the
conformity to authentic original documents of all documents submitted to us as
copies.
We are opining herein as to the effect on the subject transaction only
of the General Corporation Law of the State of Delaware and we express no
opinion with respect to the applicability thereto, or the effect thereon, of any
other laws or as to any matters of municipal law or the laws of any local
agencies within the state.
Subject to the foregoing, it is our opinion that as of the date hereof
the Shares have been duly authorized, and upon issuance, delivery and payment
therefor in the manner contemplated by the Registration Statement, will be
validly issued, fully paid and nonassessable.
We consent to you filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters."
Very truly yours,
/s/ Latham & Watkins
<PAGE>
April 30, 1997 EXHIBIT 10.6
Acme Alabama, Inc.
Acme Dixie Inc.
Acme Duval Inc.
Acme Rents, Inc.
The Air & Pump Company
Walker Jones Equipment, Inc.
Rental Service Corporation
RSC Acquisition Corp.
RSC Holdings, Inc.
14505 Hayden Road, #322
Scottsdale, Arizona 85260
RE: $100,000,000 Increase in Senior Secured Revolving Credit Facility
Gentlemen:
Reference is hereby made to that certain Amended and Restated Credit
Agreement dated as of September 24, 1996 (as amended by the First Amendment to
Amended and Restated Credit Agreement dated as of January 1, 1997 and the Second
Amendment Consent and Limited Waiver to Amended and Restated Credit Agreement
dated as of April 10, 1997, the "Credit Agreement") among Acme Alabama, Inc.,
Acme Dixie Inc., Acme Duval Inc., Acme Rents, Inc., The Air & Pump Company and
Walker Jones Equipment, Inc. (collectively, the "Borrowers"), Rental Service
Corporation, RSC Acquisition Corp. and RSC Holdings, Inc. (collectively, the
"Parent Guarantors"), each financial institution identified on Annex I thereto
(together with its successors and permitted assigns pursuant to Section 12.8
thereof, a "Lender"), the Issuing Bank and BT Commercial Corporation ("BTCC")
acting as agent for the Lenders and the Issuing Bank (in such capacity, together
with any successor agent appointed pursuant to Section 11.8 thereof, the
"Agent"). Undefined capitalized terms used herein shall have the meanings
ascribed to such terms in the Credit Agreement.
BTCC understands from discussions with representatives of the Borrowers and
the Parent Guarantors that the Borrowers and the Parent Guarantors have
requested an amendment to the Credit Agreement (i) increasing the total
Commitments thereunder by $100,000,000 (such increase being referred to as the
"Incremental Commitment"), (ii) reducing the rate at which the Unused Line Fee
accrues to 0.25% per annum, (iii) revising the definitions of Applicable
--- -----
Eurodollar Rate Margin, Applicable Prime Rate Margin and Interest Coverage
Ratio, as more particularly described on Annex I attached hereto and made
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 2
a part hereof (together with corresponding revisions to the form of Compliance
Certificate attached to the Credit Agreement as Exhibit O), (iv) reducing the
rate at which Letter of Credit Fees accrue after the occurrence of an Event of
Default to 4.00% per annum and (v) reducing the rate of interest payable after
--- -----
the occurrence of an Event of Default to (A) for all Obligations (other than
Eurodollar Rate Loans), a per annum rate equal to the Prime Lending Rate plus
--- ----- ----
2.50% and (B) for Eurodollar Rate Loans, a per annum rate equal to the Adjusted
--- -----
Eurodollar Rate for the applicable Interest Period in effect for such Eurodollar
Rate Loans plus 4.00%. Such an amendment, containing the condition relating to
----
the New Offering (as defined below) and such other terms and conditions
acceptable to the Borrowers, the Parent Guarantors, the Agent and the Lenders
and being in form and substance acceptable to the Agent and the Lenders, is
referred to herein as the "Third Amendment."
Based upon our preliminary review of the information which the Credit
Parties have provided to us, BTCC, in its capacity as a Lender under the Credit
Agreement, is pleased to confirm that it is willing to provide the Incremental
Commitment upon the effectiveness of the Third Amendment, provided, that the
--------
effectiveness of the Third Amendment shall be subject to the satisfaction of the
condition, among others, that RSC shall have received at least $45,000,000 in
net cash proceeds from the issuance of RSC common stock or subordinated debt
securities convertible into equity securities of RSC, in each case on terms
(including subordination terms) and subject to conditions satisfactory to the
Agent and the Lenders (the "New Offering"). BTCC's commitment to provide the
Incremental Commitment is also subject to the satisfaction of all the conditions
set forth herein, in the Fee Letter (as defined below) and in the Third
Amendment and review of the assets, liabilities (including existing contingent
liabilities), business and operations of the Credit Parties giving effect to the
Third Amendment and the New Offering. Further, BTCC and its counsel have not
yet completed due diligence efforts necessary to substantiate the factual
premises upon which the terms and conditions of this Commitment Letter are
based. BTCC's willingness to commit to provide the Incremental Commitment is
subject to its satisfactory completion of such review and due diligence and its
continuing satisfaction therewith.
BTCC, as Agent, will structure the Third Amendment and use its best efforts
to obtain approval thereof from the other Lenders. The Credit Parties hereby
agree to provide the Agent and the other Lenders, promptly upon request, with
all information deemed necessary by them to evaluate the New Offering, the
Incremental Commitment, and the terms of the Third Amendment, including, without
limitation, information and projections prepared by the Credit Parties or their
advisors relating to the transactions described herein, all as reasonably
requested by the Agent. Each of the Credit Parties further agrees to use its
reasonable best efforts to make the appropriate officers and representatives
thereof available to participate in information meetings for the Lenders at
times and places as the Agent may reasonably request.
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 3
Each of the Credit Parties represents and warrants that (a) all information
which has been or is hereafter made available to the Agent, any Lender or any
other financial institution which agrees to provide any portion of the
Incremental Commitment (a "New Lender") by any Credit Party or any of their
respective representatives in connection with the transactions contemplated
hereby is and will be complete and correct in all material respects for the
purposes prepared and does not and will not contain any untrue statement of
material fact or omit to state a material fact necessary in order to make the
statements contained therein not materially misleading in light of the
circumstances under which such statements are made, and (b) all financial
projections that have been or will hereafter be prepared by the Credit Parties
and made available to the Agent, any Lender or any New Lender have been or will
be prepared in good faith based upon reasonable assumptions, which assumptions
shall be disclosed as part of such projections. In arranging and structuring
the Third Amendment and the Incremental Commitment, the Agent may be using and
relying on such information and projections without independent verification
thereof.
Each of the Credit Parties agrees that any and all information, materials
or analysis furnished to us, or developed by us, in connection with the due
diligence review described herein or in arranging and structuring the Third
Amendment, including, without limitation, information bearing on the
creditworthiness of any of the Credit Parties or their Affiliates (collectively,
"Information"), may be shared by us with the other Lenders, the New Lenders and
our Affiliates, including, without limitation, Bankers Trust Company and BT
Securities Corporation (collectively "BT Affiliates") provided that none of such
Information shall be used in any manner which would violate applicable law.
Each of the Credit Parties also confirms that it has no objection to discussions
between our personnel and the personnel of the other Lenders, the New Lenders or
the BT Affiliates concerning any Credit Party or any Affiliate of any Credit
Party, the Information, the proposed Third Amendment, or any other potential
transaction between any Credit Party or BTCC, any Lender, any New Lender or any
BT Affiliate.
In connection with the Third Amendment, BTCC may, in its discretion,
allocate to the Lenders and the New Lenders portions of any fees payable to BTCC
in connection with the Incremental Commitment and the Third Amendment. Each of
the Credit Parties agrees that none of the Lenders nor any New Lender will
receive from any Credit Party or any of their respective Affiliates any
compensation of any kind for its participation in the Incremental Commitment
except as expressly provided for in this letter or in the fee letter of even
date herewith (the "Fee Letter").
BTCC's commitment to provide the Incremental Commitment is further subject
to there not having occurred and being continuing a material adverse change in
financial, banking or capital market conditions generally since the date hereof
that, in the sole judgment of BTCC, would substantially impair the subsequent
marketability of the Incremental Commitment. In addition, in the event that: (i)
prior to the execution and
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 4
delivery of definitive documentation with respect to the Third
Amendment, BTCC becomes aware of information, or an event occurs, which BTCC
reasonably believes could have a Material Adverse Effect or (ii) the Credit
Parties do not, for any reason other than a cancellation by BTCC of its
commitment pursuant to the foregoing clause (i), execute and deliver the
definitive documentation with respect to the Third Amendment on or before June
30, 1997, then BTCC may, in its sole and absolute discretion, terminate all of
its obligations hereunder.
The commitment of BTCC hereunder is also subject to negotiation and
execution of the Third Amendment and other amendments to the Credit Documents
(the Credit Documents, as amended by such amendments, collectively, the "Amended
Credit Documents") in form and substance satisfactory to the Credit Parties, the
Agent, the Lenders and their respective counsel. Whether or not the Amended
Credit Documents are executed (including, without limitation, by reason of the
failure to receive approval of each Lender (other than BTCC)), each of the
Credit Parties agrees as follows:
(a) to promptly reimburse BTCC for all reasonable costs and expenses including,
without limitation, (i) the fees, disbursements and other reasonable
charges of attorneys and paralegals, (ii) reasonable out-of-pocket expenses
of BTCC personnel, (iii) other legal, appraisal, environmental, audit,
consulting, search and filing fees and expenses incurred by BTCC or any BT
Affiliate in connection with (x) the arrangement, structuring, negotiation,
preparation, review, execution, delivery, collection and enforcement of
this Commitment Letter, the Fee Letter and the Amended Credit Documents and
(y) the completion of the due diligence investigation described herein;
(b) to indemnify and hold harmless BTCC, each Lender and each of their
respective Affiliates (other than Affiliates of BTCC or any Lender who have
been engaged by the Company with respect to the New Offering), and each
director, officer, agent, counsel and employee thereof (each an
"Indemnified Person") from and against all losses, claims, damages, costs
and other expenses ("Losses") to which any of them may become subject
arising out of or relating to this Commitment Letter, the Amended Credit
Documents, the New Offering or any other transaction contemplated hereby or
thereby except for any such Losses caused by the gross negligence or
willful misconduct of such Indemnified Person, and to reimburse BTCC and
each other Indemnified Person for any reasonable expenses (including the
fees, disbursements and other charges of attorneys and paralegals) incurred
in connection with the investigation of, preparation for or defense of any
actual or threatened claim, action or proceeding arising therefrom
(including any such costs of responding to discovery requests or
subpoenas), regardless of whether BTCC or such Indemnified Person is a
party thereto; and
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 5
(c) that neither the Agent nor any Lender shall be liable under this Commitment
Letter or the Amended Credit Documents or any other transaction
contemplated hereby or thereby or in respect of any act, omission or event
relating to the Amended Credit Documents or the New Offering, on any theory
of liability, for any punitive, special, indirect or consequential damages.
The contents of this Commitment Letter and the Fee Letter are confidential.
None of the Credit Parties will show, circulate or otherwise disclose them or
their contents to any other Person (other than Brentwood Associates, Affiliates
of Brentwood Associates and the officers, directors, employees, attorneys and
advisors of the respective Credit Parties, on a confidential basis, as
necessary, in connection with the evaluation of the terms and conditions set
forth herein and therein, who shall agree to maintain their confidentiality)
without our prior written consent; and none of the Credit Parties will file any
of them or disclose their contents in any filing with any Governmental
Authority, unless prior to the filing the Credit Parties have formally accepted
this Commitment Letter, as provided herein. This Commitment Letter and the Fee
Letter may not be assigned by any Credit Party without the prior written consent
of the Agent and the Lenders, and the undertakings by BTCC herein and therein
are made solely for the benefit of the Credit Parties and may not be relied upon
or enforced by any other Person. If the Commitment Letter is not accepted by the
Credit Parties, the Credit Parties will immediately return to us the originals
and copies of the Commitment Letter and the Fee Letter and any summaries thereof
which the Credit Parties or their respective advisors may have created. If the
Commitment Letter and Fee Letter are accepted by the Credit Parties and the
Credit Parties have complied with the terms hereof and thereof, RSC and the
Credit Parties may thereafter disclose the information contained in only the
Commitment Letter as they deem required by law or appropriate to facilitate the
New Offering. Prior to acceptance, any disclosure by any Credit Party in
violation hereof shall be deemed to constitute the Credit Parties' acceptance of
this Commitment Letter and the Fee Letter.
Each of the Credit Parties hereby acknowledges and confirms that BTCC (i)
has not required, endorsed or recommended the initiation or consummation of the
New Offering, (ii) is not doing so by issuing this Commitment Letter and (iii)
has not made and is not making any representation to any Person with respect
thereto.
BTCC's commitment to provide the Incremental Commitment on the terms and
conditions set forth in this Commitment Letter is specifically contingent upon
the execution and delivery of this Commitment Letter and the Fee Letter and the
satisfaction of all of the other conditions referred to as conditions to the
Incremental Commitment and the Third Amendment. BTCC's commitment to provide the
Incremental Commitment pursuant to the terms of this Commitment Letter will
expire at 5:00 p.m. Los Angeles, California time on May 2, 1997, unless on or
before that time this Commitment Letter and the Fee Letter have been duly
executed and delivered to BTCC. In addition and in any event, BTCC's
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 6
commitment hereunder will expire (i) if any fees or other amounts payable to
BTCC hereunder, under the Fee Letter or the Credit Documents are not paid when
due and (ii) on June 30, 1997, unless extended by mutual agreement, if the Third
Amendment shall not have been executed by the Credit Parties, the Agent and the
Lenders by that date.
This Commitment Letter may be executed in counterparts which, when
taken together, shall constitute an original. This Commitment Letter shall be
governed by and construed in accordance with the laws of the State of New York.
[Remainder of page intentionally blank]
<PAGE>
Rental Service Corporation et al.
April 30, 1997
Page 7
Please indicate your acceptance of and agreement to the foregoing by
signing and returning the enclosed copies of this Commitment Letter and the Fee
Letter to BT Commercial Corporation, 300 S. Grand Avenue, 41st Floor, Los
Angeles, CA 90071 Attention: Thomas L. Ventling.
Very truly yours,
BT COMMERCIAL CORPORATION
By:/s/ Thomas L. Ventling
_________________________________
Thomas L. Ventling
Senior Vice President
Accepted and agreed this
2nd day of May, 1997
ACME ALABAMA, INC.
ACME DIXIE INC.
ACME DUVAL INC.
ACME RENTS, INC.
THE AIR & PUMP COMPANY
WALKER JONES EQUIPMENT, INC.
RENTAL SERVICE CORPORATION
RSC ACQUISITION CORP.
RSC HOLDINGS, INC.
By: /s/Dougas A. Waugaman
___________________________
Douglas A. Waugaman
Senior Vice President
<PAGE>
ANNEX I
TO
COMMITMENT LETTER
dated April 30, 1997
Revisions to Applicable Eurodollar Rate Margin
and Applicable Prime Rate Margin
-------------------------------------------------------
Interest on Prime Rate Loans will be payable at a per annum rate equal to the
--- -----
Prime Lending Rate plus a margin (the "Applicable Prime Rate Margin"). Interest
----
on Eurodollar Rate Loans will be payable at a per annum rate equal to the
--- -----
Adjusted Eurodollar Rate plus a margin (the "Applicable Eurodollar Rate Margin"
----
and, together with the Applicable Prime Rate Margin, the "Applicable Margins").
The Applicable Margins shall be calculated as follows:
(a) from the effective date of the Third Amendment until the first anniversary
of the Effective Date of the Credit Agreement, the Applicable Eurodollar
Rate Margin will be a per annum rate equal to 1.75% and the Applicable
--- -----
Prime Rate Margin will be a per annum rate equal to 0.25%; provided, that
--- ----- --------
if the Interest Coverage Ratio for the then most recent Quarterly
Determination Date (as shown on the quarterly Compliance Certificate
delivered pursuant to Section 7.1(c) of the Credit Agreement) is within the
ranges set out below and no Default or Event of Default exists as of such
Quarterly Determination Date, the Applicable Margins shall be the per annum
--- -----
rates set out opposite the applicable range indicated below:
<TABLE>
<CAPTION>
Applicable Applicable
Interest Eurodollar Prime Rate
Coverage Ratio Rate Margin Margin
- ----------------------------------------- ------------ ------------
<S> <C> <C>
Greater than 3.5:1 1.50% 0
and not more than
4.0:1
Greater than 4.0:1 1.25% (0.25%)
</TABLE>
(b) from and after the first anniversary of the Effective Date of the Credit
Agreement, the Applicable Eurodollar Rate Margin will be a per annum rate
--- -----
equal to 2.00% and the Applicable Prime Rate Margin will be a per annum
--- -----
rate equal to 0.50%; provided, that if the Interest Coverage Ratio for the
--------
then most recent Quarterly Determination Date (as shown on the quarterly
Compliance Certificate delivered pursuant to Section 7.1(c) of the Credit
Agreement) is within the ranges set out below and no Default or Event of
Default exists as of such Quarterly Determination Date, the
-I-1
<PAGE>
Applicable Margins shall be the per annum rates set out opposite
--- -----
the applicable range indicated below:
<TABLE>
<CAPTION>
Applicable Applicable
Interest Eurodollar Prime Rate
Coverage Ratio Rate Margin Margin
------------------------------------ ------------
<S> <C> <C>
Greater than 3.0:1 1.75% 0.25%
and not more than
3.5:1
Greater than 3.5:1 1.50% 0
and not more than
4.0:1
Greater than 4.0:1 1.25% (0.25%)
</TABLE>
In the event of the delivery of a Compliance Certificate showing an increase or
decrease in the Interest Coverage Ratio requiring a change in the Applicable
Margins, the change in the Applicable Margins shall be effective from the first
day of the calendar month immediately following receipt of the Compliance
Certificate (provided that the Compliance Certificate is received by the Agent
--------
no later than 3:00 P.M. New York City time at least one (1) Business Day prior
to the first day of such calendar month) until the next such date on which the
Applicable Margins are subject to change following the delivery of (or failure
to deliver) a Compliance Certificate showing an increase or decrease in the
Interest Coverage Ratio requiring a change in the Applicable Margins. The
failure to deliver any Compliance Certificate by the date required under the
Credit Agreement (after giving effect to any applicable grace period) shall
automatically cause the Applicable Margins to be the maximum per annum rates for
--- -----
the periods described in clauses (a) and (b) above, as applicable, effective as
----------- ---
of the first day of the fiscal quarter immediately following the date on which
the delivery of the Compliance Certificate was otherwise required.
Solely for purposes of determining the Applicable Margins for periods ending
after the effective date of the Third Amendment, "Interest Coverage Ratio"
means, as of a Quarterly Determination Date, the ratio of (i) EBITA to (ii)
Interest Expense (other than non-cash Interest Expense on Indebtedness under the
Citicorp Purchase Agreement) for the six-month period ending on such Quarterly
Determination Date.
-I-2
<PAGE>
EXHIBIT 10.29
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
THIS AGREEMENT, dated February 26, 1997 is made by and between Rental
Service Corporation, a Delaware corporation hereinafter referred to as
"Company," and the employee of the Company or a Subsidiary of the Company who is
named on the signature page hereto, hereinafter referred to as "Employee":
WHEREAS, the Company wishes to afford the Employee the opportunity to
purchase shares of its $.01 par value Common Stock ("Common Stock"); and
WHEREAS, the Company wishes to carry out the Plan (the terms of which
are hereby incorporated by reference and made a part of this Agreement); and
WHEREAS, the Committee, appointed to administer the Plan, has
determined that it would be to the advantage and best interest of the Company
and its shareholders to grant the Incentive Stock Option provided for herein to
the Employee as an inducement to enter into or remain in the service of the
Company or its Subsidiaries and as an incentive for increased efforts during
such service, and has advised the Company thereof and instructed the undersigned
officers to issue said Option;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever the following terms are used in this Agreement, they shall
have the meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates. All capitalized terms used
herein without definition shall have the meanings ascribed to such terms in the
Plan.
Section 1.1 - Board
- ----------- -----
"Board" shall mean the Board of Directors of the Company.
Section 1.2 - Code
- -----------
"Code" shall mean the Internal Revenue Code of 1986, as amended.
<PAGE>
Section 1.3 - Committee
- ----------- ---------
"Committee" shall mean the Compensation Committee of the Board, or
another committee of the Board, appointed as provided in Section 9.1 of the
Plan.
Section 1.4 - Company
- -----------
"Company" shall mean Rental Service Corporation, a Delaware
corporation.
Section 1.5 - Director
- ----------- --------
"Director" shall mean a member of the Board.
Section 1.6 - Exchange Act
- ----------- ------------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.7 - Officer
- ----------- -------
"Officer" shall mean an officer of the Company, as defined in Rule
16a-1(f) under the Exchange Act, as such Rule may be amended in the future.
Section 1.8 - Option
- ----------- ------
"Option" shall mean the incentive stock option to purchase Common
Stock of the Company granted under this Agreement.
Section 1.9 - Optionee
- ----------- --------
"Optionee" shall mean the Employee under this Agreement.
Section 1.10 - Plan
- ------------ ----
"Plan" shall mean The 1996 Equity Participation Plan of Rental Service
Corporation.
Section 1.11 - Rule 16b-3
- ------------ ----------
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended from time to time.
Section 1.12 - Secretary
- ------------ ---------
"Secretary" shall mean the Secretary of the Company.
Section 1.13 - Securities Act
- ------------ --------------
"Securities Act" shall mean the Securities Act of 1933, as amended.
2
<PAGE>
Section 1.14 - Subsidiary
- ------------ ----------
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one (1) of the other corporations in such chain.
Section 1.15 - Termination of Employment
- ------------ -------------------------
"Termination of Employment" shall mean the time when the employee-
employer relationship between the Employee and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of the Employee by the Company or any
Subsidiary, (ii) at the discretion of the Committee, terminations which result
in a temporary severance of the employee-employer relationship, and (iii) at the
discretion of the Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Company or a Subsidiary with
the former employee. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Employment;
provided, however, that, unless otherwise determined by the Committee in its
- -------- -------
discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship
shall constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section. Notwithstanding any other provision of
this Agreement or of the Plan, the Company or any Subsidiary has an absolute and
unrestricted right to terminate the Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
GRANT OF OPTION
---------------
Section 2.1 - Grant of Option
- ----------- ---------------
In consideration of the Employee's agreement to remain in the employ
of the Company or its Subsidiaries and for other good and valuable
consideration, on the date hereof the Company irrevocably grants to the Employee
the option to purchase any part or all of the aggregate of (ShareNumber) shares
of its $.01 par value Common Stock set forth on the signature page hereto upon
the terms and conditions set forth in this Agreement.
3
<PAGE>
Section 2.2 - Purchase Price
- ----------- --------------
The purchase price of the shares of stock covered by the Option shall
be the dollar amount per share, without commission or other charge, set forth on
the signature page hereto.
Section 2.3 - Consideration to Company
- ----------- ------------------------
In consideration of the granting of this Option by the Company, the
Employee agrees to render faithful and efficient services to the Company or a
Subsidiary, with such duties and responsibilities as the Company shall from time
to time prescribe, for a period of at least one (1) year from the date this
Option is granted. Nothing in this Agreement or in the Plan shall confer upon
the Employee any right to continue in the employ of the Company or any
Subsidiary, or as a director of the Company, or shall interfere with or restrict
in any way the rights of the Company and its Subsidiaries, which are hereby
expressly reserved, to discharge the Employee at any time for any reason
whatsoever, with or without cause.
Section 2.4 - Adjustments in Option
- ----------- ---------------------
The Committee may make adjustments with respect to the Option in
accordance with the provisions of Section 10.3 of the Plan; provided, however,
-------- -------
that each such adjustment shall be made in such manner as not to constitute a
"modification" within the meaning of Section 424(h)(3) of the Code, unless the
Optionee consents to an adjustment which would constitute such a "modification".
ARTICLE III
PERIOD OF EXERCISABILITY
------------------------
Section 3.1 - Commencement of Exercisability
- ----------- ------------------------------
(a) Subject to Section 5.6, the Option shall become exercisable in
four (4) cumulative installments as follows:
(i) An installment covering 1/4 of the shares shall become
exercisable on February 26, 1998;
(ii) An installment covering 1/4 of the shares shall become
exercisable on February 26, 1999;
(iii) An installment covering 1/4 of the shares shall become
exercisable on February 26, 2000;
(iv) An installment covering 1/4 of the shares shall become
exercisable on February 26, 2001.
4
<PAGE>
(b) No portion of the Option which is unexercisable at Termination of
Employment shall thereafter become exercisable.
Section 3.2 - Duration of Exercisability
- ----------- --------------------------
The installments provided for in Section 3.1 are cumulative. Each
such installment which becomes exercisable pursuant to Section 3.1 shall remain
exercisable until it becomes unexercisable under Section 3.3.
Section 3.3 - Expiration of Option
- ----------- --------------------
The Option may not be exercised to any extent by anyone after the
first to occur of the following events:
(a) The expiration of ten (10) years from the date the Option was
granted; or
(b) If the Employee owned (within the meaning of Section 424(d) of the
Code), at the time the Option was granted, more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code), the expiration of five (5) years from the date the Option was
granted; or
(c) The time of the Employee's Termination of Employment unless such
Termination of Employment results from his death, his retirement, his disability
(within the meaning of Section 22(e)(3) of the Code) or his being discharged not
for good cause; or
(d) the expiration of three (3) months from the date of the Employee's
Termination of Employment by reason of his retirement or his being discharged
not for good cause, unless the Employee dies within said three-month period; or
(e) the expiration of one (1) year from the date of the Employee's
Termination of Employment by reason of his disability (within the meaning of
Section 22(e)(3) of the Code); or
(f) the expiration of one (1) year from the date of the Employee's
death; or
(g) the effective date of either the merger or consolidation of the
Company with or into another corporation, or the acquisition by another
corporation or person of all or substantially all of the Company's assets or
eighty percent (80%) or more of the Company's then outstanding voting stock, or
the liquidation or dissolution of the Company, unless the Committee waives this
provision in connection with such transaction. At least ten (10) days prior to
the effective date of such merger, consolidation, acquisition, liquidation or
dissolution, the Committee shall give the Employee notice of such event if the
Option has then neither been fully exercised nor become unexercisable under this
Section 3.3.
5
<PAGE>
Section 3.4 - Acceleration of Exercisability
- ----------- ------------------------------
In the event of the merger or consolidation of the Company with or
into another corporation, or the acquisition by another corporation or person of
all or substantially all of the Company's assets or eighty percent (80%) or more
of the Company's then outstanding voting stock, or the liquidation or
dissolution of the Company, the Board may, in its absolute discretion and upon
such terms and conditions as it deems appropriate, provide by resolution adopted
prior to such event and incorporated in the notice referred to in Section
3.3(d), that at some time prior to the effective date of such event this Option
shall be exercisable as to all the shares covered hereby, notwithstanding that
this Option may not yet have become fully exercisable under Section 3.1(a);
provided, however, that this acceleration of exercisability shall not take place
- -------- -------
if this Option becomes unexercisable under Section 3.3 prior to said effective
date; provided, further, that nothing in this Section 3.4 shall make this Option
-------- -------
exercisable if it is otherwise unexercisable.
The Board may make such determinations and adopt such rules and
conditions as it, in its absolute discretion, deems appropriate in connection
with such assumption, substitution or acceleration of exercisability, including,
but not by way of limitation, provisions to ensure that any such acceleration
and resulting exercise shall be conditioned upon the consummation of the
contemplated corporate transaction, and determinations regarding whether
reasonable and adequate provisions for assumption or substitution have been made
as defined in subsection (a) above.
Section 3.5 - Special Tax Consequences
- ----------- ------------------------
The Employee acknowledges that, to the extent that the aggregate Fair
Market Value of stock with respect to which "incentive stock options" (within
the meaning of Section 422 of the Code, but without regard to Section 422(d) of
the Code), including the Option, are exercisable for the first time by the
Employee during any calendar year (under the Plan and all other incentive stock
option plans of the Company, any Subsidiary and any parent corporation thereof
(within the meaning of Section 422 of the Code)) exceeds $100,000, such options
shall be treated as Non-Qualified Options to the extent required by Section 422
of the Code. The Employee further acknowledges that the rule set forth in the
preceding sentence shall be applied by taking options into account in the order
in which they were granted. For purposes of these rules, the Fair Market Value
of stock shall be determined as of the time the option with respect to such
stock is granted.
ARTICLE IV
EXERCISE OF OPTION
------------------
Section 4.1 - Person Eligible to Exercise
- ----------- ---------------------------
During the lifetime of the Employee, only he may exercise the Option
or any portion thereof. After the death of the Employee, any exercisable
portion of the Option may, prior to the time when the Option becomes
unexercisable under Section 3.3, be exercised by his
6
<PAGE>
personal representative or by any person empowered to do so under the deceased
Employee's will or under the then applicable laws of descent and distribution.
Section 4.2 - Partial Exercise
- ----------- ----------------
Any exercisable portion of the Option or the entire Option, if then
wholly exercisable, may be exercised in whole or in part at any time prior to
the time when the Option or portion thereof becomes unexercisable under Section
3.3; provided, however, that each partial exercise shall be for not less than
one hundred (100) shares (or the minimum installment set forth in Section 3.1,
if a smaller number of shares) and shall be for whole shares only.
Section 4.3 - Manner of Exercise
- ----------- ------------------
The Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following prior
to the time when the Option or such portion becomes unexercisable under Section
3.3:
(a) written notice complying with the applicable rules established by
the Committee stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Employee or other person then entitled to exercise
the Option or such portion; and
(b) (i) Full cash payment to the Secretary of the Company for the
shares with respect to which such Option or portion is exercised; or
(ii) With the consent of the Committee, (A) shares of the
Company's Common Stock owned by the Employee, duly endorsed for transfer to
the Company, with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof, or (B)
shares of the Company's Common Stock issuable to the Employee upon exercise
of the Option, with a Fair Market Value on the date of delivery equal to
the aggregate exercise price of the Option or exercised portion thereof; or
(iii) With the consent of the Committee, a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code or successor provision)
and payable upon such terms as may be prescribed by the Committee. The
Committee may also prescribe the form of such note and the security to be
given for such note. The Option may not be exercised, however, by delivery
of a promissory note or by a loan from the Company when or where such loan
or other extension of credit is prohibited by law; or
(iv) With the consent of the Committee, any combination of the
consideration provided in the foregoing subparagraphs (i), (ii) and (iii);
and
(c) A bona fide written representation and agreement, in a form
satisfactory to the Committee, signed by the Employee or other person then
entitled to exercise such Option or portion, stating that the shares of stock
are being acquired for his own account, for investment
7
<PAGE>
and without any present intention of distributing or reselling said shares or
any of them except as may be permitted under the Securities Act and then
applicable rules and regulations thereunder, and that the Employee or other
person then entitled to exercise such Option or portion will indemnify the
Company against and hold it free and harmless from any loss, damage, expense or
liability resulting to the Company if any sale or distribution of the shares by
such person is contrary to the representation and agreement referred to above.
The Committee may, in its absolute discretion, take whatever additional actions
it deems appropriate to insure the observance and performance of such
representation and agreement and to effect compliance with the Securities Act
and any other federal or state securities laws or regulations. Without limiting
the generality of the foregoing, the Committee may require an opinion of counsel
acceptable to it to the effect that any subsequent transfer of shares acquired
on an Option exercise does not violate the Securities Act, and may issue stop-
transfer orders covering such shares. Share certificates evidencing stock issued
on exercise of this Option shall bear an appropriate legend referring to the
provisions of this subsection (c) and the agreements herein. The written
representation and agreement referred to in the first sentence of this
subsection (c) shall, however, not be required if the shares to be issued
pursuant to such exercise have been registered under the Securities Act, and
such registration is then effective in respect of such shares;
(d) Full payment to the Company (or other employer corporation) of all
amounts which, under federal, state or local tax law, it is required to withhold
upon exercise of the Option; with the consent of the Committee, (i) shares of
the Company's Common Stock owned by the Employee, duly endorsed for transfer,
with a Fair Market Value equal to the sums required to be withheld, or (ii)
shares of the Company's Common Stock issuable to the Employee upon exercise of
the Option with a Fair Market Value equal to the sums required to be withheld,
may be used to make all or part of such payment; and
(e) In the event the Option or portion shall be exercised pursuant to
Section 4.1 by any person or persons other than the Employee, appropriate proof
of the right of such person or persons to exercise the Option.
Section 4.4 - Conditions to Issuance of Stock Certificates
- ----------- --------------------------------------------
The shares of stock deliverable upon the exercise of the Option, or
any portion thereof, may be either previously authorized but unissued shares or
issued shares which have then been reacquired by the Company. Such shares shall
be fully paid and nonassessable. The Company shall not be required to issue or
deliver any certificate or certificates for shares of stock purchased upon the
exercise of the Option or portion thereof prior to fulfillment of all of the
following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under rulings or regulations of the
Securities and Exchange Commission or of any other governmental regulatory body,
which the Committee shall, in its absolute discretion, deem necessary or
advisable; and
8
<PAGE>
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The receipt by the Company of full payment for such shares,
including payment of all amounts which, under federal, state or local tax law,
the Company (or other employer corporation) is required to withhold upon
exercise of the Option; and
(e) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may from time to time establish for reasons of
administrative convenience.
Section 4.5 - Rights as Shareholder
- ----------- ---------------------
The holder of the Option shall not be, nor have any of the rights or
privileges of, a shareholder of the Company in respect of any shares purchasable
upon the exercise of any part of the Option unless and until certificates
representing such shares shall have been issued by the Company to such holder.
ARTICLE V
OTHER PROVISIONS
----------------
Section 5.1 - Administration
- ----------- --------------
The Committee shall have the power to interpret the Plan and this
Agreement and to adopt such rules for the administration, interpretation and
application of the Plan as are consistent therewith and to interpret, amend or
revoke any such rules. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon the Employee, the Company and all other interested persons. No member of
the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Option. Any
such interpretations and rules with respect to incentive stock options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan and this Agreement except with
respect to matters which under Rule 16b-3 or Section 162(m) of the Code, or any
regulations or rules issued thereunder, or other applicable law, are required to
be determined in the sole discretion of the Committee.
Section 5.2 - Option Not Transferable
- ----------- -----------------------
Neither the Option nor any interest or right therein or part thereof
shall be sold, pledged, assigned, or transferred in any manner other than by
will or the laws of descent and distribution, unless and until such Option has
been exercised, or the shares underlying such Option have been issued, and all
restrictions applicable to such shares have lapsed. Neither the Option nor any
interest or right therein or part thereof shall be liable for the debts,
contracts or
9
<PAGE>
engagements of the Employee or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
Section 5.3 - Shares to Be Reserved
- ----------- ---------------------
The Company shall at all times during the term of the Option reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
Section 5.4 - Notices
- ----------- -------
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Employee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Employee shall,
if the Employee is then deceased, be given to the Employee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall
be deemed duly given when enclosed in a properly sealed envelope or wrapper
addressed as aforesaid, deposited (with postage prepaid) in a post office or
branch post office regularly maintained by the United States Postal Service.
Section 5.5 - Titles
- ----------- ------
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 5.6 - Notification of Disposition
- ----------- ---------------------------
The Employee shall give prompt notice to the Company of any
disposition or other transfer of any shares of stock acquired under this
Agreement if such disposition or transfer is made (a) within two (2) years from
the date of granting the Option with respect to such shares or (b) within one
(1) year after the transfer of such shares to him. Such notice shall specify
the date of such disposition or other transfer and the amount realized, in cash,
other property, assumption of indebtedness or other consideration, by the
Employee in such disposition or other transfer.
Section 5.7 - Construction
- ----------- ------------
This Agreement shall be administered, interpreted and enforced under
the internal laws of the State of Delaware without regard to conflicts of laws
thereof..
10
<PAGE>
Section 5.8 - Conformity to Securities Laws
- ----------- -----------------------------
The Employee acknowledges that the Plan is intended to conform to the
extent necessary with all provisions of the Securities Act and the Exchange Act
and any and all regulations and rules promulgated by the Securities and Exchange
Commission thereunder, including without limitation Rule 16b-3. Notwithstanding
anything herein to the contrary, the Plan shall be administered, and the Option
is granted and may be exercised, only in such a manner as to conform to such
laws, rules and regulations. To the extent permitted by applicable law, the
Plan and this Agreement shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
11
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
RENTAL SERVICE CORPORATION
By:____________________________________
Martin R. Reid, Chairman & CEO
By:____________________________________
Douglas A. Waugaman, Secretary
______________________________________
(Employee), Employee
_______________________________________
_______________________________________
Address
Employee's Taxpayer
Identification Number:
_______________________________________
DATED: February 26, 1997
Number of shares covered by Option: (ShareNumber)
Initial Exercise Price per share: $20.25
12
<PAGE>
SECTION 5.6 NOTICE OF DISPOSITION OF SHARES
OF RENTAL SERVICE CORPORATION
This will serve to notify Rental Service Corporation (the "Company")
pursuant to Section 5.6 of my Incentive Stock Option Agreement dated
______________, 1997, that I have sold or otherwise disposed of _______shares
of the Company's common stock which I acquired on exercise of all or a part of
such incentive stock option. The date of the disposition was _____________.
The amount realized by me in cash, property or other consideration was
$_______________.
I understand that I must give this notice is such a disposition or transfer
is made (x) within 2 years from the date the option was granted or (y) within 1
year after the exercise of the option.
__________________________________
Name of employee
Date:__________________
Please return the completed form to: Doug Waugaman, Rental Service Corporation,
14505 N. Hayden Road, Suite 322, Scottsdale, AZ 85260
13
<PAGE>
EXHIBIT 10.30
NON-QUALIFIED STOCK OPTION AGREEMENT
------------------------------------
THIS AGREEMENT, dated February 26, 1997, is made by and between Rental
Service Corporation, a Delaware corporation hereinafter referred to as the
"Company," and (Director), an Independent Director of the Company, hereinafter
referred to as the "Optionee:"
WHEREAS, the Company wishes to afford the Optionee the opportunity to
purchase shares of its $.01 par value Common Stock; and
WHEREAS, the Company wishes to carry out the Plan (the terms of which
are hereby incorporated by reference and made a part of this Agreement); and
WHEREAS, the Board has determined that it would be to the advantage
and best interest of the Company and its shareholders to grant the Non-Qualified
Option provided for herein to the Optionee as an inducement to serve on the
Company's Board of Directors and as an incentive for increased efforts during
such service, and has advised the Company thereof and instructed the undersigned
officers to issue said Option;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
Whenever the following terms are used in this Agreement, they shall
have the meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter, and the
singular the plural, where the context so indicates. All capitalized terms used
herein without definition shall have the meanings ascribed to such terms in the
Plan.
Section 1.1 - Board
- ----------- -----
"Board" shall mean the Board of Directors of the Company.
Section 1.2 - Code
- ----------- ----
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.3 - Company
- ----------- -------
"Company" shall mean Rental Service Corporation, a Delaware
corporation.
Section 1.4 - Director
- ----------- --------
"Director" shall mean a member of the Board.
Section 1.5 - Exchange Act
- ----------- ------------
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
1
<PAGE>
Section 1.6 - Independent Director
- ----------- --------------------
"Independent Director" shall mean a Director who is not an
Employee of the Company.
Section 1.7 - Option
- ----------- ------
"Option" shall mean the non-qualified option to purchase Common
Stock of the Company granted under this Agreement.
Section 1.8 - Plan
- ----------- ----
"Plan" shall mean The 1996 Equity Participation Plan of Rental
Service Corporation.
Section 1.9 - Rule 16b-3
- ----------- ----------
"Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
Section 1.10 - Secretary
- ------------- ---------
"Secretary" shall mean the Secretary of the Company.
Section 1.11 - Securities Act
- ------------ --------------
"Securities Act" shall mean the Securities Act of 1933, as
amended.
Section 1.12 - Termination of Directorship
- ------------ ---------------------------
"Termination of Directorship" shall mean the time when the
Optionee for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death, disability or retirement. The
Board, in its absolute discretion, shall determine the effect of all matters and
questions relating to Termination of Directorship.
ARTICLE II
GRANT OF OPTION
---------------
Section 2.1 - Grant of Option
- ----------- ---------------
In consideration of the Optionee's agreement to serve as a
Director of the Company and for other good and valuable consideration, on the
date hereof the Company irrevocably grants to the Optionee the option to
purchase any part or all of an aggregate of (ShareNumber) shares of its $.01 par
value Common Stock upon the terms and conditions set forth in this Agreement.
Section 2.2 - Purchase Price
- ----------- --------------
The purchase price of the shares of stock covered by the Option
shall be $(ExercisePrice) per share without commission or other charge.
Section 2.3 - Consideration to Company
- ----------- ------------------------
In consideration of the granting of this Option by the Company,
the Optionee agrees to serve as a Director until the next annual meeting of the
Company's stockholders. Nothing in this Agreement or in the Plan shall confer
upon the Optionee any right to continue as a director, or shall interfere with
or restrict in any way the rights of the Company and its stockholders, which are
hereby
2
<PAGE>
expressly reserved, to remove the Optionee in accordance with applicable
law and the Company's Certificate of Incorporation.
Section 2.4 - Adjustments in Option
- ----------- ---------------------
The Board shall make adjustments with respect to the Option in
accordance with the provisions of Section 10.3 of the Plan.
ARTICLE III
PERIOD OF EXERCISABILITY
------------------------
Section 3.1 - Commencement of Exercisability
- ----------- ------------------------------
(a) Subject to Section 5.6, the Option shall become exercisable
in four (4) cumulative installments as follows:
(i) An installment covering 1/4 of the shares shall
become exercisable on February 26, 1998;
(ii) An installment covering 1/4 of the shares shall
become exercisable on February 26, 1999;
(iii) An installment covering 1/4 of the shares shall
become exercisable on February 26, 2000;
(iv) An installment covering 1/4 of the shares shall
become exercisable on February 26, 2001.
(b) No portion of the Option which is unexercisable at
Termination of Directorship shall thereafter become exercisable.
Section 3.2 - Duration of Exercisability
- ----------- --------------------------
The installments provided for in Section 3.1 are cumulative. Each
such installment which becomes exercisable pursuant to Section 3.1 shall remain
exercisable until it becomes unexercisable under Section 3.3.
Section 3.3 - Expiration of Option
- ----------- --------------------
The Option may not be exercised to any extent by anyone after the
first to occur of the following events:
(a) the expiration of ten (10) years from the date the Option
was granted; or
(b) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than the Optionee's
death, unless the Optionee dies within said three-month period; or
(c) the expiration of one (1) year from the date of the
Optionee's death; or
(d) the effective date of either the merger or consolidation of
the Company with or into another corporation, or the acquisition by another
corporation or person of all or substantially all of the Company's assets or
eighty percent (80%) or more of the Company's then outstanding voting stock, or
the liquidation or dissolution of the Company, unless the Board waives this
provision in connection with such termination. At least ten (10) days prior to
the effective date of
3
<PAGE>
such merger, consolidation, acquisition, liquidation or dissolution, the Board
shall give the Optionee notice of such event if the Option has then neither been
fully exercised nor become unexercisable under this Section 3.3.
Section 3.4 - Acceleration of Exercisability
- ----------- ------------------------------
In the event of the merger or consolidation of the Company with
or into another corporation, or the acquisition by another corporation or person
of all or substantially all of the Company's assets or eighty percent (80%) or
more of the Company's then outstanding voting stock, or the liquidation or
dissolution of the Company, the Board may, in its absolute discretion and upon
such terms and conditions as it deems appropriate, provide by resolution adopted
prior to such event and incorporated in the notice referred to in Section
3.3(d), that at some time prior to the effective date of such event this Option
shall be exercisable as to all the shares covered hereby, notwithstanding that
this Option may not yet have become fully exercisable under Section 3.1(a);
provided, however, that this acceleration of exercisability shall not take place
- -------- -------
if this Option becomes unexercisable under Section 3.3 prior to said effective
date; provided, further, that nothing in this Section 3.4 shall make this Option
-------- -------
exercisable if it is otherwise unexercisable.
The Board may make such determinations and adopt such rules and
conditions as it, in its absolute discretion, deems appropriate in connection
with such assumption, substitution or acceleration of exercisability, including,
but not by way of limitation, provisions to ensure that any such acceleration
and resulting exercise shall be conditioned upon the consummation of the
contemplated corporate transaction, and determinations regarding whether
reasonable and adequate provisions for assumption or substitution have been made
as defined in subsection (a) above.
ARTICLE IV
EXERCISE OF OPTION
------------------
Section 4.1 - Person Eligible to Exercise
- ----------- ---------------------------
During the lifetime of the Optionee, only he may exercise the
Option or any portion thereof. After the death of the Optionee, any exercisable
portion of the Option may, prior to the time when the Option becomes
unexercisable under Section 3.3, be exercised by his personal representative or
by any person empowered to do so under the Optionee's will or under the then
applicable laws of descent and distribution.
Section 4.2 - Partial Exercise
- ----------- ----------------
Any exercisable portion of the Option or the entire Option, if
then wholly exercisable, may be exercised in whole or in part at any time prior
to the time when the Option or portion thereof becomes unexercisable under
Section 3.3; provided, however, that each partial exercise shall be for not less
than one hundred (100) shares (or the minimum installment set forth in Section
3.1, if a smaller number of shares) and shall be for whole shares only.
Section 4.3 - Manner of Exercise
------------------
The Option, or any exercisable portion thereof, may be exercised
solely by delivery to the Secretary or his office of all of the following prior
to the time when the Option or such portion becomes unexercisable under Section
3.3:
4
<PAGE>
(a) Notice in writing signed by the Optionee or the other person
then-entitled to exercise the Option or portion stating that the Option or
portion is thereby exercised, which notice shall comply with all applicable
rules established by the Board; and
(b) (i) Full cash payment to the Secretary of the Company for the
shares with respect to which such Option or portion is exercised;
(ii) With the consent of the Board, (A) shares of the
Company's Common Stock owned by the Optionee, duly endorsed for transfer to the
Company, with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof, or (B) shares of the
Company's Common Stock issuable to the Optionee upon exercise of the Option,
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof;
(iii) With the consent of the Board, a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code or successor provision) and
payable upon such terms as may be prescribed by the Board. The Board may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law;
(iv) With the consent of the Board, any combination of the
consideration provided in the foregoing subparagraphs (i), (ii), (iii) and (iv);
and
(c) A bona fide written representation and agreement, in a form
satisfactory to the Board, signed by the Optionee or other person then entitled
to exercise such Option or portion, stating that the shares of stock are being
acquired for his own account, for investment and without any present intention
of distributing or reselling said shares or any of them except as may be
permitted under the Securities Act and then applicable rules and regulations
thereunder, and that the Optionee or other person then entitled to exercise such
Option or portion will indemnify the Company against and hold it free and
harmless from any loss, damage, expense or liability resulting to the Company if
any sale or distribution of the shares by such person is contrary to the
representation and agreement referred to above. The Board may, in its absolute
discretion, take whatever additional actions it deems appropriate to ensure the
observance and performance of such representation and agreement and to effect
compliance with the Securities Act and any other federal or state securities
laws or regulations. Without limiting the generality of the foregoing, the Board
may require an opinion of counsel acceptable to it to the effect that any
subsequent transfer of shares acquired on an Option exercise does not violate
the Securities Act, and may issue stop-transfer orders covering such shares.
Share certificates evidencing stock issued on exercise of this Option may bear
an appropriate legend referring to the provisions of this subsection (c) and the
agreements herein. The written representation and agreement referred to in the
first sentence of this subsection (c) shall, however, not be required if the
shares to be issued pursuant to such exercise have been registered under the
Securities Act, and such registration is then effective in respect of such
shares; and
(d) In the event the Option or portion shall be exercised
pursuant to Section 4.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the Option.
5
<PAGE>
Section 4.4 - Conditions to Issuance of Stock Certificates
- ----------- --------------------------------------------
The shares of stock deliverable upon the exercise of the Option,
or any portion thereof, may be either previously authorized but unissued shares
or issued shares which have then been re-acquired by the Company. Such shares
shall be fully paid and nonassessable. The Company shall not be required to
issue or deliver any certificate or certificates for shares of stock purchased
upon the exercise of the Option or portion thereof prior to fulfillment of all
of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed; and
(b) The completion of any registration or other qualification of
such shares under any state or federal law or under rulings or regulations of
the Securities and Exchange Commission or of any other governmental regulatory
body, which the Board shall, in its absolute discretion, deem necessary or
advisable; and
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Board shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Board may from time to time establish for reasons
of administrative convenience.
Section 4.5 - Rights as Shareholder
- ----------- ---------------------
The holder of the Option shall not be, nor have any of the rights
or privileges of, a shareholder of the Company with respect to any shares
purchasable upon the exercise of any part of the Option unless and until
certificates representing such shares shall have been issued by the Company to
such holder.
ARTICLE V
OTHER PROVISIONS
----------------
Section 5.1 - Administration
- ----------- --------------
The Board or the Committee shall have the power to interpret the
Plan and this Agreement and to adopt such rules for the administration,
interpretation and application of the Plan as are consistent therewith and to
interpret, amend or revoke any such rules. All actions taken and all
interpretations and determinations made by the Board or the Committee in good
faith shall be final and binding upon the Optionee, the Company and all other
interested persons. No member of the Board or the Committee shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or the Option. In its absolute discretion, the Board may, at
any time and from time to time, exercise any and all rights and duties of the
Committee under the Plan and this Agreement, or may, at any time and from time
to time, delegate to the Committee any and all of its rights and duties under
the Plan and this Agreement.
Section 5.2 - Option Not Transferable
- ----------- -----------------------
Neither the Option nor any interest or right therein or part
thereof shall be sold, pledged, assigned, or transferred in any manner other
than by will or the laws of descent and distribution, unless and until such
Option has been exercised, or the shares underlying such Option
6
<PAGE>
have been issued, and all restrictions applicable to such shares have lapsed.
Neither the Option nor any interest or right therein or part thereof shall be
liable for the debts, contracts or engagements of the Optionee or his successors
in interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment,
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect, except to the extent that such disposition is permitted
by the preceding sentence.
Section 5.3 - Shares to Be Reserved
- ----------- ---------------------
The Company shall at all times during the term of the Option
reserve and keep available such number of shares of stock as will be sufficient
to satisfy the requirements of this Agreement.
Section 5.4 - Notices
- ----------- -------
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary, and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature hereto. By a notice given pursuant to this Section
5.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section 5.4. Any notice shall be
deemed duly given when enclosed in a properly sealed envelope or wrapper
addressed as aforesaid, deposited (with postage prepaid) in a post office or
branch post office regularly maintained by the United States Postal Service.
Section 5.5 - Titles
- ----------- ------
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this Agreement.
Section 5.6 - Construction
- ----------- ------------
This Agreement shall be administered, interpreted and enforced
under the internal laws of the State of Delaware without regard to conflicts of
laws thereof.
Section 5.7 - Conformity to Securities Laws
- ----------- -----------------------------
The Optionee acknowledges that the Plan is intended to conform to
the extent necessary with all provisions of the Securities Act and the Exchange
Act and any and all regulations and rules promulgated by the Securities and
Exchange Commission thereunder, including without limitation, Rule 16b-3.
Notwithstanding anything herein to the contrary, the Plan shall be administered,
and the Option is granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations. To the extent permitted by
applicable law, the Plan and this Agreement shall be deemed amended to the
extent necessary to conform to such laws, rules and regulations.
(signature page follows)
7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto.
Rental Service Corporation
By _______________________________
Martin Reid, Chairman & CEO
By ___________________________
Douglas A. Waugaman, Secretary
___________________________
(Director), Optionee
___________________________
___________________________
Address
Optionee's Taxpayer Identification Number:
___________________________
Date: February 26, 1997
Number of shares covered by Option: (ShareNumber)
Exercise Price per share - $20.25
8
<PAGE>
EXHIBIT 11.1
RENTAL SERVICE CORPORATION
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average common
shares outstanding..... 4,337,820 4,116,412 7,020,405 5,279,114 11,376,378
Net effect of dilutive
common stock options--
based on the treasury
stock method using the
average market price... -- -- 50,270 -- 116,895
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 19,708 --
Options............... 152,604 152,604 94,805 147,113 --
Warrants.............. 60,821 60,821 47,160 60,821 --
----------- ----------- ----------- ---------- -----------
5,427,728 5,087,790 7,218,041 5,506,756 11,493,273
=========== =========== =========== ========== ===========
Income before
extraordinary item..... $ 1,976,000 $ 3,715,000 $ 3,989,000 $ 330,000 $ 2,183,000
Preferred stock
accretion.............. (1,646,000) (1,717,000) (1,643,000) (554,000) --
----------- ----------- ----------- ---------- -----------
$ 330,000 $ 1,998,000 $ 2,346,000 $ (224,000) $ 2,183,000
=========== =========== =========== ========== ===========
Net income.............. $ 1,976,000 $ 3,237,000 $ 2,720,000 $ 330,000 $ 1,649,000
Preferred stock
accretion.............. (1,646,000) (1,717,000) (1,643,000) (554,000) --
----------- ----------- ----------- ---------- -----------
$ 330,000 $ 1,520,000 $ 1,077,000 $ (224,000) $ 1,649,000
=========== =========== =========== ========== ===========
Per share amount:
Income before
extraordinary item.... $ .06 $ .39 $ .33 $ (.04) $ .19
Extraordinary item..... -- (.09) (.18) -- (.05)
----------- ----------- ----------- ---------- -----------
Net income............. $ .06 $ .30 $ .15 $ (.04) $ .14
=========== =========== =========== ========== ===========
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF RENTAL SERVICE CORPORATION
RSC Holdings Inc. (Delaware)
RSC Acquisition Corporation (Delaware)
Wholly owned subsidiaries of RSC Holdings Inc.
Acme Dixie Inc. (Delaware)
Acme Duval Inc. (Delaware)
Acme Rents, Inc. (California)
Wholly owned subsidiaries of RSC Acquisition Corporation
Acme Alabama, Inc. (Alabama)
The Air & Pump Company, Inc. (Texas)
Walker Jones Equipment, Inc. (Mississippi)
Wholly owned subsidiary of Acme Dixie Inc.
Comtect, Inc. (Nevada)
Wholly owned subsidiaries of Comtect, Inc.
IAT Interests of Nevada, Inc. (Nevada)
CFTSIJC, Inc. (Nevada)
RNJB, Inc. (Nevada)
Wholly owned subsidiaries of RNJB, Inc.
PST, Inc. of Louisiana (Louisiana)
Industrial Air Tool Texas City, Inc. (Texas)
Wholly owned subsidiary of IAT Interests of Nevada, Inc.
Industrial Air Tool Pasadena, Inc. (Texas)
Wholly owned subsidiary of CFTSIJC, Inc.
LRB Supply, Inc. (Texas)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 28, 1997, with respect to the
consolidated financial statements and schedules of Rental Service Corporation
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996, in the Registration Statement (Form S-1 No. 333- )
and related Prospectus of Rental Service Corporation for the registration of
4,600,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
May 6, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 30, 1995 with respect to the
consolidated financial statements of Acme Holdings Inc. as of December 31,
1993 and 1994, and for each of the three years in the period ended December
31, 1994, in the Registration Statement (Form S-1 No. 333- ) and related
Prospectus of Rental Service Corporation for the registration of 4,600,000
shares of its common stock.
/s/ ERNST & YOUNG LLP
Orange County, California
May 6, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 6, 1997 with respect to the combined financial
statements of Industrial Air Tool as of March 31, 1996 and 1997 and for the
years then ended, in the Registration Statement (Form S-1 No. 333- ) and
related Prospectus of Rental Service Corporation for the registration of
4,600,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
May 6, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 26, 1997 with respect to the financial
statements of Brute Equipment Co. as of December 31, 1995 and 1996 and for each
of the years then ended, in the Registration Statement (Form S-1 No. 333- )
and related Prospectus of Rental Service Corporation for the registration of
4,600,000 shares of its common stock.
/s/ McGLADREY & PULLEN, LLP
Moline, Illinois
May 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF RENTAL SERVICE CORPORATION AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,578,000
<SECURITIES> 0
<RECEIVABLES> 25,655,000
<ALLOWANCES> 2,811,000
<INVENTORY> 10,515,000
<CURRENT-ASSETS> 0
<PP&E> 211,094,000
<DEPRECIATION> 34,935,000
<TOTAL-ASSETS> 267,543,000
<CURRENT-LIABILITIES> 56,335,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 267,543,000
<SALES> 27,527,000
<TOTAL-REVENUES> 41,309,000
<CGS> 20,622,000
<TOTAL-COSTS> 30,331,000
<OTHER-EXPENSES> 5,476,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,597,000
<INCOME-PRETAX> 3,905,000
<INCOME-TAX> 1,722,000
<INCOME-CONTINUING> 2,183,000
<DISCONTINUED> 0
<EXTRAORDINARY> 534,000
<CHANGES> 0
<NET-INCOME> 1,649,000
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
