<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 13, 1998
REGISTRATION NO. 333-59519
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
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>
6929 E. GREENWAY PARKWAY, SUITE 200
SCOTTSDALE, ARIZONA 85254
(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
6929 E. GREENWAY PARKWAY, SUITE 200
SCOTTSDALE, ARIZONA 85254
(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. JOHN B. TEHAN, ESQ.
LATHAM & WATKINS SIMPSON THACHER & BARTLETT
633 WEST FIFTH STREET, SUITE 4000 425 LEXINGTON AVENUE
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10017
(213) 485-1234 (212) 455-2000
</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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [_]
---------------
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, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS TWO SEPARATE PROSPECTUSES. THE FIRST
PROSPECTUS RELATES TO A PUBLIC OFFERING OF SHARES OF COMMON STOCK OF RENTAL
SERVICE CORPORATION IN THE UNITED STATES AND CANADA (THE "U.S. OFFERING"). THE
SECOND PROSPECTUS RELATES TO A CONCURRENT OFFERING OF COMMON STOCK OUTSIDE THE
UNITED STATES AND CANADA (THE "INTERNATIONAL OFFERING"). THE PROSPECTUSES FOR
THE U.S. OFFERING AND THE INTERNATIONAL OFFERING WILL BE IDENTICAL IN ALL
RESPECTS, OTHER THAN THE FRONT COVER PAGE, THE "UNDERWRITING" SECTION AND THE
BACK COVER PAGE RELATING TO THE INTERNATIONAL OFFERING. SUCH ALTERNATE PAGES
APPEAR IN THIS REGISTRATION STATEMENT IMMEDIATELY FOLLOWING THE COMPLETE
PROSPECTUS FOR THE U.S. OFFERING.
<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 +
+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
PRELIMINARY PROSPECTUS DATED AUGUST 13, 1998
PROSPECTUS
2,750,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION (SM)]
COMMON STOCK
-----------
Of the 2,750,000 shares of Common Stock of Rental Service Corporation ("RSC"
or the "Company") offered hereby, 2,669,920 shares are being offered by the
Company and 80,080 shares are being offered by certain stockholders of the
Company (the "Selling Stockholders"). See "Principal and Selling Stockholders."
The Company will not receive any of the proceeds from the sale of the shares of
Common Stock by the Selling Stockholders.
Of the shares of Common Stock offered hereby, 2,200,000 shares are being
offered for sale initially in the United States and Canada by the U.S.
Underwriters and 550,000 shares are being offered for sale initially in a
concurrent offering outside the United States and Canada by the International
Managers. The public offering price and the underwriting discount per share
will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "RSV." On August 12, 1998, the last sale price of the Common Stock
as reported on the NYSE was $28 9/16 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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)........................ $ $ $ $
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- ---------------------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
several 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) The Company has granted the U.S. Underwriters and the International
Managers options to purchase up to an aggregate of 412,500 additional
shares of Common Stock, exercisable within 30 days after the date hereof,
solely to cover over-allotments, if any. If such options are exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on
or about , 1998.
-----------
MERRILL LYNCH & CO.
WILLIAM BLAIR & COMPANY
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
LEGG MASON WOOD WALKER
INCORPORATED
-----------
The date of this Prospectus is , 1998.
<PAGE>
[MAP SHOWING RENTAL LOCATIONS AND LOCATIONS TO BE ACQUIRED.]
<PAGE>
The Company operates through its subsidiaries and, unless the context
otherwise requires, references in this Prospectus to the "Company" or "RSC"
include Rental Service Corporation, a Delaware corporation, and its direct and
indirect subsidiaries. Industry figures were obtained from the Rental
Equipment Register (the "RER"), an industry trade magazine, and other industry
sources that the Company has not independently verified.
----------------
The Company's principal executive offices are located at 6929 E. Greenway
Parkway, Suite 200, Scottsdale, Arizona 85254, and its telephone number is
(602) 905-3300.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus. Certain information contained in this summary and
elsewhere in this Prospectus, including information with respect to the
Company's plans and strategy for its business, especially RSC's growth
strategy, plans to raise additional capital and prospective acquisitions, are
forward-looking statements. Prospective investors should carefully consider the
factors set forth herein under the caption "Risk Factors" for a discussion of
important factors that could cause actual results to differ materially from
results referred to in the forward-looking statements. Unless otherwise
indicated, all information set forth in this Prospectus assumes no exercise of
the Underwriters' overallotment option. Capitalized terms used but not defined
in this Prospectus Summary have the meanings ascribed to them elsewhere in this
Prospectus.
THE COMPANY
The Company is a leading consolidator in the rapidly-growing equipment rental
industry, with a demonstrated track record of 60 business acquisitions since
its formation in 1992. The Company serves the needs of a wide variety of
industrial, manufacturing, construction, government and homeowner markets
through a network of 225 rental locations in 26 states and Canada (as of August
7, 1998). RSC rents a broad selection of equipment ranging from small items
such as pumps, generators, welders and electric hand tools, to larger equipment
such as backhoes, forklifts, air compressors, scissor lifts, aerial manlifts
and skid-steer loaders. The Company also sells maintenance, repair and
operations ("MRO") supplies, small tools, contractor supplies, parts and used
rental equipment, and acts as a distributor for new equipment on behalf of
certain national equipment manufacturers. Depending upon market needs, RSC also
offers its customers 24 hours-a-day, seven days-a-week support services,
including on-site maintenance and repair. The Company has a diverse customer
base and rented equipment to over 100,000 customers in 1997, with the top ten
customers representing less than 3% of total revenues. The Company's customers
include industrial companies (such as manufacturers, petrochemical facilities,
large chemical processing companies, paper mills, entertainment companies and
public utilities), construction companies (such as contractors), governmental
entities and homeowners.
RSC's strategy is to expand its presence in existing markets and capitalize
on opportunities to enter new geographic markets through a combination of
acquisitions and start-up locations. From its formation in July 1992 through
August 7, 1998, the Company has acquired 60 businesses consisting of 188
locations and has opened 62 start-up locations. As of August 7, 1998, the
Company was party to non-binding letters of intent to acquire seven equipment
rental businesses with a combined 14 locations in nine states. See "--Recent
Developments." The Company also focuses on increasing revenues and
profitability across its locations through investments in fleet expansion, the
implementation of sophisticated information systems designed to improve asset
utilization and targeted marketing efforts. For the year ended December 31,
1997 and the six months ended June 30, 1998, after giving effect to the
acquisitions and other pro forma adjustments described under "Unaudited Pro
Forma Consolidated Financial Data," the Company would have generated pro forma
revenues of $475.5 million and $272.8 million, respectively, and operating
income of $67.8 million and $45.3 million, respectively. See "Unaudited Pro
Forma Consolidated Financial Data."
The Company believes the rental equipment industry offers substantial
consolidation opportunities for large, well capitalized equipment rental
companies such as RSC. The equipment rental industry is highly fragmented,
primarily consisting of relatively small entities serving discrete local market
areas and a number of multi-location regional or national firms. This
fragmentation is demonstrated by the following statistics derived from the
Rental Equipment Register (the "RER") for 1997: (i) the largest 100 equipment
rental companies had total rental revenues of approximately $4.2 billion, which
would account for approximately 20% of the management-estimated $21 billion in
industry rental revenues; (ii) no one company had a market share greater than
5%; (iii) the industry had approximately 17,000 participants; and (iv) there
were only ten equipment rental companies having rental revenues in excess of
$100 million.
1
<PAGE>
The Company believes RSC benefits from several competitive advantages,
including sophisticated management information systems, volume purchasing
discounts, professional management, a diverse customer base and geographic
locations, a modern and well-maintained rental fleet, the ability to transfer
equipment among rental locations to satisfy customer demand and national brand
identity. Management believes the equipment rental industry benefits from the
trend among businesses to outsource non-core operations in order to reduce
capital investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. As a result of consolidation and industry
growth, 1997 rental revenues of the top 100 rental equipment companies
increased over 1996 rental revenues by approximately 35%, to more than
$4.2 billion, according to estimates by the RER. See "Business--Competition."
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by taking
advantage of its strong market position and pursuing a business strategy that
includes the following key elements:
Small- to Medium-Sized Market Focus. The Company focuses on operating rental
locations in underserved small- to medium-sized rental markets where the
Company can capitalize on its competitive advantages relative to the small,
local equipment rental businesses and equipment dealers who have traditionally
served such markets. In addition, the Company believes small- to medium-sized
markets provide an extensive selection of acquisition candidates and attractive
start-up locations. The Company believes future acquisitions and start-up
locations will provide opportunities to achieve greater geographic and customer
diversification. Through its geographic diversification, the Company believes
it can more effectively manage economic fluctuations than single-location
businesses by transferring equipment to regions with higher demand. See
"Business--Locations" and "--Growth Strategy."
Cluster Strategy. Under its cluster strategy, RSC establishes a comprehensive
pool of rental equipment at a central, readily-accessible "hub" location, and
surrounds the hub with smaller "satellite" locations 30 to 150 miles away,
which draw on this equipment pool to serve local customers' needs. The hub
locations provide full-service rental fleet maintenance and repair operations
for the satellite locations. The Company believes this strategy increases fleet
utilization and allows RSC to bring the benefits of a large, high-quality and
diversified rental equipment fleet to markets with populations as small as
25,000 where a full-scale rental facility might not otherwise be justified. See
"Business--Fleet Management."
Advanced Information Systems. The Company has made substantial investments in
its management information systems in order to improve asset utilization and
financial performance. Every rental location has on-line access to a
centralized computer system that provides real-time transaction processing,
extensive fleet management tools and financial management reports. Use of these
systems allows the Company to improve its asset utilization by deploying assets
to locations generating higher returns and identifying underperforming assets
for disposition. These systems also allow an employee at any location to
identify and reserve a specific piece of equipment anywhere in a region, and
schedule delivery (generally within 24 hours) to a customer's job site. With
the acquisition of Center, the Company obtained Center's proprietary
information system, which, among other enhancements, automatically prioritizes
equipment for maintenance based on type, age and recent use. The Company
believes Center's system is scaleable over a large number of locations, and
expects to add it to the Company's existing systems. See "--Recent
Developments--Acquisition of Center Rental," "Business--Fleet Management" and
"--Information Systems"
Decentralized Management. Under the Company's decentralized management
structure, RSC's region vice presidents and district managers, who currently
average over 20 years of rental experience, are responsible for management,
customer service, marketing strategies and business growth, including pursuing
acquisitions and identifying start-up locations, in their regions. Each region
vice president and district manager is compensated through a stock option
program and cash bonus plan tied directly to the region's performance. A small
corporate
2
<PAGE>
staff at the Company's headquarters focuses on corporate planning, financial
reporting and analysis and overseeing execution of the Company's growth
strategy. The Company has also centralized its purchasing and equipment
disposal functions in order to maximize purchase discounts and sale prices for
used rental equipment.
Superior Customer Service. The Company believes it differentiates itself from
many of its competitors by providing responsive customer service, a broad
selection of high-quality rental equipment and "one-stop shopping" for a wide
range of supplies, tools, parts and equipment. Depending upon market needs, RSC
also offers value-added services to its customers such as a radio-dispatched
transportation fleet and 24-hours-a-day, seven-days-a-week support services,
including on-site maintenance and repair. The Company believes its rapid
response time in delivering, servicing or replacing equipment at job sites
generates customer loyalty. A cornerstone to the Company's customer service
commitment is its extensive training system, Rental Service University ("RSU"),
which provides formal training to Company employees relating to customer
service, strategy, finance, information systems, fleet management, safety and
risk management and human resources. See "Business--Products" and "--Sales and
Marketing."
GROWTH STRATEGY
RSC's growth strategy is to continue to expand its presence in existing
markets and capitalize on opportunities to enter new geographic markets through
a combination of acquisitions and start-up locations. The Company is systematic
in its selection of new markets for expansion and, together with Arthur D.
Little, Inc., has developed a proprietary model to guide future expansion
efforts by identifying and ranking desirable locations based on more than 25
demographic characteristics found in the Company's most successful geographic
markets. The Company also seeks to increase revenues at new and existing
locations through fleet expansion, improved asset utilization and targeted
marketing efforts. The Company also has begun to increase revenues across
existing locations by cross-selling both equipment rental services and MRO
tools and supplies to its industrial customers.
Acquisitions. RSC's acquisition efforts focus on acquiring stable, respected
businesses in markets the Company believes offer opportunities for additional
growth. The Company primarily targets acquisitions of businesses in small- to
medium-sized markets where an existing owner has limited resources to expand
the rental equipment fleet and/or the owner's decision to sell coincides with
the decision to retire. The Company believes it can capitalize in such markets
on its competitive advantages relative to the small, local equipment rental
businesses and equipment dealers who have traditionally served such markets.
Immediately after completing an acquisition, the Company generally integrates
the operations of the acquired business into its management information
systems, consolidates its equipment purchasing and disposal functions, and
centralizes its fleet management, while seeking to provide consistent, high-
quality service to the acquired business' customers. The Company has a proven
track record in completing and integrating acquisitions. Proprietors of smaller
businesses often place significant emphasis on the Company's reputation in
these areas, and the Company believes this reputation provides it access to
additional acquisition opportunities. Since its formation in 1992, RSC has
acquired 60 businesses consisting of 188 locations (through August 7, 1998).
See "Business--Business Strategy--Small- to Medium-Sized Market Focus" and
"Business--Locations."
Start-Up Locations. RSC also enters targeted markets through start-up
locations where there is no quality business available for acquisition or where
such a business cannot be acquired on terms acceptable to the Company. The
Company's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. RSC enhances the flexibility of start-up locations by entering
into real estate leases with short initial terms and multiple option periods.
In addition, RSC typically minimizes capital expenditures at a start-up
location by redeploying and sharing equipment with an existing hub. If a start-
up location does not meet expectations, the Company can redeploy the equipment
elsewhere. Since the Company opened its first start-up location in October
1994, the Company has opened 61 additional start-up locations (through August
7, 1998). See "Business--Business Strategy--Cluster Strategy" and "Business--
Locations."
3
<PAGE>
Internal Growth. The Company focuses on achieving internal growth through an
emphasis on disciplined fleet expansion, improved asset utilization and
targeted marketing efforts. The Company intends to replace assets in, and
increase the breadth and depth of, its existing rental equipment fleet through
capital expenditures. In addition, RSC's information systems provide the data
necessary to improve asset deployment based upon such factors as price
realization, time utilization and individual asset return on investment.
Through its national accounts marketing program, the Company targets large
petrochemical, industrial and commercial customers. The Company offers these
customers In-Plant Maintenance ("IPM") services whereby RSC locates equipment
at a customer's facility and assumes complete responsibility for the
maintenance of such equipment. The IPM program allows the Company to eliminate
operating expenses such as equipment transportation and delivery, and to
improve asset utilization rates. In addition, the Company has increased its MRO
supply business and its tool room management and small tool trailer business.
The Company has also created an Industrial Division, with a dedicated and
specially trained sales force focusing exclusively on industrial customers. See
"Business--Fleet Management," "--Information Systems" and "--Sales and
Marketing."
RECENT DEVELOPMENTS
ACQUISITION OF CENTER RENTAL
On December 2, 1997, the Company acquired all of the outstanding stock of
Rent-It-Center, Inc. d/b/a Center Rental & Sales and substantially all of the
assets of certain affiliated entities (collectively, "Center") for
approximately $100.9 million in cash, 482,315 shares of common stock, par value
$.01 per share, of the Company ("Common Stock") (of which 64,544 shares will be
issued over seven years, subject to earlier issuance within three years if
certain performance objectives are achieved) and the assumption of
approximately $16.0 million of Center's debt (the "Center Acquisition"). Center
was a leading independent equipment rental company that also sold a variety of
equipment ranging from small tools to heavy equipment, including related
commodity supplies. Center operated a total of 14 locations in Colorado, New
Mexico, Texas, Kansas, Missouri and Nebraska, and had total combined revenues
of approximately $49.8 million for its fiscal year ended October 31, 1997.
Center operated on a "hub" and "satellite" strategy similar to that employed by
the Company. Center's balance sheet was consolidated with the Company's under
the purchase method of accounting as of December 2, 1997. Pursuant to the
acquisition agreements, the Company assumed effective control of Center's
operations on November 1, 1997, and has included Center's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
ACQUISITION OF VALLEY RENTALS
On February 3, 1998, the Company acquired substantially all of the assets of
JDW Enterprises, Inc. d/b/a Valley Rentals ("Valley") for $93.6 million in cash
and 435,602 shares of Common Stock (the "Valley Acquisition"). Valley was a
leading independent equipment rental company in the Southwest, operating a
total of ten locations in Arizona and New Mexico, and had total revenues of
approximately $36.7 million for its fiscal year ended December 31, 1997. This
acquisition was recorded under the purchase method of accounting as of February
3, 1998.
Valley was an excellent strategic fit with both the Company's operations and
the Colorado and New Mexico locations of Center. Valley was a leader in the
Arizona rental market, and operated on a limited "hub" and "satellite" system
similar to the Company and Center. Valley's locations in the Southwest were a
natural geographic extension of RSC's and Center's locations.
OTHER ACQUISITIONS AND START-UPS
On April 1, 1998, the Company acquired all of the outstanding stock of James
S. Peterson Enterprises, Inc. d/b/a Metroquip Rental Centers ("Metroquip") for
approximately $51.2 million in cash (including the payoff of
4
<PAGE>
assumed debt) and 193,090 shares of Common Stock. Up to an additional 95,727
shares of Common Stock may be paid to the seller over a three-year period if
certain performance objectives are met. Metroquip rented, sold and supported
aerial work platforms and contractors' equipment, operated a total of five
locations in Minnesota and Nebraska, and had total revenues of approximately
$25.2 million for its fiscal year ended December 31, 1997. Metroquip's balance
sheet was consolidated with the Company's as of April 1, 1998. Pursuant to the
acquisition agreement, the Company assumed effective control of Metroquip's
operations on March 1, 1998 and has included Metroquip's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
On April 2, 1998, the Company acquired all of the outstanding stock of T&M
Rental, Inc. ("T&M") for approximately $21.9 million in cash (including the
payoff of assumed debt). Up to 33,132 shares of Common Stock may be paid to the
seller over a three-year period if certain performance objectives are met. T&M
was an independent rental company operating one location in Indiana, and had
total revenues of approximately $5.8 million for its fiscal year ended February
28, 1998. T&M's balance sheet was consolidated with the Company's as of April
2, 1998. Pursuant to the acquisition agreement, the Company assumed effective
control of T&M's operations on March 1, 1998 and has included T&M's revenues,
costs and expenses from such date in its consolidated statements of operations,
net of related imputed purchase price adjustments.
On July 29, 1998, the Company acquired all of the outstanding stock of M.J.
Struckel & Company, Inc. ("Struckel") for approximately $21.2 million in cash
(including the payoff of assumed debt). Struckel rented and sold a variety of
aerial equipment to customers in the construction industry, operated a total of
three locations in Illinois and Missouri, and had total revenues of
approximately $9.2 million for its fiscal year ended December 31, 1997.
Struckel's balance sheet was consolidated with the Company's as of July 29,
1998. Pursuant to the acquisition agreement, the Company assumed effective
control of Struckel's operations on July 1, 1998 and has included Struckel's
revenues, costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments.
Subsequent to June 30, 1998, the Company completed two additional
acquisitions for a total combined purchase price of approximately $10.6 million
in cash. These acquisitions had a combined six locations in Canada and
Illinois.
As of August 7, 1998, the Company was party to non-binding letters of intent
to acquire seven equipment rental businesses with a combined 14 locations in
Arizona, Idaho, Illinois, Maryland, Nevada, New Mexico, Oklahoma, Utah and
Wisconsin for a total combined purchase price of approximately $52.9 million in
cash (including the assumption of approximately $1.3 million of debt). These
acquisitions are subject to a number of closing conditions, including the
execution of definitive purchase agreements, RSC board of directors approval
and, in some cases, expiration of early termination of the waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). Furthermore, in view of the fact that these letters of intent are non-
binding and that the Company has not completed its due diligence investigations
with respect thereto, the Company cannot predict whether these letters of
intent will lead to definitive agreements, whether the terms of any such
definitive agreements will be the same as the terms contemplated by the letters
of intent or whether any transaction contemplated by such letters of intent
will be consummated.
ISSUANCE OF SENIOR SUBORDINATED NOTES
On May 13, 1998, the Company issued $200.0 million aggregate principal amount
of its 9% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes")
in a private placement pursuant to Rule 144A under the Securities Act of 1933,
as amended (the "Securities Act"). The net proceeds of the offering were used
to repay indebtedness under the Revolver in order to provide borrowing
availability for general corporate purposes, including acquisitions.
5
<PAGE>
THE OFFERINGS
The offering of 2,200,000 shares of the Company's Common Stock, par value
$.01 per share, in the United States and Canada (the "U.S. Offering") and the
offering of 550,000 shares of the Company's Common Stock outside the United
States and Canada (the "International Offering") are collectively referred to
as the "Offerings."
Common Stock Offered:
<TABLE>
<C> <S>
By the Company...................................... 2,669,920 shares
By the Selling Stockholders......................... 80,080 shares
---------
Total........................................... 2,750,000 shares
=========
Common Stock to be Outstanding After the Offerings(1).. 23,467,316 shares
Use of Proceeds........................................ The net proceeds to be
received by the Company
from the Offerings will
be used to reduce the
Company's indebtedness
under the Revolver in
order to provide
borrowing availability
for general corporate
purposes, including
acquisitions. See "Use
of Proceeds."
New York Stock Exchange Symbol...................... RSV
</TABLE>
- --------
(1) Excludes (i) 1,255,824 shares subject to options outstanding as of July 31,
1998 pursuant to the Company's Equity Participation Plans at a weighted
average exercise price of $20.81 per share, (ii) 888,044 shares reserved
for issuance pursuant to the Company's Equity Participation Plans,
(iii) 229,118 shares reserved for issuance pursuant to the Company's
Employee Qualified Stock Purchase Plan (the "QSP Plan") and (iv) up to
393,518 shares reserved for issuance in connection with certain of the
Company's acquisitions. See "Management--Equity Participation Plans," "--
Employee Qualified Stock Purchase Plan" and "--Recent Developments."
RISK FACTORS
Purchasers of Common Stock in the Offerings should carefully consider the
risk factors set forth under the caption "Risk Factors" and the other
information included in this Prospectus prior to making an investment decision.
See "Risk Factors."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following summary consolidated statement of operations data for the years
ended December 31, 1995, 1996 and 1997, and summary consolidated balance sheet
data as of December 31, 1996 and 1997, have been derived from the audited
consolidated financial statements of the Company appearing elsewhere in this
Prospectus. The selected consolidated financial data with respect to the
Company's balance sheet as of December 31, 1995 has been derived from audited
financial statements of the Company not included in this Prospectus. The
summary consolidated financial data with respect to the Company's statements of
operations for the six months ended June 30, 1997 and 1998, and with respect to
the balance sheet as of June 30, 1998, 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
six months ended June 30, 1998 are not necessarily indicative of the results
which may be expected for future periods, including for the year ending
December 31, 1998. The selected operating data presented has not been audited.
The summary consolidated financial and operating data presented should be read
in conjunction with the Company's Consolidated Financial Statements and the
notes thereto, "Unaudited Pro Forma Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1995 1996 1997 1997(1) 1997 1998 1998(1)
------- ------- -------- ----------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(2):
Revenues:
Equipment rentals...... $47,170 $94,218 $170,704 $309,775 $64,327 $166,751 $182,659
Sales of parts,
supplies and new
equipment............. 14,621 21,919 70,957 165,682 26,952 61,053 90,179
Sales of used
equipment(3).......... 4,126 12,217 19,602 N/A 8,584 21,909 N/A
------- ------- -------- -------- ------- -------- --------
Total revenues......... 65,917 128,354 261,263 475,457 99,863 249,713 272,838
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 27,854 55,202 87,552 145,330 33,677 86,024 92,394
Depreciation, equipment
rentals............... 7,691 17,840 37,413 63,294 14,036 35,499 38,275
Cost of sales of parts,
supplies and new
equipment............. 10,439 15,582 54,739 121,679 20,606 47,227 67,617
Cost of sales of used
equipment(3).......... 2,178 8,488 12,927 N/A 5,696 15,579 N/A
------- ------- -------- -------- ------- -------- --------
Total cost of
revenues.............. 48,162 97,112 192,631 330,304 74,015 184,329 198,286
------- ------- -------- -------- ------- -------- --------
Gross profit............ 17,755 31,242 68,632 145,154 25,848 65,384 74,552
Selling, general and
administrative
expense................ 6,421 12,254 20,996 58,091 8,469 14,404 19,248
Depreciation and
amortization, excluding
equipment rental
depreciation........... 1,186 2,835 5,373 8,209 2,287 4,326 4,574
Amortization of
intangibles............ 718 2,379 3,907 11,054 1,369 4,590 5,418
------- ------- -------- -------- ------- -------- --------
Operating income........ 9,430 13,774 38,356 67,800 13,723 42,064 45,312
Interest expense, net... 3,314 7,063 14,877 36,338 4,627 20,008 22,017
------- ------- -------- -------- ------- -------- --------
Income before income
taxes and extraordinary
items.................. 6,116 6,711 23,479 31,462 9,096 22,056 23,295
Provision for income
taxes.................. 2,401 2,722 10,330 13,843 4,058 9,437 9,971
------- ------- -------- -------- ------- -------- --------
Income before
extraordinary items.... 3,715 3,989 13,149 $ 17,619 5,038 12,619 $ 13,324
======== ========
Extraordinary items(4).. (478) (1,269) (534) (534) --
------- ------- -------- ------- --------
Net income.............. 3,237 2,720 12,615 4,504 12,619
Redeemable preferred
stock accretion........ 1,717 1,643 -- -- --
------- ------- -------- ------- --------
Net income available to
common stockholders.... $ 1,520 $ 1,077 $ 12,615 $ 4,504 $ 12,619
======= ======= ======== ======= ========
Income before
extraordinary items per
common share........... $ .50 $ .34 $ .96 $ .75 $ .43 $ .61 $ .57
Income before
extraordinary items per
common share, assuming
dilution............... $ .49 $ .33 $ .94 $ .74 $ .42 $ .60 $ .56
SELECTED OPERATING DATA:
Beginning locations..... 25 50 94 94 165
Locations acquired...... 26 25 64 33 41
Locations opened........ 10 19 16 6 6
Locations closed, sold
or held for sale(5).... (11) -- (9) (2) (4)
------- ------- -------- ------- --------
Ending locations........ 50 94 165 131 208
======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
-------------------------- -------------------------
PRO FORMA
1995 1996 1997 ACTUAL AS ADJUSTED(1)
-------- -------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment............... $ 52,818 $116,921 $314,696 $ 543,363 $ 554,999
Total assets............. 137,832 218,933 699,326 1,098,751 1,132,522
Total debt............... 68,555 68,594 306,975 654,658 614,836
Redeemable preferred
stock (net of treasury
stock).................. 28,401 -- -- -- --
Common stockholders'
equity.................. 46 95,072 290,781 320,381 392,018
</TABLE>
8
<PAGE>
- --------
(1) The unaudited pro forma as adjusted consolidated statement of operations
data for the year ended December 31, 1997 gives effect to the 1997 Pro
Forma Combined Acquisitions, the 1998 Pro Forma Combined Acquisitions, the
1997 Pro Forma Acquisition Adjustments, the 1998 Pro Forma Acquisition
Adjustments and the 1997 Pro Forma Offering Adjustments, as described in
"Unaudited Pro Forma Consolidated Financial Data," as if such transactions
had occurred on January 1, 1997. The unaudited pro forma as adjusted
consolidated statement of operations data for the six months ended June 30,
1998 gives effect to the 1998 Pro Forma Combined Acquisitions, the 1998 Pro
Forma Acquisition Adjustments and the 1998 Pro Forma Offering Adjustments,
as described in "Unaudited Pro Forma Consolidated Financial Data," as if
such transactions had occurred on January 1, 1998. The unaudited pro forma
as adjusted balance sheet at June 30, 1998 gives effect to the Other
Acquisitions and the Offerings as if they had occurred on June 30, 1998.
See "Unaudited Pro Forma Consolidated Financial Data."
(2) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statements of operations data from the date of effective control of each
such acquisition. See Note 2 to the Company's Consolidated Financial
Statements.
(3) Sales of used equipment and cost of sales of used equipment are included
with sales of parts, supplies and new equipment and cost of sales of parts,
supplies and new equipment, respectively, on a pro forma as adjusted basis
for the year ended December 31, 1997 and the six months ended June 30,
1998.
(4) The extraordinary item in the year ended December 31, 1995 represents the
loss on extinguishment of debt related to the Company's $30.0 million
revolving credit facility (the "Old Revolver") paid off September 12, 1995.
The extraordinary item in the year ended December 31, 1996 represents the
loss on extinguishment of debt related to the amendment to the Revolver in
September 1996. The extraordinary item in the year ended December 31, 1997
represents the loss on extinguishment of debt related to the amendment to
the Revolver in January 1997.
(5) In 1996, the Company closed or disposed of its California locations, which
were previously classified as "assets held for sale" in the Company's
Consolidated Financial Statements.
----------------
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 6929 E.
Greenway Parkway, Suite 200, Scottsdale, Arizona 85254, and its telephone
number is (602) 905-3300.
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information set forth in this Prospectus, in
evaluating an investment in the Common Stock offered hereby. Certain
information contained in this Prospectus, including information with respect
to the Company's plans and strategy for its business, are forward-looking
statements. Prospective investors should carefully consider, in addition to
the other information contained in this Prospectus, the factors set forth
below for a discussion of important factors that could cause actual results to
differ materially from the results referred to in forward-looking statements
contained in this Prospectus.
RISKS RELATING TO GROWTH STRATEGY
A principal component of the Company's growth strategy is to continue to
expand through additional acquisitions and start-up locations that complement
the Company's business in new or existing markets. From its formation in 1992
through August 7, 1998, the Company, through its aggressive expansion
strategy, has acquired 60 businesses comprised of 188 locations and has opened
62 start-up locations. At August 7, 1998, the Company was party to non-binding
letters of intent to acquire seven equipment rental businesses with a combined
14 locations in Arizona, Idaho, Illinois, Maryland, Nevada, New Mexico,
Oklahoma, Utah and Wisconsin for a total combined purchase price of
approximately $52.9 million in cash (including the assumption of approximately
$1.3 million of debt). 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 growth
prospects and the market price of the Common Stock. Through several recent
acquisitions (including Valley and Center), the Company began operating in the
Rocky Mountain area, the Mid-Atlantic regions and the Southwest, areas in
which it had no experience. The results achieved to date by the Company may
not be indicative of its prospects or ability to succeed in these or other new
markets, many of which may have different competitive conditions, seasonality
and demographic characteristics than the Company's current markets. 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 expects to increase the number of its employees, the scope of its
operating and financial systems and the geographic area of its operations. The
Company believes this growth will increase 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 "--Need for Additional Capital for Future
Growth; Restrictions Imposed by Debt Covenants" and "Business--Growth
Strategy."
NEED FOR ADDITIONAL CAPITAL FOR FUTURE GROWTH; RESTRICTIONS IMPOSED BY DEBT
COVENANTS
Expansion of the Company through acquisitions, start-up locations and
internal growth will require significant capital expenditures. The Company
made capital expenditures of $86.8 million, $165.1 million and $195.9 million
in the years ended December 31, 1996 and 1997 and the six months ended June
30, 1998, respectively, and completed acquisitions for $27.3 million, $278.9
million and $205.1 million in the aggregate, respectively, during such
periods. The Company's capital expenditures have principally been
discretionary expenditures to finance growth of its rental fleet. The Company
must continue to reinvest in ongoing capital
10
<PAGE>
expenditures to maintain the condition of its rental equipment fleet in order
to remain competitive and provide its customers with high-quality equipment.
The Company historically has financed capital expenditures, acquisitions and
start-up locations primarily through the issuance of equity securities,
secured bank borrowings and internally generated cash flow. To implement its
growth strategy and meet its capital needs, the Company is selling Common
Stock in the Offerings and may in the future issue additional equity
securities or may incur additional indebtedness. Such additional indebtedness
may increase RSC's leverage, may make the Company more vulnerable to economic
downturns and may limit its ability to withstand competitive pressures. There
can be no assurance that additional capital, if and when required, will be
available on terms acceptable to the Company, or at all. Failure by the
Company to obtain sufficient additional capital in the future could force the
Company to curtail its growth or delay capital expenditures, which would have
a material adverse effect on the Company and the market price of the Common
Stock.
The Company's ability to finance future acquisitions, start-ups and internal
growth will be limited by the covenants contained in the Bank Facility and the
indenture governing the Senior Subordinated Notes (the "Indenture"). The Bank
Facility contains a number of significant covenants that, among other things,
restrict the ability of the Company to dispose of assets or merge, incur debt,
pay dividends, repurchase or redeem capital stock, create liens, make capital
expenditures and make certain investments or acquisitions and otherwise
restrict corporate activities. The Bank Facility also contains, among other
covenants, requirements that the Company maintain specified financial ratios,
including minimum cash flow levels and interest coverage and debt coverage
ratios, and prohibits the Company and its subsidiaries from prepaying,
redeeming or defeasing the Company's other indebtedness. Furthermore, the
Indenture contains, and any additional financing agreements are likely to
contain, certain restrictive covenants. The restrictions contained in the
Indenture and such other agreements affect, and in some cases significantly
limit or prohibit, among other things, the ability of the Company to incur
indebtedness, make prepayments of certain indebtedness, pay dividends, make
investments, engage in transactions with affiliates, create liens, sell assets
and engage in mergers and consolidations. If the Company fails to comply with
the restrictive covenants in the Indenture, the Company's obligation to repay
such obligations may be accelerated.
The ability of the Company to comply with such provisions may be affected by
events that are beyond the Company's control. The breach of any of these
covenants could result in a default under the Bank Facility or the Indenture.
In the event of any such default, the lenders under the Bank Facility and the
holders of the Senior Subordinated Notes could elect to declare all amounts
borrowed under the Bank Facility and the Senior Subordinated Notes, together
with accrued interest and other fees, to be due and payable. If such
indebtedness were to be accelerated, all indebtedness outstanding under such
Bank Facility and Indenture would be required to be paid in full before the
subsidiaries of the Company that are parties to the Bank Facility and
guarantors of the Senior Subordinated Notes would be permitted to distribute
any assets or cash to the Company. There can be no assurance that the assets
of the Company and its subsidiaries would be sufficient to repay all
borrowings under the Bank Facility, the other creditors of such subsidiaries
and the Senior Subordinated Notes in full. In addition, as a result of these
covenants, the ability of the Company and its subsidiaries to respond to
changing business and economic conditions and to secure additional financing,
if needed, may be significantly restricted, and the Company may be prevented
from engaging in transactions, including acquisitions, that might otherwise be
considered important to the Company's growth strategy or beneficial to the
Company, which could have a material adverse effect on the market price of the
Common Stock. See "Description of the Bank Facility," "Description of Senior
Subordinated Notes," "Business--Growth Strategy" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
ABILITY TO SERVICE DEBT; SIGNIFICANT LEVERAGE
The Company's leverage is significant in relation to its equity. The level
of the Company's indebtedness could have important consequences to the Company
and the market price of the Common Stock, including the following: (i) the
ability of the Company to obtain any necessary financing in the future for
capital expenditures, working capital, debt service requirements, acquisitions
or other purposes may be limited; (ii) a substantial
11
<PAGE>
portion of the Company's cash flow from operations must be dedicated to the
payment of principal of and interest on its indebtedness and other
obligations; (iii) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to changes in, its business; (iv) the
Company will be more highly leveraged than some of its competitors; (v) the
Company's high degree of indebtedness will make it more vulnerable to a
default and the consequences thereof (such as a bankruptcy or workout) in the
event of a downturn in its business; and (vi) the Bank Facility accrues
interest at variable rates, which will cause the Company to be vulnerable to
fluctuations in interest rates. See "--Risks Relating to Growth Strategy," "--
Need for Additional Capital for Future Growth; Restrictions Imposed by Debt
Covenants," "--Seasonality and Quarterly Fluctuations," "--RHI's Bankruptcy;
Increase in Indebtedness," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of the Bank Facility" and
"Description of Senior Subordinated Notes."
The ability of the Company to meet its debt service requirements will be
dependent upon the successful implementation of the Company's strategy, among
other things. In addition, the Company's ability to satisfy its debt service
obligations will be dependent upon the Company's future performance, which is
subject to a number of factors that are beyond the Company's control. The
Company's revenues and operating results are subject to seasonality and
quarterly fluctuations. There can be no assurance that the Company will
generate sufficient cash flow from operating activities to meet its debt
service and working capital requirements. Any failure or delay in meeting
these debt service requirements could have a material adverse effect upon the
Company and the market price of the Common Stock.
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., BET
Plant Services U.S.A. and United Rentals, Inc.); regional competitors that
operate in a few states; small, independent businesses with one or two rental
locations; and equipment vendors and dealers who both sell and rent equipment
directly to customers. Additionally, United Rentals, Inc. and U.S. Rentals,
Inc. have announced plans for a merger, which is expected to close in
September 1998. Fragmentation has attracted new competitors. Through its
acquisition of Prime Services, Inc., Atlas Copco North America Inc., a
subsidiary of Sweden-based Atlas Copco AB ("Atlas Copco"), has entered into
the equipment rental business, and the Company believes that equipment
manufacturers such as Caterpillar Inc. ("Caterpillar"), John Deere Capital
Corporation, a wholly owned subsidiary of Deere & Company ("John Deere"), and
equipment dealers such as Neff Corp., a John Deere dealer in which GE Capital
Corp. has an equity investment ("Neff"), have or may enter into the business
as well. The Company also competes against MRO suppliers, including large
companies (such as W.W. Grainger and McMaster Carr), as well as regional and
independent competitors. These competitors of the Company, as well as some
others, have greater financial resources, are more geographically diverse and
have greater name recognition than the Company. There can be no assurance that
the Company will not encounter increased competition from existing competitors
or new market entrants that may be significantly larger and have greater
financial and marketing resources. In addition, to the extent existing or
future competitors seek to gain or retain market share by reducing prices, the
Company may be required to lower its prices, thereby impacting operating
results.
Existing or future competitors also may seek to compete with the Company for
acquisition candidates that could have the effect of increasing the price for
acquisitions or reducing the already limited number of suitable acquisition
candidates. Management believes that such competition has increased the prices
obtained by businesses acquired by the Company and its competitors. In
addition, such competitors may also compete with the Company for start-up
locations, thereby limiting the number of attractive locations for expansion.
Competition in the rental or MRO business and competition in making
acquisitions could have a material adverse effect on the Company and the
market price of the Common Stock. See "Business--Competition."
12
<PAGE>
GENERAL ECONOMIC CONDITIONS
The Company's business is sensitive to economic and competitive conditions,
including national, regional and local slowdowns in construction,
petrochemical or other industrial activity. As of August 7, 1998, the Company
operated 225 locations in 26 states (Alabama, Arizona, Arkansas, Colorado,
Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Louisiana,
Maryland, Minnesota, Mississippi, Missouri, Nebraska, New Mexico,
North Carolina, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia and Wisconsin) and Canada. As of August 7, 1998, the Company was
party to non-binding letters of intent to acquire seven equipment rental
businesses with a combined 14 locations in nine states (Arizona, Idaho,
Illinois, Maryland, Nevada, New Mexico, Oklahoma, Utah and Wisconsin). 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, its financial condition or the market price
of the Common Stock. See "Business--Locations."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing and cost of
acquisitions and start-up locations; the effectiveness of integrating acquired
businesses and start-up locations; the timing of fleet expansion capital
expenditures; the realization of targeted equipment utilization rates;
seasonal rental and purchasing patterns of the Company's customers; and price
changes in response to competitive factors. The Company incurs various costs
in establishing or integrating newly acquired locations or start-ups, and the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. These factors,
among others, make it likely that in some future quarter the Company's results
of operations may be below the expectations of securities analysts and
investors, which could have a material adverse effect on the value of the
Common Stock. 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."
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, Robert M. Wilson, Senior Vice President and Chief Financial Officer,
and Douglas A. Waugaman, Ronald Halchishak, David G. Ledlow and John Markle,
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 and the market price of the Common Stock. The Company's
future success also will depend on its ability to attract, train and retain
skilled personnel in all areas of its business. See "Management."
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to various federal, state and
local laws and regulations governing, among other things, worker safety, air
emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. There can be no assurance
that acquired or leased locations have been operated in compliance with
environmental laws and regulations or that future uses or conditions will not
result in the imposition of environmental liability upon the Company or expose
13
<PAGE>
the Company to third-party actions such as tort suits. The Company uses
hazardous materials such as solvents to clean and maintain its rental
equipment fleet. In addition, the Company generates and disposes waste such as
used motor oil, radiator fluid and solvents, and may be liable under various
federal, state and local laws for environmental contamination at facilities
where its waste is or has been disposed. In addition, the Company dispenses
petroleum products from underground and above-ground storage tanks located at
certain rental locations that it owns or leases. The Company maintains an
environmental compliance program that includes the implementation of required
technical and operational activities designed to minimize the potential for
leaks and spills, maintenance of records and the regular testing and
monitoring of tank systems for tightness. There can be no assurance, however,
that these tank systems have been or will at all times remain free from leaks
or that the use of these tanks has not or will not result in spills or other
releases. The Company incurs ongoing expenses associated with the removal of
older underground storage tanks and other activities to come into compliance
with environmental laws, and the performance of appropriate remediation at
certain of its locations. The foregoing risks could have a material adverse
effect on the market price of the Common Stock. See "Business--Government and
Environmental Regulation."
LIABILITY AND INSURANCE
The Company's business exposes it to possible claims for personal injury or
death resulting from the use of equipment rented or sold by the Company and
from injuries caused in motor vehicle accidents in which Company delivery or
service personnel are involved. The Company carries comprehensive insurance
subject to 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. Any of the foregoing risks could have a
material adverse effect on the market price of the Common Stock.
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated Bylaws ("Bylaws")
include provisions that may delay, defer or prevent a takeover attempt that
may be in the best interest of stockholders. These provisions include the
ability of the Board of Directors to issue up to 500,000 shares of preferred
stock, having such rights, privileges and preferences as the Board of
Directors may determine, without any further stockholder approval, a provision
under which only the Board of Directors may call meetings of stockholders and
certain advance notice procedures for nominating candidates for election to
the Board of Directors. The issuance of preferred stock, or the perception
that such issuance might occur, could also discourage bids for the Common
Stock at a premium as well as create a depressive effect on the market price
of the Common Stock. In addition, under certain conditions, Section 203 of the
Delaware General Corporation Law (the "DGCL") would prohibit the Company from
engaging in a "business combination" with an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) for a period of three years. The Bank Facility contains certain
provisions which may delay, defer or prevent a takeover attempt which may be
in the best interest of the Company's stockholders, including provisions
providing that a change in control of the Company is an event of default under
the Bank Facility. In addition, the Indenture also requires that upon a change
of control of the Company, the Company must offer to repurchase the Senior
Subordinated Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest. See "Description of Capital Stock," "Description of Senior
Subordinated Notes" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
VOLATILITY OF STOCK PRICE
The Common Stock's market price has experienced and may be expected to
continue to experience significant volatility. Such volatility may be caused
by fluctuations in the Company's operating results, changes in earnings
estimates by investment analysts, the degree of success the Company achieves
in implementing its
14
<PAGE>
business and growth strategies, changes in business or regulatory conditions
affecting the Company, its customers or its competitors, and other factors. In
addition, the NYSE historically has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic, political and market conditions, may adversely affect the market
price of the Common Stock. There can be no assurance that the market price of
the Common Stock will not decline below the price at which shares of Common
Stock are offered hereunder. See "Price Range of Common Stock and Dividend
Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the Offerings, the Company will have outstanding an
aggregate of 23,467,316 shares of Common Stock (23,879,816 shares if the
Underwriters' overallotment option is exercised in full). After the Offerings,
the holders of 2,500,171 shares of Common Stock 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 and the Company's directors
and executive officers have, subject to certain exceptions in the case of the
Company described in "Underwriting" (including securities to be issued
pursuant to employee benefit plans and acquisitions), agreed not to directly
or indirectly offer, sell, contract to sell or otherwise dispose of or
transfer any capital stock of the Company, or any security convertible into,
or exercisable or exchangeable for, such capital stock, for a period of 90
days after the date of this Prospectus, without the prior written consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated. In addition, the Company
has the authority to issue additional shares of Common Stock and shares of one
or more series of preferred stock. The issuance of such shares, or the
perception that such shares may be issued, and any dilutive effect on earnings
per share may adversely affect the market price of the Common Stock. No
prediction can be made as to the effect, if any, that future sales of shares,
or the availability of shares for future sale, will have on the market price
of the Common Stock. See "Description of Capital Stock," "Principal and
Selling Stockholders," "Shares Eligible for Future Sale" and "Underwriting."
RHI'S BANKRUPTCY; INCREASE IN INDEBTEDNESS
In September 1995, the Company acquired Acme Holdings Inc. ("RHI") an
equipment rental business with 22 locations, primarily serving Florida, the
Texas/Louisiana Gulf Coast and California. Between 1986 and 1990, RHI had
acquired nine equipment rental businesses financed primarily with debt. In
1993, RHI refinanced its debt through the public sale of $78.0 million of
senior notes (the "Retired Notes"). In 1994, due to a downturn in business
conditions, combined with RHI's highly leveraged capital structure, RHI faced
liquidity constraints and was unable to service its debt. In response, RHI
brought in a new management team and hired Martin R. Reid, the Company's
current Chief Executive Officer, as RHI's Chief Executive Officer in June
1994. This new management team initiated restructuring discussions with the
holders of the Retired Notes in August 1994, culminating in the prepackaged
bankruptcy of RHI and its subsidiaries. On September 12, 1995, the effective
date of the prepackaged bankruptcy plan, the holders of the Retired Notes
received an aggregate of $35.4 million in cash from the Company in exchange
for the surrender of the Retired Notes and the release of all claims against
RHI. In addition, in exchange for providing the financing necessary for the
consummation of RHI's prepackaged bankruptcy plan, the Company acquired RHI
through a stock merger. Prior to such acquisition, the Company and RHI shared
certain common stockholders, including members of RHI's management and
affiliates of Brentwood Associates. In addition, from July 1992 to September
1995, RHI provided executive management services to the Company pursuant to a
Management Agreement. RHI currently operates as a subsidiary of the Company
under the name RSC Holdings Inc. The Company's growth strategy has increased
and is expected to continue to increase the Company's indebtedness. As a
result of such increased levels of indebtedness, a downturn in business could
have a material adverse effect on the Company and the market price of the
Common Stock. See "Capitalization," "Unaudited Pro Forma Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Management."
15
<PAGE>
RISKS RELATED TO INTERNATIONAL OPERATIONS
The Company has recently acquired an equipment rental business with five
locations in Canada and is considering operations elsewhere outside of the
United States in the near future. These operations are subject to risks
normally associated with international operations, including currency
conversion risks, slower and more difficult accounts receivable collection,
greater difficulty and expense in administering business abroad and complying
with foreign laws.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer and software systems as the Year 2000 approaches. The Year
2000 problem is pervasive and complex, as virtually every computer operation
could be affected in some way by the rollover of the two-digit year value to
"00." The issue is whether systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause complete
system failures. The Company has received confirmation from all of its current
systems' vendors that each of their systems will properly handle the rollover
to the Year 2000.
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 Commission.
Actual results could differ materially from results referred to in the
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 results referred to in the forward-looking statements
contained in this Prospectus will in fact occur. The Company undertakes no
obligation to publicly release the results of any revisions to these forward-
looking statements that may be made to reflect any future events or
circumstances.
16
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the sale of the Common Stock offered hereby
(assuming an offering price of $28.5625 per share), after deducting discounts
and estimated expenses of the Offerings, are estimated to be $71.6 million
($82.9 million if the Underwriters' overallotment option is exercised in
full).
The Company intends to use the net proceeds of the Offerings to reduce its
indebtedness under the Revolver in order to provide borrowing availability for
general corporate purposes, including acquisitions. At August 7, 1998, the
Company was party to non-binding letters of intent to acquire seven equipment
rental businesses, of which a significant portion of the purchase price is
expected to be funded by borrowings by the Company, including borrowings under
the Revolver. See "Prospectus Summary--Recent Developments."
Proceeds from the Bank Facility were used to, among other things, fund
capital expenditures, acquisitions and start-up locations and meet seasonal
fluctuations in working capital. A reduction of amounts outstanding under the
Revolver will increase the amount of borrowing availability under such
facility. On a pro forma as adjusted basis giving effect to the Offerings, the
repayment of indebtedness under the Revolver with a portion of the net
proceeds of the Offerings and the completion of the Other Acquisitions, there
would have been approximately $188.0 million available for borrowing under the
Revolver at June 30, 1998, after taking into account restrictions under the
borrowing base, if any, and other customary restrictions. The Revolver bears
interest at specified margins over the prime and Eurodollar interest rates
based on the Company's achievement of specified interest coverage ratios, and
matures on December 2, 2002. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the NYSE under the symbol "RSV." The
Company's Common Stock was traded on the Nasdaq National Market ("Nasdaq")
from September 18, 1996 until May 21, 1997 under the symbol "RSVC." The
following table sets forth for each period indicated, the high and low closing
sales prices for the Common Stock as reported by the NYSE or Nasdaq, as
applicable.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE
---------------
HIGH LOW
------- -------
<S> <C> <C>
Year ended December 31, 1996
Third quarter (from September 18, 1996).................... $23.250 $21.500
Fourth quarter............................................. 28.500 20.375
Year ended December 31, 1997
First quarter.............................................. 27.250 18.000
Second quarter............................................. 26.375 18.000
Third quarter.............................................. 28.000 22.438
Fourth quarter............................................. 28.000 22.875
Year ended December 31, 1998
First quarter.............................................. 24.813 19.875
Second quarter............................................. 33.625 23.500
Third quarter (through August 11, 1998).................... 37.000 28.563
</TABLE>
On August 12, 1998, the last reported sale price for the Common Stock on the
NYSE was as set forth on the cover page of this Prospectus. As of August 7,
1998, there were approximately 64 holders of record of the Common Stock. The
Company believes the number of beneficial owners is substantially greater than
the number of record holders because a large portion of the Common Stock is
held of record in broker "street names."
The Company has not paid any cash dividends on its Common Stock since its
formation and does not currently intend to pay cash dividends in the
foreseeable future. Management anticipates that all earnings and other cash
resources of the Company, if any, will be retained by the Company for the
operation and expansion of its business and for general corporate purposes.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, the Company's
earnings, financial condition, results of operations, level of indebtedness,
capital requirements, general business conditions and contractual restrictions
on payment of dividends, if any, as well as such other factors as the Board of
Directors may deem relevant. The Company is effectively restricted by the
terms of the Bank Facility from paying cash dividends on its Common Stock and
may in the future enter into loan or other agreements or issue debt securities
or preferred stock that restrict the payment of cash dividends on Common
Stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
CAPITALIZATION
The following table sets forth the total cash and cash equivalents and total
capitalization of the Company at June 30, 1998 on (i) an historical basis,
(ii) a pro forma combined basis to give effect to the Other Acquisitions as
though all such acquisitions were consummated as of June 30, 1998 and (iii) a
pro forma as adjusted basis to give effect to the Other Acquisitions, the
Offerings and the application of the net proceeds therefrom to repay
indebtedness under the Revolver. This table should be read in conjunction with
"Use of Proceeds," "Unaudited Pro Forma Consolidated Financial Data,"
"Selected Consolidated Financial and Operating Data" and the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------
PRO FORMA PRO FORMA
ACTUAL COMBINED AS ADJUSTED
-------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 3,559 $ 3,811 $ 3,811
Debt:
Revolver(1)................................ 351,834 383,649 312,012
Term Loan(1)............................... 100,000 100,000 100,000
9% Senior Subordinated Notes due 2008...... 200,000 200,000 200,000
Other...................................... 2,824 2,824 2,824
-------- ---------- ----------
Total debt............................... 654,658 686,473 614,836
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;
40,000,000 authorized and 20,784,666
outstanding, actual; 40,000,000 authorized
and 20,784,666 outstanding, pro forma
combined; 40,000,000 authorized and
23,454,586 outstanding, pro forma as
adjusted(2)............................... 208 208 235
Additional paid-in capital................. 291,749 291,749 363,359
Common stock issuable(3)................... 2,780 2,780 2,780
Deferred compensation expense.............. (631) (631) (631)
Retained earnings.......................... 26,275 26,275 26,275
-------- ---------- ----------
Total stockholders' equity............... 320,381 320,381 392,018
-------- ---------- ----------
Total capitalization................... $975,039 $1,006,854 $1,006,854
======== ========== ==========
</TABLE>
- --------
(1) As of June 30, 1998, the total commitment under the Bank Facility was
$600.0 million. On a pro forma as adjusted basis giving effect to the
Offerings, the repayment of indebtedness under the Revolver with the net
proceeds of the Offerings and the completion of the Other Acquisitions,
the Company would have had borrowing availability of approximately
$188.0 million under the Bank Facility, after taking into account the
restrictions under the borrowing base, if any, and other customary
restrictions.
(2) Excludes (i) 1,228,066 shares subject to options outstanding as of June
30, 1998 pursuant to the Company's Equity Participation Plans at a
weighted average exercise price of $20.48 per share, (ii) 916,440 shares
reserved for issuance pursuant to the Company's Equity Participation
Plans, (iii) 241,660 shares reserved for issuance pursuant to the
Company's QSP Plan and (iv) up to 393,518 shares reserved for issuance in
connection with certain of the Company's acquisitions. See "Prospectus
Summary--Recent Developments," "Management--Equity Participation Plans,"
"--Employee Qualified Stock Purchase Plan," and Notes 2 and 6 to the
Company's Consolidated Financial Statements.
(3) The common stock issuable is associated with the Common Stock relating to
the acquisitions of Central States and Center that vests over future time
periods. See Note 2 to the Company's Consolidated Financial Statements.
19
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of the Company
presents the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1997 and the six months ended June 30, 1998, and the
unaudited pro forma consolidated balance sheet at June 30, 1998. The unaudited
pro forma combined consolidated statement of operations for the year ended
December 31, 1997 has been adjusted to give effect to the following, as if
such transactions had occurred on January 1, 1997: (i) the Company's
acquisitions of substantially all of the assets of 3 W Services, Inc.
(completed in January 1997), Holt Equipment Rental & Supply (completed in
February 1997), Crider Electric Motor & Tool Rental Service, Inc. (completed
in March 1997), United Rental & Sales (completed in March 1997), Kastner
Rentals (completed in March 1997), Stop Again Rentals & Sales, Inc. (completed
in May 1997), D & D Rentals, Inc. (completed in May 1997), Brute Equipment Co.
d/b/a Foxx Hy-Reach Company (completed in June 1997), Central States
Equipment, Inc. and Equipment Lessors, Inc. (completed in June 1997), Carter
Rental & Equipment, Inc. (completed in June 1997), Super Rent Enterprises,
Inc. (completed in June 1997), Plateau Rental, Inc. (completed in June 1997),
AMCA Equipment Corp. (completed in September 1997), Kansas Enterprises, Inc.
d/b/a AAA Rent-All (completed in October 1997), Sunbelt Equipment & Rentals,
Inc. (completed in October 1997), Roesch Equipment Company (completed in
October 1997), Allen Equipment, Inc. (completed in October 1997), R&M Rentals,
Inc. (completed in December 1997) and the Company's acquisitions of all of the
outstanding stock of Comtect, Inc. and subsidiaries d/b/a Industrial Air Tool
(effective March 1, 1997) and Siems Rental & Sales Co., Inc. (effective
November 1, 1997) (collectively, the "1997 Acquisitions"); (ii) the Center
Acquisition (effective November 1, 1997), including the pro forma effect of
Center's acquisition of Zuni Rental Enterprises, L.L.C.; (iii) the Valley
Acquisition (completed in February 1998); (iv) the Company's acquisitions of
substantially all of the assets of Panama City Rentals, Inc. (completed in
January 1998), Ray E. Miller d/b/a Franklin Rent-All (completed in January
1998), Chris Roddenberry, Inc. and Joy Roddenberry, Inc. (completed in
February 1998), Rex Rentals, Inc. (completed in February 1998), Rent-It
Company of Alexandria, Inc. (completed in March 1998) and Webb City Rental
Center, Inc. d/b/a Southwest Rental & Sales (completed in April 1998), the
Company's acquisitions of all of the outstanding stock of Frank Wilson's
Rentals & Sales Co. (completed in January 1998), Metroquip (effective March 1,
1998), T&M (effective March 1, 1998), Equipment & Supply Company of Virginia,
Inc. (completed in April 1998) and Midwest Aerial Platforms, Inc. (completed
in May 1998), and the Company's acquisition of all of the outstanding stock of
Sooner Rental & Supply, Inc. and substantially all of the assets of certain
affiliated entities (completed in June 1998) (collectively, the "1998
Acquisitions"); and (v) the Company's acquisitions of substantially all of the
assets of Barney Hurley Crane Service, Inc. (completed in July 1998) and Fasco
Rentals Ltd. (completed in July 1998), and the Company's acquisition of all of
the outstanding stock of Struckel (completed in July 1998) (collectively, the
"Other Acquisitions"). All such acquisitions in (i) and (ii) are referred to
herein collectively as the "1997 Pro Forma Combined Acquisitions," and such
acquisitions in (iii) through (v) are referred to herein collectively as the
"1998 Pro Forma Combined Acquisitions." The pro forma adjustments relating to
the 1997 Pro Forma Combined Acquisitions are referred to herein collectively
as the "1997 Pro Forma Acquisition Adjustments," and the pro forma adjustments
relating to the 1998 Pro Forma Combined Acquisitions are referred to herein
collectively as the "1998 Pro Forma Acquisition Adjustments."
The unaudited pro forma combined consolidated statement of operations for
the six months ended June 30, 1998 has been adjusted to give effect to the
1998 Pro Forma Combined Acquisitions and the 1998 Pro Forma Acquisition
Adjustments as if such transactions had occurred on January 1, 1998. The
unaudited pro forma combined consolidated balance sheet at June 30, 1998 gives
effect to the Other Acquisitions as if they had occurred on June 30, 1998.
In addition to the 1997 Pro Forma Combined Acquisitions and the 1998 Pro
Forma Combined Acquisitions, the unaudited pro forma as adjusted consolidated
statement of operations for the year ended December 31, 1997 gives effect to
the following transactions, in each case as if such transactions had occurred
on January 1, 1997: (i) the Offerings (assuming an offering price of $28.5625
per share); (ii) the issuance by the Company of the Senior Subordinated Notes
in May 1998 (the "Notes Offering"); (iii) the sale by the Company of
3,000,000 shares of Common Stock in June 1997 at a price of $19.875 per share
and the sale by the Company of
20
<PAGE>
4,345,224 shares of Common Stock in December 1997 at a price of $24.00 per
share (collectively, the "Completed Common Stock Offerings"); (iv) the change
in interest expense as a result of reductions in the Revolver upon the
application of the net proceeds from the Offerings, the Notes Offering and the
Completed Common Stock Offerings; (v) the additional interest expense related
to the implementation of the Term Loan in December 1997; and (vi) the change
in interest expense resulting from amendments and/or restatements to the
Revolver in January 1997, June 1997, December 1997 and May 1998 (collectively,
(i) through (vi) above, the "1997 Pro Forma Offering Adjustments"). In
addition to the 1998 Pro Forma Combined Acquisitions, the unaudited pro forma
as adjusted consolidated statement of operations for the six months ended June
30, 1998 gives additional effect to the following transactions, in each case
as if such transactions had occurred on January 1, 1998: (i) the Offerings
(assuming an offering price of $28.5625 per share); (ii) the Notes Offering;
(iii) the change in interest expense as a result of reductions in the amounts
outstanding under the Revolver upon the application of the net proceeds from
the Offerings and the Notes Offering; and (iv) the change in interest expense
resulting from the amendment to the Revolver in May 1998 (collectively,
(i) through (iv) above, the "1998 Pro Forma Offering Adjustments"). In
addition to the Other Acquisitions, the unaudited pro forma as adjusted
balance sheet at June 30, 1998 gives effect to the following transactions, in
each case as if such transactions had occurred on June 30, 1998: (i) the
Offerings (assuming an offering price of $28.5625 per share) and (ii) the
reduction in the amounts outstanding under the Revolver upon the application
of the net proceeds from the Offerings (collectively, (i) through (ii) above,
the "Balance Sheet Pro Forma 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 1997 Pro Forma Acquisition Adjustments, the 1998 Pro Forma Acquisition
Adjustments, the 1997 Pro Forma Offering Adjustments, the 1998 Pro Forma
Offering Adjustments and the Balance Sheet Pro Forma Adjustments represent, in
the opinion of management, all adjustments necessary to present fairly the
Company's pro forma results of operations and financial position and are based
upon available information and certain assumptions considered reasonable under
the circumstances. The unaudited pro forma consolidated financial data
presented herein does not purport to present what the Company's financial
position or results of operations would actually have been had such events
leading to the 1997 Pro Forma Acquisition Adjustments, the 1998 Pro Forma
Acquisition Adjustments, the 1997 Pro Forma Offering Adjustments, the 1998 Pro
Forma Offering Adjustments and the Balance Sheet Pro Forma Adjustments in fact
occurred on the date or at the beginning of the periods indicated or to
project the Company's financial position or results of operations for any
future date or period.
The Unaudited Pro Forma Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto and management's discussion thereof contained elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and the notes thereto.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL 1997 CENTER VALLEY 1998 OTHER ACQUISITION
COMPANY ACQUISITIONS(1) ACQUISITION(1) ACQUISITION ACQUISITIONS ACQUISITIONS ADJUSTMENTS
---------- --------------- -------------- ----------- ------------ ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals......... $170,704 $29,180 $28,437 $30,831 $38,512 $12,111 $ --
Sales of parts,
supplies and
equipment....... 90,559 30,159 12,122 5,900 22,768 4,174 --
-------- ------- ------- ------- ------- ------- --------
Total revenues... 261,263 59,339 40,559 36,731 61,280 16,285 --
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 87,552 11,009 13,226 15,852 13,149 4,542 --
Depreciation,
equipment
rentals......... 37,413 7,721 5,301 6,831 10,269 1,406 (5,647)(2)
Cost of sales of
parts, supplies
and equipment... 67,666 21,609 10,894 3,848 14,322 3,340 --
-------- ------- ------- ------- ------- ------- --------
Total cost of
revenues......... 192,631 40,339 29,421 26,531 37,740 9,288 (5,647)
-------- ------- ------- ------- ------- ------- --------
Gross profit..... 68,632 19,000 11,138 10,200 23,540 6,997 5,647
Selling, general
and
administrative
expense.......... 20,996 12,414 6,213 4,421 14,997 3,682 (4,632)(3)
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 5,373 600 729 844 687 145 (169)(4)
Amortization of
intangibles...... 3,907 23 102 20 4 -- 6,998 (5)
-------- ------- ------- ------- ------- ------- --------
Operating
income........... 38,356 5,963 4,094 4,915 7,852 3,170 3,450
Non-operating
(income)
expense.......... -- (59) 8 (480) -- (158) 689 (6)
Interest expense,
net.............. 14,877 2,148 1,286 3,396 2,464 864 20,710 (7)
-------- ------- ------- ------- ------- ------- --------
Income before
income taxes and
extraordinary
items............ 23,479 3,874 2,800 1,999 5,388 2,464 (17,949)
Provision
(benefit) for
income taxes..... 10,330 322 964 -- 1,499 945 (4,356) (9)
-------- ------- ------- ------- ------- ------- --------
Income before
extraordinary
items............ $ 13,149 $ 3,552 $ 1,836 $ 1,999 $ 3,889 $ 1,519 $(13,593)
======== ======= ======= ======= ======= ======= ========
Income before
extraordinary
items per common
share............ $ .96
Weighted average
common shares.... 13,653
Income before
extraordinary
items per common
share, assuming
dilution......... $ .94
Weighted average
common shares,
assuming
dilution......... 13,927
<CAPTION>
PRO PRO FORMA
FORMA OFFERING PRO FORMA
COMBINED ADJUSTMENTS AS ADJUSTED
---------------- ------------- ------------------
<S> <C> <C> <C>
Revenues:
Equipment
rentals......... $309,775 $ -- $309,775
Sales of parts,
supplies and
equipment....... 165,682 -- 165,682
---------------- ------------- ------------------
Total revenues... 475,457 -- 475,457
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 145,330 -- 145,330
Depreciation,
equipment
rentals......... 63,294 -- 63,294
Cost of sales of
parts, supplies
and equipment... 121,679 -- 121,679
---------------- ------------- ------------------
Total cost of
revenues......... 330,303 -- 330,304
---------------- ------------- ------------------
Gross profit..... 145,154 -- 145,154
Selling, general
and
administrative
expense.......... 58,091 -- 58,091
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 8,209 -- 8,209
Amortization of
intangibles...... 11,054 -- 11,054
---------------- ------------- ------------------
Operating
income........... 67,800 -- 67,800
Non-operating
(income)
expense.......... -- -- --
Interest expense,
net.............. 45,745 (9,407)(8) 36,338
---------------- ------------- ------------------
Income before
income taxes and
extraordinary
items............ 22,055 9,407 31,462
Provision
(benefit) for
income taxes..... 9,704 4,139 (9) 13,843
---------------- ------------- ------------------
Income before
extraordinary
items............ $ 12,351 $ 5,268 $ 17,619
================ ============= ==================
Income before
extraordinary
items per common
share............ $ .81 $ .75
Weighted average
common shares.... 15,265(10)(11) 23,394(10)(11)
Income before
extraordinary
items per common
share, assuming
dilution......... $ .79 $ .74
Weighted average
common shares,
assuming
dilution......... 15,540(10)(11) 23,668(10)(11)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) Represents the results of the 1997 Acquisitions and the Center
Acquisition prior to their acquisition by the Company, using in some
cases estimates based on the mathematical annualization of such results
of operations. Results of the 1997 Acquisitions and the Center
Acquisition subsequent to the dates of their acquisition are included in
the Historical Company results for the year ended December 31, 1997 from
the date of effective control of such acquisitions. See Note 2 to the
Company's Consolidated Financial Statements.
(2) Represents the elimination of the historical carrying value of rental
equipment depreciation of $31,529,000 and the Company's estimate of
$25,882,000 for depreciation assuming the rental fleet acquired was
adjusted to fair market value at the beginning of the period presented.
As a result, pro forma depreciation decreased by $5,647,000.
(3) Represents the elimination of compensation expense and other payments to
officers and/or stockholders of certain acquired businesses, as such
officers and/or stockholders will either be employed at lower contractual
rates or will not be employed by the Company.
(4) Represents the elimination of the historical carrying value of
depreciation and amortization, excluding equipment rental depreciation,
of $844,000 and the Company's estimate of $675,000 for depreciation
excluding those assets not acquired and assuming the assets acquired were
adjusted to fair market value at the beginning of the period presented.
As a result, pro forma depreciation decreased by $169,000.
(5) Represents the Company's estimate of amortization of goodwill and
covenants not to compete for the 1997 Pro Forma Combined Acquisitions and
the 1998 Pro Forma Combined Acquisitions of $6,998,000, as if such
acquisitions were consummated at the beginning of the period presented.
(6) Represents the elimination of income earned on, or expenses associated
with, assets or liabilities not acquired or assumed in connection with
certain of the above acquisitions.
(7) Represents the elimination of historical interest expense of $10,158,000
and the addition of $30,868,000 of interest expense on borrowings to fund
the above acquisitions as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma interest
expense increased by $20,710,000.
(8) Represents the reduction in historical interest expense on the Revolver
at an interest rate of 7.6% (after giving effect to the additional
borrowings resulting from the 1997 Pro Forma Combined Acquisitions and
the 1998 Pro Forma Combined Acquisitions) assuming the repayment of such
indebtedness at the beginning of the period presented with a portion of
the net proceeds from the Offerings (assuming an offering price of
$28.5625 per share), the Notes Offering and the Completed Common Stock
Offerings, the additional interest expense associated with the Notes
Offering and the implementation of the Term Loan at an interest rate of
8.5%, and the effect of the reductions in interest expense resulting from
the Company's amendments and restatements to the Revolver, including the
effects on capitalized debt issuance costs.
(9) Represents the adjustment to provide income taxes at the Company's 1997
effective tax rate of 44.0%.
(10) The acquisition agreements for certain of the Company's acquisitions
provide for the potential issuance of certain amounts of Common Stock
over specified periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
are not considered in the pro forma consolidated statement of operations
until the related performance objectives have been achieved. See Note 2
to the Company's Consolidated Financial Statements.
(11) Weighted average common shares includes 2,062,514 shares of Common Stock
for certain of the Company's acquisitions.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO PRO FORMA
HISTORICAL VALLEY 1998 OTHER ACQUISITION FORMA OFFERING
COMPANY ACQUISITION(1) ACQUISITIONS(1) ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS
---------- -------------- --------------- ------------ ----------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment
rentals......... $166,751 $2,401 $ 7,685 $5,822 $ -- $182,659 $ --
Sales of parts,
supplies and
equipment....... 82,962 513 4,726 1,978 -- 90,179 --
-------- ------ ------- ------ ------- -------- -------
Total revenues... 249,713 2,914 12,411 7,800 -- 272,838 --
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 86,024 1,411 2,663 2,296 -- 92,394 --
Depreciation,
equipment
rentals......... 35,499 627 1,885 830 (566)(2) 38,275 --
Cost of sales of
parts, supplies
and equipment... 62,806 363 2,928 1,520 -- 67,617 --
-------- ------ ------- ------ ------- -------- -------
Total cost of
revenues......... 184,329 2,401 7,476 4,646 (566) 198,286 --
-------- ------ ------- ------ ------- -------- -------
Gross profit..... 65,384 513 4,935 3,154 566 74,552 --
Selling, general
and
administrative
expense.......... 14,404 432 3,228 1,886 (702)(3) 19,248 --
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 4,326 71 143 49 (15)(4) 4,574 --
Amortization of
intangibles...... 4,590 2 -- -- 826 (5) 5,418 --
-------- ------ ------- ------ ------- -------- -------
Operating
income........... 42,064 8 1,564 1,219 457 45,312 --
Interest expense,
net.............. 20,008 103 478 416 2,407 (6) 23,412 (1,395)(7)
-------- ------ ------- ------ ------- -------- -------
Income (loss)
before income
taxes and
extraordinary
items............ 22,056 (95) 1,086 803 (1,950) 21,900 1,395
Provision
(benefit) for
income taxes..... 9,437 -- 286 183 (532)(8) 9,374 597(8)
-------- ------ ------- ------ ------- -------- -------
Income (loss)
before
extraordinary
items............ $ 12,619 $ (95) $ 800 $ 620 $(1,418) $ 12,526 $ 798
======== ====== ======= ====== ======= ======== =======
Income before
extraordinary
items per common
share............ $ 0.61 $ 0.60
Weighted average
common shares.... 20,633 20,849(9)(10)
Income before
extraordinary
items per common
share, assuming
dilution......... $ 0.60 $ 0.59
Weighted average
common shares,
assuming
dilution......... 20,877 21,093(9)(10)
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C>
Revenues:
Equipment
rentals......... $182,659
Sales of parts,
supplies and
equipment....... 90,179
---------
Total revenues... 272,838
Cost of revenues:
Cost of
equipment
rentals,
excluding
equipment rental
depreciation.... 92,394
Depreciation,
equipment
rentals......... 38,275
Cost of sales of
parts, supplies
and equipment... 67,617
---------
Total cost of
revenues......... 198,286
---------
Gross profit..... 74,552
Selling, general
and
administrative
expense.......... 19,248
Depreciation and
amortization,
excluding
equipment rental
depreciation..... 4,574
Amortization of
intangibles...... 5,418
---------
Operating
income........... 45,312
Interest expense,
net.............. 22,017
---------
Income (loss)
before income
taxes and
extraordinary
items............ 23,295
Provision
(benefit) for
income taxes..... 9,971
---------
Income (loss)
before
extraordinary
items............ $ 13,324
=========
Income before
extraordinary
items per common
share............ $ 0.57
Weighted average
common shares.... 23,519(9)(10)
Income before
extraordinary
items per common
share, assuming
dilution......... $ 0.56
Weighted average
common shares,
assuming
dilution......... 23,763(9)(10)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(1) Represents the results of the Valley Acquisition and the 1998
Acquisitions prior to their acquisition by the Company, using in some
cases estimates based on the mathematical annualization of such results
of operations. Results of the Valley Acquisition and the 1998
Acquisitions subsequent to the dates of their acquisition are included in
the Historical Company results for the six months ended June 30, 1998
from the date of effective control of such acquisitions. See Note 2 to
the Company's Consolidated Financial Statements.
(2) Represents the elimination of the historical carrying value of rental
equipment depreciation of $3,342,000 and the Company's estimate of
$2,776,000 for depreciation assuming the rental fleet acquired was
adjusted to fair market value at the beginning of the period presented.
As a result, pro forma depreciation decreased by $566,000.
(3) Represents the elimination of compensation expense and other payments to
officers and/or stockholders of certain acquired businesses, as such
officers and/or stockholders will either be employed at lower contractual
rates or will not be employed by the Company.
(4) Represents the elimination of the historical carrying value of
depreciation and amortization, excluding equipment rental depreciation,
of $71,000 and the Company's estimate of $56,000 for depreciation
excluding those assets not acquired and assuming the assets acquired were
adjusted to fair market value at the beginning of the period presented.
As a result, pro forma depreciation decreased by $15,000.
(5) Represents the Company's estimate of amortization of goodwill and
covenants not to compete for the 1998 Pro Forma Combined Acquisitions of
$826,000, as if the acquisitions were consummated at the beginning of the
period presented.
(6) Represents the elimination of historical interest expense of $997,000 and
the addition of $3,404,000 of interest expense on borrowings to fund the
above acquisitions as if the transactions were consummated at the
beginning of the period presented. As a result, pro forma interest
expense increased by $2,407,000.
(7) Represents the reduction in historical interest expense on the Revolver
at an interest rate of 7.3% (after giving effect to the additional
borrowings resulting from the 1998 Pro Forma Combined Acquisitions)
assuming the repayment of such indebtedness at the beginning of the
period presented with a portion of the net proceeds from the Offerings
(assuming an offering price of $28.5625 per share) and the Notes
Offering, the additional interest expense associated with the Notes
Offering, and the reduction of interest expense resulting from the
Company's amendment to the Revolver in May 1998, including the effects on
capitalized debt issuance costs.
(8) Represents the adjustment to provide income taxes at the Company's
effective tax rate of 42.8%.
(9) The acquisition agreements for certain of the Company's acquisitions
provide for the potential issuance of certain amounts of Common Stock
over specified periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
are not considered in the pro forma consolidated statement of operations
until the related performance objectives have been achieved. See Note 2
to the Company's Consolidated Financial Statements.
(10) Weighted average common shares includes 696,892 shares of Common Stock
for certain of the Company's acquisitions.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998(1)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL OTHER ACQUISITION PRO FORMA OFFERING PRO FORMA
COMPANY ACQUISITIONS ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED
---------- ------------ ----------- ---------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents............ $ 3,559 $ 275 $ (23)(4) $ 3,811 $ -- $ 3,811
Accounts receivable,
net.................... 82,507 2,272 -- 84,779 -- 84,779
Other receivables and
prepaid expense........ 9,727 442 (31)(4) 10,138 -- 10,138
Income tax receivable... 2 10 -- 12 -- 12
Parts and supplies
inventories, net....... 39,025 1,063 -- 40,088 -- 40,088
Deferred taxes.......... 15,017 184 (184)(4) 15,017 -- 15,017
Rental equipment, net... 543,363 12,271 (635)(5) 554,999 -- 554,999
Operating property and
equipment, net......... 46,969 918 -- 47,887 -- 47,887
Intangible assets, net.. 345,878 -- 17,204 (6) 363,082 -- 363,082
Other assets, net....... 12,704 578 (573)(4) 12,709 -- 12,709
---------- ------- ------- ---------- -------- ----------
$1,098,751 $18,013 $15,758 $1,132,522 $ -- $1,132,522
========== ======= ======= ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Accounts payable........ $ 51,206 $ 525 $ (152)(4) $ 51,579 $ -- $ 51,579
Payroll and other
accrued expenses....... 27,914 569 (540)(4) 27,943 -- 27,943
Accrued interest
payable................ 4,215 67 -- 4,282 -- 4,282
Income taxes payable.... 7,218 41 (41)(4) 7,218 -- 7,218
Deferred taxes.......... 33,159 1,487 -- 34,646 -- 34,646
Bank debt and long term
obligations............ 354,658 10,986 20,829 (7) 386,473 (71,637)(8) 314,836
Term Loan............... 100,000 -- -- 100,000 -- 100,000
9% Senior Subordinated
Notes due 2008......... 200,000 -- -- 200,000 -- 200,000
Related party notes
payable................ -- 180 (180) -- -- --
---------- ------- ------- ---------- -------- ----------
Total liabilities...... 778,370 13,855 19,916 812,141 (71,637) 740,504
Stockholders' equity:
Common stock(2)......... 208 8 (8)(9) 208 27 (10) 235
Additional paid-in
capital................ 291,749 -- -- 291,749 71,610 (10) 363,359
Common stock
issuable(3)............ 2,780 -- -- 2,780 -- 2,780
Deferred compensation
expense................ (631) -- -- (631) -- (631)
Retained earnings....... 26,275 4,150 (4,150)(9) 26,275 -- 26,275
---------- ------- ------- ---------- -------- ----------
Total stockholders'
equity................ 320,381 4,158 (4,158) 320,381 71,637 392,018
---------- ------- ------- ---------- -------- ----------
$1,098,751 $18,013 $15,758 $1,132,522 $ -- $1,132,522
========== ======= ======= ========== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
26
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(1) The purchase method of accounting has been used in preparing the
Unaudited Pro Forma Consolidated Balance Sheet of the Company with
respect to the Other Acquisitions. Purchase accounting values have been
assigned to the Other Acquisitions on a preliminary basis and are subject
to adjustment when final information as to the fair values of the net
assets acquired is available.
(2) The acquisition agreements for certain of the Company's acquisitions
provide for the potential issuance of certain amounts of Common Stock
over specified periods following the acquisitions if certain performance
objectives are met. The effects of the potential issuance of these shares
are not considered in the pro forma consolidated balance sheet until the
related performance objectives have been achieved. See Note 2 to the
Company's Consolidated Financial Statements.
(3) The Common Stock issuable is associated with Common Stock issued or
issuable as partial consideration for certain of the Company's
acquisitions that vests over future time periods. See Note 2 to the
Company's Consolidated Financial Statements.
(4) Represents assets not acquired or liabilities not assumed in the Other
Acquisitions.
(5) Represents the Company's preliminary estimates of the adjustments
necessary to record the assets acquired at fair market value.
(6) Represents the estimated fair market value of covenants not to compete
and goodwill represented by the excess purchase price over the estimated
fair market value of the net assets acquired.
(7) Represents borrowings under the Revolver to fund the Other Acquisitions.
(8) Represents the use of the estimated net proceeds from the Offerings to
reduce the Company's outstanding obligations under the Revolver.
(9) Represents the elimination of the equity accounts of the Other
Acquisitions and the effects of the issuance of Common Stock as a portion
of the consideration paid for certain of these acquisitions.
(10) Represents the issuance of the Common Stock in connection with the
Offerings (assuming an offering price of $28.5625 per share).
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated statement of operations data for the
years ended December 31, 1995, 1996 and 1997, and selected consolidated
balance sheet data as of December 31, 1996 and 1997, have been derived from
the audited consolidated financial statements of the Company appearing
elsewhere in this Prospectus. The selected consolidated financial data with
respect to the Company's statement of operations for the years ended December
31, 1993 and 1994, and with respect to the balance sheet as of December 31,
1993, 1994 and 1995, have been derived from audited financial statements of
the Company not included in this Prospectus. The selected consolidated
financial data with respect to the Company's statements of operations for the
six months ended June 30, 1997 and 1998, and with respect to the balance sheet
as of June 30, 1998, 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 six months
ended June 30, 1998 are not necessarily indicative of the results which may be
expected for future periods, including for the year ending December 31, 1998.
The selected operating data presented has not been audited. The selected
consolidated financial and operating data presented should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- ------- ------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Equipment rentals...... $17,238 $27,775 $47,170 $94,218 $170,704 $64,327 $166,751
Sales of parts,
supplies and new
equipment............. 7,387 10,800 14,621 21,919 70,957 26,952 61,053
Sales of used
equipment............. 1,007 3,240 4,126 12,217 19,602 8,584 21,909
-------- ------- ------- ------- -------- ------- --------
Total revenues......... 25,632 41,815 65,917 128,354 261,263 99,863 249,713
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 11,405 16,284 27,854 55,202 87,552 33,677 86,024
Depreciation, equipment
rentals............... 2,161 4,020 7,691 17,840 37,413 14,036 35,499
Cost of sales of parts,
supplies and new
equipment............. 5,370 7,978 10,439 15,582 54,739 20,606 47,227
Cost of sales of used
equipment............. 589 2,320 2,178 8,488 12,927 5,696 15,579
-------- ------- ------- ------- -------- ------- --------
Total cost of
revenues.............. 19,525 30,602 48,162 97,112 192,631 74,015 184,329
-------- ------- ------- ------- -------- ------- --------
Gross profit............ 6,107 11,213 17,755 31,242 68,632 25,848 65,384
Selling, general and
administrative
expense................ 2,683 4,747 6,421 12,254 20,996 8,469 14,404
Depreciation and
amortization, excluding
equipment rental
depreciation........... 211 504 1,186 2,835 5,373 2,287 4,326
Amortization of
intangibles(2)......... 2,635 2,078 718 2,379 3,907 1,369 4,590
-------- ------- ------- ------- -------- ------- --------
Operating income........ 578 3,884 9,430 13,774 38,356 13,723 42,064
Interest expense, net... 407 731 3,314 7,063 14,877 4,627 20,008
-------- ------- ------- ------- -------- ------- --------
Income before income
taxes and extraordinary
items.................. 171 3,153 6,116 6,711 23,479 9,096 22,056
Provision for income
taxes.................. 465 1,177 2,401 2,722 10,330 4,058 9,437
-------- ------- ------- ------- -------- ------- --------
Income (loss) before
extraordinary items.... (294) 1,976 3,715 3,989 13,149 5,038 12,619
Extraordinary items(3).. -- -- (478) (1,269) (534) (534) --
-------- ------- ------- ------- -------- ------- --------
Net income (loss)....... (294) 1,976 3,237 2,720 12,615 4,504 12,619
Redeemable preferred
stock accretion........ 1,013 1,646 1,717 1,643 -- -- --
-------- ------- ------- ------- -------- ------- --------
Net income (loss)
available to common
stockholders........... $ (1,307) $ 330 $ 1,520 $ 1,077 $ 12,615 $ 4,504 $ 12,619
======== ======= ======= ======= ======== ======= ========
Income (loss) before
extraordinary items per
common share........... $ (.29) $ .08 $ .50 $ .34 $ .96 $ .43 $ .61
Income (loss) before
extraordinary items per
common share, assuming
dilution............... $ (.29) $ .08 $ .49 $ .33 $ .94 $ .42 $ .60
SELECTED OPERATING DATA:
Beginning locations..... 11 21 25 50 94 94 165
Locations acquired...... 11 1 26 25 64 33 41
Locations opened........ -- 3 10 19 16 6 6
Locations closed, sold
or held for sale(4).... (1) -- (11) -- (9) (2) (4)
-------- ------- ------- ------- -------- ------- --------
Ending locations........ 21 25 50 94 165 131 208
======== ======= ======= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
------- ------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net book value of rental
equipment.............. $16,223 $24,138 $ 52,818 $116,921 $314,696 $ 543,363
Total assets............ 35,877 48,098 137,832 218,933 699,326 1,098,751
Total debt ............. 4,411 12,752 68,555 68,594 306,975 654,658
Redeemable preferred
stock (net of treasury
stock)................. 25,956 26,684 28,401 -- -- --
Common stockholders'
equity (deficit)....... (1,281) (1,474) 46 95,072 290,781 320,381
</TABLE>
29
<PAGE>
- --------
(1) The Company's acquisitions have been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statements of operations data from the date of effective control of each
such acquisition. See Note 2 to the Company's Consolidated Financial
Statements.
(2) 1993 data includes $781,000 for the write-off of costs in excess of net
assets acquired.
(3) The extraordinary item in the year ended December 31, 1995 represents the
loss on extinguishment of debt related to the Old Revolver paid off
September 12, 1995. The extraordinary item in the year ended December 31,
1996 represents the loss on extinguishment of debt related to the
amendment to the Revolver in September 1996. The extraordinary item in the
year ended December 31, 1997 represents the loss on extinguishment of debt
related to the amendment to the Revolver in January 1997.
(4) In 1996, the Company closed or disposed of its California locations, which
were previously classified as "assets held for sale" in the Company's
Consolidated Financial Statements.
30
<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 results of operations should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
OVERVIEW
Since its formation in 1992 through August 7, 1998, the Company has acquired
60 businesses consisting of 188 locations and has opened 62 start-up
locations. The Company also focuses on increasing revenues and profitability
across its locations through investments in fleet expansion, the
implementation of information systems designed to improve asset utilization
and targeted marketing efforts. As a result, the Company has increased its
total revenues from $65.9 million in the year ended December 31, 1995 to
$261.3 million in the year ended December 31, 1997, and operating income has
increased from $9.4 million to $38.4 million during the same period,
representing increases of 296.4% and 306.7%, respectively. During the first
six months of 1998, the Company generated revenues of $249.7 million with
operating income of $42.1 million, increases of 150.1% and 206.5%,
respectively, over the same period in 1997. The Company has also substantially
increased its presence in the MRO supply business, which has historically had
lower gross margins than the Company's equipment rental business.
The Company has historically financed its acquisitions, start-up locations
and capital expenditures primarily through the issuance of equity securities,
secured bank borrowings and internally generated cash flow. Such financings
have increased the Company's interest expense and resulted in the accretion of
dividends on its 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 substantially
increased the Company's goodwill and covenants not to compete. During the
initial phase of an acquisition or start-up location, the Company typically
incurs expenses related to completing acquisitions and opening start-up
locations, training employees, installing or converting information systems,
facility set-up and marketing expenses. As a result, the profitability of a
new location is generally expected to be lower in the initial period of its
operation than in subsequent periods. Integration of acquisitions is generally
completed within the first six months, while the Company generally expects
start-up locations to achieve normalized profitability after one year. The
Company anticipates that as it continues to implement its growth strategy, new
locations will continue to impact the Company's margins until such locations
achieve normalized profitability.
The Company is continually involved in the investigation and evaluation of
potential acquisitions and start-up locations. Acquisition transactions are
typically subject to numerous conditions, including due diligence
investigation, environmental review and negotiation of a definitive purchase
agreement. In evaluating acquisition targets, the Company considers, among
other things, the target's competitive market position, management team,
growth position and the demographic characteristics of the target market. At
any time, the Company may have one or more offers outstanding and may have
executed one or more non-binding letters of intent or binding acquisition
agreements. As of August 7, 1998, the Company was party to non-binding letters
of intent to acquire seven equipment rental businesses with a combined 14
locations in nine states for a total combined purchase price of approximately
$52.9 million in cash (including the assumption of approximately $1.3 million
of debt). In view of the fact that these letters of intent are non-binding and
that the Company has not completed its due diligence investigations with
respect thereto, the Company cannot predict whether these letters of intent
will lead to definitive agreements, whether the terms of any such definitive
agreements will be the same as the terms contemplated by the letters of intent
or whether any transaction contemplated by such letters of intent will be
consummated.
The Company's capital expenditures have principally been discretionary
expenditures to finance the growth of its rental equipment fleet; however, the
Company must continually reinvest in ongoing capital expenditures in order to
acquire and maintain a competitive, high quality rental equipment fleet. For
the years ended
31
<PAGE>
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998, the Company made capital expenditures of $23.6 million, $86.8 million,
$165.1 million, $100.8 million and $195.9 million, respectively. The Company
depreciates rental equipment over periods ranging from three to seven years,
which has resulted in equipment rental depreciation of $7.7 million, $17.8
million, $37.4 million, $14.0 million and $35.5 million for the years ended
December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997 and
1998, 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 utilization rates. In recent
years, the Company has also made substantial investments in its information
systems.
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
--------------------------------- -----------------------------------------
SIX MONTHS SIX MONTHS
YEARS ENDED ENDED ENDED
DECEMBER 31, JUNE 30, YEARS ENDED DECEMBER 31, JUNE 30,
------------------- ------------ --------------------------- -------------
1995 1996 1997 1997 1998 1996 VS. 1995 1997 VS. 1996 1998 VS. 1997
----- ----- ----- ----- ----- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... 71.6% 73.4% 65.3% 64.4% 66.8% 99.7% 81.2% 159.2%
Sales of parts,
supplies and new
equipment............. 22.2 17.1 27.2 27.0 24.4 49.9 223.7 126.5
Sales of used
equipment............. 6.2 9.5 7.5 8.6 8.8 196.1 60.4 155.2
----- ----- ----- ----- -----
Total revenues......... 100.0 100.0 100.0 100.0 100.0 94.7 103.5 150.1
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 42.3 43.0 33.5 33.7 34.5 98.2 58.6 155.4
Depreciation, equipment
rentals............... 11.7 13.9 14.3 14.1 14.2 132.0 109.7 152.9
Cost of sales of parts,
supplies and new
equipment............. 15.8 12.2 21.0 20.6 18.9 49.3 251.3 129.2
Cost of sales of used
equipment............. 3.3 6.6 4.9 5.7 6.2 289.7 52.3 173.5
----- ----- ----- ----- -----
Total cost of
revenues.............. 73.1 75.7 73.7 74.1 73.8 101.6 98.4 149.0
----- ----- ----- ----- -----
Gross profit............ 26.9 24.3 26.3 25.9 26.2 76.0 119.7 153.0
Selling, general and
administrative
expense................ 9.7 9.5 8.0 8.5 5.8 90.8 71.3 70.1
Depreciation and
amortization, excluding
equipment rental
depreciation........... 1.8 2.2 2.1 2.3 1.7 139.0 89.5 89.2
Amortization of
intangibles............ 1.1 1.9 1.5 1.4 1.9 231.3 64.2 235.3
----- ----- ----- ----- -----
Operating income........ 14.3 10.7 14.7 13.7 16.8 46.1 178.5 206.5
Interest expense, net... 5.0 5.5 5.7 4.6 8.0 113.1 110.6 332.4
----- ----- ----- ----- -----
Income before income
taxes and extraordinary
items.................. 9.3% 5.2% 9.0% 9.1% 8.8% 9.7 249.9 142.5
===== ===== ===== ===== =====
Selected Financial Data:
Gross profit on
equipment rentals..... 24.6% 22.5% 26.8% 25.8% 27.1% 82.2 116.0 172.2
Gross profit on sales
of parts, supplies and
new equipment......... 28.6 28.9 22.9 23.5 22.6 51.5 155.9 117.9
Gross profit on sales
of used equipment..... 47.2 30.5 34.1 33.6 28.9 91.4 79.0 119.2
</TABLE>
32
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998 increased
150.1% to $249.7 million from $99.9 million for the six months ended June 30,
1997. This increase was primarily due to the inclusion of revenues from
acquisitions of 21 businesses (consisting of 72 locations) and the opening of
16 start-up locations since June 30, 1997. Also contributing to the increased
revenues was the larger rental fleet resulting from the Company's significant
investment in capital expenditures. Equipment rental revenues increased 159.2%
to $166.8 million from $64.3 million due to the larger rental fleet resulting
from acquisitions and capital expenditures. Sales of parts, supplies and new
equipment increased 126.5% to $61.1 million from $27.0 million due to the
acquisition of IAT (effective in the Company's results of operations from
March 1, 1997), the increased number of rental locations selling these items
and the acquisitions of businesses that were dealers for certain new
equipment. Sales of used equipment increased 155.2% to $21.9 million from $8.6
million due to the larger rental fleet and the Company's continuing strategy
of selling the older items in its fleet.
Gross Profit. Gross profit for the six months ended June 30, 1998 increased
to $65.4 million, or 26.2% of total revenues, from $25.8 million, or 25.9% of
total revenues, for the six months ended June 30, 1997. This increase was
primarily attributable to the Company's increased number of locations due to
acquisitions and start-up locations and the increased rental fleet resulting
from capital expenditures. Gross margin on equipment rentals increased to
27.1% of equipment rental revenues from 25.8% for the six months ended June
30, 1997, primarily due to the improved gross profit resulting from the
Company's cost controlling methods and the greater flow-through achieved from
the larger rental fleet. Gross margin on sales of parts, supplies and new
equipment decreased to 22.6% of sales from 23.5%, due to the acquisition of
IAT, which generally had lower gross margins than the Company on the sale of
parts, supplies and new equipment, and a change in the product mix of parts,
supplies and new equipment sales. Gross margin on sales of used equipment
decreased to 28.9% of sales from 33.6%, due primarily to increasing sales of
relatively younger equipment to meet customer demand. Generally, newer
equipment is sold at lower margins than more fully depreciated, older items.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the six months ended June 30, 1998 was $14.4
million, or 5.8% of total revenues, compared to $8.5 million, or 8.5% of total
revenues for the six months ended June 30, 1997. This increase was the result
of the greater number of locations and employees resulting from the Company's
acquisitions and start-ups since June 30, 1997, with the decreasing percentage
of total revenues resulting from economies of scale and the Company's focus on
cost control.
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the six months ended June 30, 1998 was $4.3 million, or 1.7%
of total revenues, compared to $2.3 million, or 2.3% of total revenues for the
six months ended June 30, 1997. This increase was primarily attributable to
the larger fleet of service and delivery vehicles in 1998 versus 1997, which
has grown as a result of the Company's increased number of locations and
larger rental fleet.
Amortization of Intangibles. Amortization of intangibles for the six months
ended June 30, 1998 was $4.6 million, or 1.9% of total revenues, compared to
$1.4 million, or 1.4% of total revenues for the six months ended June 30,
1997. This increase was due to the additional goodwill and covenants not to
compete associated with acquisitions completed since June 30, 1997.
Interest Expense, net. Interest expense, net, for the six months ended June
30, 1998 was $20.0 million, compared to $4.6 million for the six months ended
June 30, 1997. This increase was the result of the Company's increased average
debt outstanding for the six months ended June 30, 1998 versus the six months
ended June 30, 1997. The increased debt has resulted from acquisitions,
capital expenditures and start-up locations financed under the Bank Facility
and the Senior Subordinated Notes. Interest expense will continue to increase
in subsequent periods to the extent the Company borrows under the Bank
Facility, or otherwise, to fund acquisitions, capital expenditures and start-
up locations.
33
<PAGE>
Provision for Income Taxes. Provision for income taxes was $9.4 million for
the six months ended June 30, 1998, compared to $4.1 million for the six
months ended June 30, 1997. The Company's effective tax rate was 42.8% for the
six months ended June 30, 1998, compared to 44.6% for the six months ended
June 30, 1997. The decrease in the Company's effective tax rate was a result
of increased profitability, which has lessened the impact of the higher levels
of non-deductible items (primarily goodwill).
Extraordinary Item. In connection with the implementation of an amendment to
the Revolver in January 1997, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of
$920,000, which has been classified as an extraordinary item, net of income
taxes of $386,000, in the consolidated statement of operations for the six
months ended June 30, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues for the year ended December 31, 1997 increased
103.5% to $261.3 million from $128.4 million for the year ended December 31,
1996. This increase was primarily due to the inclusion of revenues from
acquisitions of 22 businesses (consisting of 64 locations) and the opening of
16 start-up locations since December 31, 1996. Also contributing to the
increased revenues was the larger rental fleet resulting from the Company's
significant investment in capital expenditures. Equipment rental revenues
increased 81.2% to $170.7 million from $94.2 million due to the larger rental
fleet resulting from acquisitions and capital expenditures. Sales of parts,
supplies and new equipment increased 223.7% to $71.0 million from $21.9
million due primarily to the acquisition of IAT (effective in the Company's
results of operations from March 1, 1997), the increased number of rental
locations selling these items and the 1997 acquisitions of businesses that
were dealers for certain new equipment. Sales of used equipment increased
60.4% to $19.6 million from $12.2 million due to the larger rental fleet and
the Company's continuing strategy of selling the older items in its fleet.
Gross Profit. Gross profit for the year ended December 31, 1997 increased to
$68.6 million, or 26.3% of total revenues, from $31.2 million, or 24.3% of
total revenues, for the year ended December 31, 1996. Gross margin on
equipment rentals increased to 26.8% of equipment rental revenues from 22.5%
for the year ended December 31, 1996, primarily due to the improved gross
profit resulting from the Company's cost controlling methods. Gross margin on
sales of parts, supplies and new equipment decreased to 22.9% of sales from
28.9%, due primarily to the acquisition of IAT, effective in the Company's
results of operations from March 1, 1997, and a change in the product mix of
parts, supplies and new equipment sales. Excluding the effect of the
acquisition of IAT, the Company's gross margin on sales of parts, supplies and
new equipment would have been 26.2% for the year ended December 31, 1997. The
Company believes that the gross margin on sales of parts, supplies and new
equipment will likely remain at this lower level due to the impact of IAT's
product sales, which generally have had lower gross margins than the parts,
supplies and new equipment sold by the Company prior to the acquisition of
IAT. Gross margin on sales of used equipment increased to 34.1% of sales from
30.5%, due primarily to a change in the mix and age of the equipment being
sold.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the year ended December 31, 1997 was $21.0 million,
or 8.0% of total revenues, compared to $12.3 million, or 9.5% of total
revenues for the year ended December 31, 1996. This increase is the result of
the greater number of locations and employees resulting from the Company's
acquisitions and start-ups.
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the year ended December 31, 1997 was $5.4 million, or 2.1%
of total revenues, compared to $2.8 million, or 2.2% of total revenues for the
year ended December 31, 1996. This increase is primarily attributable to the
larger fleet of service and delivery vehicles in 1997 versus 1996, which has
grown as a result of the Company's increased number of locations and larger
rental fleet.
Amortization of Intangibles. Amortization of intangibles for the year ended
December 31, 1997 was $3.9 million, or 1.5% of total revenues, compared to
$2.4 million, or 1.9% of total revenues for the year ended
34
<PAGE>
December 31, 1996. This increase is due to the additional goodwill and
covenants not-to-compete associated with acquisitions completed since December
31, 1996.
Interest Expense, net. Interest expense, net, for the year ended December
31, 1997 was $14.9 million, compared to $7.1 million for the year ended
December 31, 1996. This increase is the result of the Company's increased
average debt outstanding in 1997 versus 1996. The increased debt has resulted
from acquisitions, capital expenditures and start-up locations financed under
the Bank Facility. Interest expense will continue to increase in subsequent
periods to the extent the Company borrows under the Bank Facility, or
otherwise, to fund acquisitions and capital expenditures.
Provision for Income Taxes. Provision for income taxes was $10.3 million for
the year ended December 31, 1997, compared to $2.7 million for the year ended
December 31, 1996. The Company's effective tax rate was 44.0% for 1997,
compared to 40.6% for 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 an amendment
to the Revolver in January 1997, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of
$920,000, which has been classified as an extraordinary item, net of income
taxes of $386,000, in the consolidated statement of operations for the year
ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Total revenues for the year ended December 31, 1996 increased
94.7% to $128.4 million compared to $65.9 million for the year ended December
31, 1995. This increase was primarily due to the full period impact of the
acquisition of RHI (consisting of 11 locations), the full period impact of ten
start-up locations opened in 1995 and the inclusion of revenues from 11
acquired businesses (consisting of 25 locations) and the opening of 19 start-
up locations during 1996. Equipment rental revenues increased 99.7% to
$94.2 million for the year ended December 31, 1996 from $47.2 million in the
same period in 1995 due to a larger rental equipment fleet as a result of
acquisitions, the partial year impact of $86.8 million in capital expenditures
in 1996 and the full year impact of 1995 capital expenditures of $23.6
million. Sales of parts, supplies and new equipment increased 49.9% to $21.9
million for the year ended December 31, 1996 from $14.6 million for the year
ended December 31, 1995 due primarily to the increased number of rental
locations selling these items. Sales of used equipment increased 196.1% to
$12.2 million for the year ended December 31, 1996 from $4.1 million for the
year ended December 31, 1995 due to the larger rental equipment fleet
resulting from acquisitions and the Company's ongoing strategy of selling the
older items in its fleet.
Gross Profit. Gross profit for the year ended December 31, 1996 increased to
$31.2 million, or 24.3% of total revenues, from $17.8 million, or 26.9% of
total revenues, for the year ended December 31, 1995. Gross margins on
equipment rentals decreased to 22.5% of equipment rental revenues from 24.6%
for the year ended December 31, 1995 primarily due to the impact of 44
location additions during the period. These new locations were comprised of 25
acquired locations and 19 start-ups, and operated for an average of seven
months during the period. Start-ups and acquisitions generally incur start-up
and integration expenses during their first nine months of operation resulting
in lower profit margins than the Company's more established locations. Gross
margin on sales of parts, supplies and new equipment increased slightly to
28.9% of sales from 28.6% for the year ended December 31, 1995. Gross margin
on sales of used equipment decreased to 30.5% of sales from 47.2% of sales for
the year ended December 31, 1995 due primarily to a change in the mix and age
of the equipment being sold.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased to $12.3 million, or 9.5% of total revenues,
for the year ended December 31, 1996, compared to $6.4 million, or 9.7% of
total revenues, for the year ended December 31, 1995. This increase is
attributable primarily to the increase in the number of locations from 1995.
35
<PAGE>
Depreciation and Amortization, excluding equipment rental
depreciation. Depreciation and amortization, excluding equipment rental
depreciation, for the year ended December 31, 1996 was $2.8 million, or 2.2%
of total revenues, compared to $1.2 million, or 1.8% of total revenues, for
the same period in 1995. This increase is primarily attributable to the larger
fleet of service and delivery vehicles in 1996 versus 1995, as well as to
capital expenditures on rental locations in order to standardize their
appearance.
Amortization of Intangibles. Amortization of intangibles for the year ended
December 31, 1996 was $2.4 million, or 1.9% of total revenues, compared to
$718,000, or 1.1% of total revenues, for the same period in 1995. This
increase is due to the full year impact of additional goodwill and covenants
not-to-compete associated with 1995 acquisitions, the partial year impact of
additional goodwill and covenants not-to-compete associated with 1996
acquisitions and amortization of the capitalized costs associated with the
Revolver entered into in September 1995, amended in January 1996 and amended
and restated in September 1996.
Interest Expense, net. Interest expense, net, for the year ended December
31, 1996 was $7.1 million, compared to $3.3 million for the year ended
December 31, 1995. This increase was the result of the Company's increased
average debt outstanding for the year ended December 31, 1996 compared to the
year ended December 31, 1995, as well as amortization of mandatory increases
in the prepayment price of the Bank Note. The increased debt resulted from
start-up locations, acquisitions and capital expenditures financed under the
Company's Revolver. In September 1996, the Company utilized proceeds from its
initial public offering of $13.0 million to repay the Bank Note and $37.7
million to reduce its indebtedness under the Revolver.
Provision for Income Taxes. Provision for income taxes was $2.7 million for
the year ended December 31, 1996, compared to $2.4 million for the same period
in 1995. The Company's effective tax rate was 40.6% for 1996, as compared to
39.3% for 1995. The Company's effective tax rate for the fourth quarter of
1996 increased to 42.0% as a result of increased levels of non-deductible
items. This higher tax rate is expected to continue in future periods.
Extraordinary Items. In connection with the implementation of the amended
Revolver in September 1996, the Company wrote off the related unamortized
deferred financing costs and recorded a loss on extinguishment of debt of $2.5
million, which has been classified as an extraordinary item, net of income
taxes of $964,000. Additionally, in September 1996, the Company repaid the
Bank Note and repurchased the related warrants for $13 million, resulting in a
gain on extinguishment of debt of $362,000, which has been classified as an
extraordinary item, net of income taxes of $142,000. In 1995, the Company paid
off the borrowings under the Old Revolver upon entering into the Revolver,
resulting in a loss on extinguishment of such debt of $783,000 which has been
classified as an extraordinary item, net of income taxes of $305,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary uses of cash have been the funding of capital
expenditures, acquisitions and start-up locations. The Company has
historically 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 $3.6 million at June 30, 1998, $8.9 million at
December 31, 1997 and $1.5 million at December 31, 1996.
Operating activities. During the six months ended June 30, 1997 and 1998,
the Company's operating activities provided net cash flow of $38.2 million and
$33.7 million, respectively. The principal causes for the variation in cash
flow between periods were higher net income, increased depreciation and
amortization, higher inventory levels and lower levels of accrued expenses.
During the years ended December 31, 1995, 1996 and 1997, the Company's
operating activities provided net cash flow of $9.9 million, $23.5 million and
$46.0 million, respectively. The principal causes for the variations in cash
flow between years were higher net income, increased depreciation and
amortization and higher average accounts payable.
36
<PAGE>
Investing activities. Net cash used in investing activities was $211.7
million and $379.0 million for the six months ended June 30, 1997 and 1998,
respectively. The increase between periods was attributable to a higher
combined level of capital expenditures and acquisitions. Acquisition spending
totaled $119.6 million and $205.1 million for the six months ended June 30,
1997 and 1998, respectively. In addition, the Company had capital expenditures
of $100.8 million and $195.9 million for the six months ended June 30, 1997
and 1998, respectively. Capital expenditures were primarily for purchases of
rental equipment. Included in investing activities were proceeds from the sale
of used equipment, which were $8.6 million and $21.9 million for the
six months ended June 30, 1997 and 1998, respectively.
Net cash used in investing activities was $58.9 million, $84.7 million and
$424.4 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The increases between years were attributable to a higher
combined level of capital expenditures and acquisitions. Acquisition spending
totaled $42.1 million, $27.3 million and $278.9 million for the years ended
December 31, 1995, 1996 and 1997, respectively. In addition, the Company had
capital expenditures of $23.6 million, $86.8 million and $165.1 million for
the years ended December 31, 1995, 1996 and 1997, respectively. Capital
expenditures were primarily for purchases of rental equipment. Included in
investing activities were proceeds from the sale of used equipment, which were
$4.1 million, $12.7 million and $19.6 million for the years ended December 31,
1995, 1996 and 1997, respectively. Also included in investing activities were
proceeds from assets held for sale of $2.7 million and $16.7 million for the
years ended December 31, 1995 and 1996, respectively.
Financing activities. Net cash provided by financing activities was $174.7
million and $339.9 million for the six months ended June 30, 1997 and 1998,
respectively. The net cash provided by financing activities during these
periods was primarily from borrowings under the Revolver, from the issuance of
Common Stock in a public offering completed in June 1997, and from the
issuance of the Senior Subordinated Notes in May 1998.
Net cash provided by financing activities was $49.8 million, $61.3 million
and $385.9 million for the years ended December 31, 1995, 1996 and 1997,
respectively. During 1997, the net cash provided by financing activities was
primarily due to issuances of Common Stock in the public offerings completed
in June and December, and from borrowings under the Bank Facility. During
1996, the net cash provided by financing activities was primarily due to
issuances of Common Stock, primarily from the Company's initial public
offering in September 1996, and from borrowings under the Revolver. During
1995, the net cash provided by financing activities was primarily due to the
receipt of the proceeds from the Revolver and the Bank Note, which were used
to pay off the Old Revolver and to acquire RHI.
In September 1996, the Company received net proceeds of approximately $87.9
million from the sale of 6,027,813 shares of Common Stock in its initial
public offering. Additionally, the Company received net proceeds of
approximately $55.6 million from the sale of 3,000,000 shares of Common Stock
in a public offering completed in June 1997, and approximately $98.3 million
from the sale of 4,345,224 shares of Common Stock in a public offering
completed in December 1997. Through the application of these proceeds, the
Company has improved its liquidity and capital resources through the
replacement of a portion of its secured debt, as well as the related interest
and debt obligations, with Common Stock. Specifically, the Company used these
proceeds to reduce the outstanding indebtedness under its Revolver to provide
borrowing availability for general corporate purposes, including acquisitions.
Since December 2, 1997, the Company's principal source of liquidity has been
the Bank Facility, which consists of the Revolver and the Term Loan. Prior to
December 2, 1997, the Company's principal source of liquidity was the
Revolver, which consisted of a revolving line of credit and availability of
letters of credit. On January 31, 1997, the Company amended the Revolver to,
among other things, increase the availability to $200.0 million, decrease the
interest rate margins by 0.50% and extend the maturity date to January 31,
2002. On June 4, 1997, the Company again amended the Revolver to, among other
things, increase the availability to $300.0 million, decrease the interest
rate margins by 0.25% with further reductions if certain interest coverage
ratios are met and to reduce the unused line fee to 0.25% of the unused
commitment. In connection with the implementation of the January 1997
amendment, the Company recorded an extraordinary loss on extinguishment
37
<PAGE>
of debt of $920,000, net of income taxes of $386,000, associated with the
write-off of unamortized debt issuance costs.
On December 2, 1997, the Company amended and restated the Revolver to
increase its total available financing to $600.0 million. This increase
consisted of an increase in the availability under the Revolver to $500.0
million and the implementation of the new $100.0 million Term Loan (together
with the Revolver, the "Bank Facility"). In addition, this new financing
package extended the maturity date of the Revolver to December 2, 2002;
changed the methodology for determining the interest rate margins; increased
the allowed levels of capital expenditures and investments; and amended
several covenants, including the computation methodology of certain financial
covenants.
In connection with the issuance of the Senior Subordinated Notes in May
1998, the Company amended the Revolver to (i) reduce the interest rate margins
by 0.25%, (ii) increase the allowed levels of capital expenditures and
investments to $220.0 million in 1998, $235.0 million in 1999, $250.0 million
in 2000, $270.0 million in 2001 and $340.0 million in each of 2002, 2003 and
2004 (plus amounts reinvested from asset sales), (iii) change certain
financial and other covenants and (iv) permit the issuance of the Senior
Subordinated Notes.
In connection with the formation of Rental Service Corporation of Canada
Ltd. ("RSC Canada"), a wholly owned subsidiary of RSC, and the negotiations
for the Canadian credit facility described below, the Company has executed an
amendment and consent to the Bank Facility to permit the Canadian credit
facility, and to make certain other changes.
The amended and restated Revolver contains provisions to periodically adjust
the prime and Eurodollar interest rate margins based on the Company's
achievement of specified total debt to EBITDA ratios. The total amount of
credit available under the Revolver is limited to a borrowing base equal to
the sum of (i) 85% of eligible accounts receivable of the Company's
subsidiaries and (ii) 100% of the value (lower of net book value or orderly
liquidation value) of eligible rental equipment through December 31, 1998; 90%
of the value of eligible rental equipment from January 1, 1999 through
December 31, 1999; 85% of the value of eligible rental equipment from January
1, 2000 through December 31, 2000; and 80% of the value of eligible rental
equipment from January 1, 2001 through the expiration date of the Revolver.
The Revolver expires December 2, 2002.
The Term Loan consists of a $100.0 million seven-year term loan facility,
which requires mandatory principal payments of $1.0 million on each of its
first six anniversaries, with the remaining principal
balance due at maturity. The Term Loan matures on December 2, 2004. Interest
on the Term Loan is payable monthly at either the prime rate plus 1.0% or the
Eurodollar rate plus 2.5% (at the Company's option).
The Bank Facility has financial covenants for RSC regarding debt incurrence,
interest coverage, capital expenditures and investments (including
acquisitions), rental equipment utilization and minimum EBITDA levels. The
Bank Facility also contains covenants and provisions that restrict, among
other things, the ability of the Company and its subsidiaries to: (i) incur
additional indebtedness; (ii) incur liens on their property, (iii) enter into
contingent obligations; (iv) make certain capital expenditures and
investments; (v) engage in certain sales of assets; (vi) merge or consolidate
with or acquire another person or engage in other fundamental changes;
(vii) enter into leases; (viii) engage in certain transactions with
affiliates; and (ix) declare or pay dividends. For the period ended June 30,
1998, the Company is in compliance with all covenants of the Bank Facility.
Borrowings under the Bank Facility are secured by all of the personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Bank Facility, and has granted liens
on substantially all of its assets (including the stock of its subsidiaries)
to secure such guaranty. The Bank Facility also restricts the Company from
declaring or paying dividends on its Common Stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Bank Facility. The Bank Facility also includes a $2.0 million letter of
credit facility. A commitment fee equal to 0.25% of the unused commitment,
excluding the face amount of all outstanding and undrawn letters of credit, is
also payable monthly in arrears. The obligation of the lenders to make loans
or issue letters of credit under the Bank Facility is subject to certain
customary conditions.
38
<PAGE>
At August 7, 1998, the principal amount outstanding under the Revolver was
approximately $424.6 million, the average interest rate on such borrowings was
approximately 7.2%, and approximately $75.4 million was available to the
Company under the Revolver.
RSC Canada is negotiating a secured revolving credit facility with lenders
(or affiliates) who are parties to the Bank Facility. The new Canadian
facility is anticipated to be in an amount of up to Cdn. $30.0 million,
subject to certain borrowing base limitations. The Canadian credit facility
will be secured by substantially all of the assets of RSC Canada and any
subsidiary of RSC Canada and guaranteed by RSC, with the guarantee being
secured by the stock of RSC Canada. The Canadian credit facility will expire
on December 2, 2002, and will contain other terms substantially similar to
those contained in the Bank Facility.
On May 13, 1998, the Company issued $200.0 million aggregate principal
amount of 9% Senior Subordinated Notes due 2008 in a private placement
pursuant to Rule 144A. The net proceeds of the offering were used to repay
indebtedness under the Revolver in order to provide borrowing availability for
general corporate purposes, including acquisitions. The Senior Subordinated
Notes call for semi-annual interest payments on May 15 and November 15 of each
year (beginning November 15, 1998) and mature on May 15, 2008. The Senior
Subordinated Notes are guaranteed by substantially all of the Company's
current and future domestic subsidiaries, and contain covenants restricting
additional indebtedness, certain payments by the Company and its subsidiaries,
asset sales, liens, mergers and consolidations and transactions with
affiliates. See "Description of Senior Subordinated Notes."
Acquisitions and Start-ups. 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 non-binding letters of intent or acquisition
agreements. At December 31, 1997, the Company operated 165 locations
throughout the United States. Since December 31, 1997, the Company has
completed 16 acquisitions of equipment rental businesses (including Valley,
Metroquip, T&M and Struckel) with an aggregate of 50 locations, has opened 14
new start-up locations and has consolidated four acquired locations with
existing locations serving the same markets, bringing the Company's total
number of locations to 225 in the United States and Canada as of August 7,
1998.
During the six months ended June 30, 1998, the Company completed 13
acquisitions of equipment rental businesses with a combined total of 41
locations for an aggregate purchase price of approximately $205.1 million in
cash (including the payoff of assumed debt), 696,892 shares of Common Stock
and the assumption of approximately $12.6 million in liabilities.
Additionally, 128,859 shares of Common Stock may be paid for these
acquisitions based on the achievement of certain performance objectives by the
acquired companies. During the six months ended June 30, 1997, the Company
completed 14 acquisitions of equipment rental businesses with a combined total
of 33 locations for an aggregate purchase price of approximately
$119.6 million in cash, 678,306 shares of Common Stock (of which 68,290 shares
will be issued in future years) and the assumption of approximately
$12.2 million in liabilities. Additionally, 197,738 shares of Common Stock may
be paid for these acquisitions based on the achievement of certain performance
objectives by the acquired companies, of which 65,913 shares were issued
during the first six months of 1998.
During the year ended December 31, 1997, the Company completed 22
acquisitions of equipment rental businesses with a combined total of 64
locations for an aggregate purchase price of approximately $278.9 million in
cash (including the payoff of assumed debt), 1,299,709 shares of Common Stock
(of which 132,834 shares will be issued in future years) and the assumption of
approximately $23.6 million in liabilities. Additionally, 197,738 shares of
Common Stock may be paid for these acquisitions based on the achievement of
certain performance objectives by the acquired companies, of which 65,913
shares were issued during the first six months of 1998. During the year ended
December 31, 1996, the Company completed eleven acquisitions of equipment
rental businesses with a combined total of 25 locations for an aggregate
purchase price of approximately $27.3 million in cash and the assumption of
approximately $5.3 million in liabilities. During the year ended December 31,
1995, the Company completed five acquisitions of equipment rental businesses
39
<PAGE>
(including RHI) with a combined total of 26 locations for an aggregate
purchase price of approximately $42.1 million in cash (including the payoff of
assumed debt) and the assumption of approximately $27.6 million in
liabilities.
During the six months ended June 30, 1998, the Company opened six new start-
up locations and consolidated four acquired locations with existing locations
serving the same markets. During the six months ended June 30, 1997, the
Company opened six new start-up locations, consolidated one acquired location
with an existing location servicing the same market and closed one under-
performing location.
During the year ended December 31, 1997, the Company opened 16 new start-up
locations, consolidated seven acquired locations with existing locations
serving the same markets and closed two under-performing locations. During the
year ended December 31, 1996, the Company opened 19 new start-up locations.
During the year ended December 31, 1995, the Company opened ten new start-up
locations and designated the eleven California locations acquired from RHI as
"assets held for sale." RHI's eleven California locations were sold or closed
during 1996.
On July 29, 1998, the Company acquired all of the outstanding stock of
Struckel for approximately $21.2 million in cash (including the payoff of
assumed debt). Struckel rented and sold a variety of aerial equipment to
customers in the construction industry, operated a total of three locations in
Illinois and Missouri, and had total revenues of approximately $9.2 million
for its fiscal year ended December 31, 1997. Struckel's balance sheet was
consolidated with the Company's as of July 29, 1998. Pursuant to the
acquisition agreement, the Company assumed effective control of Struckel's
operations on July 1, 1998 and has included Struckel's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
Subsequent to June 30, 1998, the Company completed two additional
acquisitions for a total combined purchase price of approximately $10.6
million in cash. These acquisitions had a combined six locations in Canada and
Illinois.
As of August 7, 1998, the Company was party to non-binding letters of intent
to acquire seven equipment rental businesses with a combined 14 locations in
Arizona, Idaho, Illinois, Maryland, Nevada, New Mexico, Oklahoma, Utah and
Wisconsin for a total combined purchase price of approximately $52.9 million
in cash (including the assumption of approximately $1.3 million of debt).
These acquisitions are subject to a number of closing conditions, including
the execution of definitive purchase agreements, RSC board of directors
approval and, in some cases, expiration or early termination of the waiting
period under the HSR Act. Furthermore, in view of the fact that these letters
of intent are non-binding and that the Company has not completed its due
diligence investigations with respect thereto, the Company cannot predict
whether these letters of intent will lead to definitive agreements, whether
the terms of any such definitive agreements will be the same as the terms
contemplated by the letters of intent or whether any transaction contemplated
by such letters of intent will be consummated.
General. The Company's liquidity and capital resources have been and will
continue to be significantly impacted by the Company's growth strategy and by
the need to offer customers a modern and well-maintained rental equipment
fleet. To pursue its growth strategy, the Company must be able to complete
acquisitions, open start-up locations and make the capital expenditures
necessary to acquire and maintain its rental fleet. At August 7, 1998, the
Company was obligated, under noncancellable purchase commitments, to purchase
approximately $92.3 million of equipment. Such purchases are expected to be
financed with cash flow from operations and through borrowings under the
Revolver.
The Company believes cash flow from operations, together with availability
under the Revolver, and vendor financing in appropriate cases, will be
sufficient to support its operations and capital liquidity requirements for at
least the next 12 months. However, if significant additional acquisition
opportunities arise, the Company may need to seek additional capital. Such
acquisitions and discretionary capital expenditures could be financed
40
<PAGE>
through the incurrence of additional indebtedness, including convertible debt,
or the issuance of common or preferred stock (which may be issued to third
parties or to sellers of acquired businesses), depending on market conditions.
If such financing were not available, the Company's growth strategy could be
hampered and its cash flow from operations reduced, thereby constraining funds
available for growth and acquisitions. Further, additional indebtedness
generally 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.
ENVIRONMENTAL
The Company and its operations are subject to a variety of federal, state
and local laws and regulations governing, among other things, worker safety,
air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. The Company incurs ongoing expenses
associated with the removal of older underground storage tanks and other
activities to come into compliance with environmental laws, and the
performance of appropriate remediation at certain locations. The Company has
accrued $456,000 and $652,000 at June 30, 1998 and December 31, 1997,
respectively, related to the removal of underground tanks and remediation
expenses. The Company believes the impact of the cost of such remediation on
its financial position, results of operations and cash flows will not be
material. See "Business--Government and Environmental Regulation."
41
<PAGE>
SEASONALITY AND SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth unaudited quarterly consolidated statement of
operations data for the eight consecutive quarters through the quarter ended
June 30, 1998. The unaudited quarterly data has been prepared on the same
basis as the Company's annual financial statements and, in the opinion of
management, includes all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for the quarters presented.
Historically, the Company's revenues and operating results have varied from
quarter to quarter and are expected to continue to fluctuate in the future.
These fluctuations have been due to a number of factors, including: general
economic conditions in the Company's markets; the timing of acquisitions and
start-up locations and related costs; the effectiveness of integrating
acquired businesses and start-up locations; the timing of fleet expansion
capital expenditures; the realization of targeted equipment utilization rates;
seasonal rental patterns of the Company's customers; and price changes in
response to competitive factors. In addition, operating results have been
seasonally lower during the first and fourth fiscal quarters than during the
other quarters of the fiscal year. The operating results for any historical
quarter are not necessarily indicative of the results which may be expected
for any future period. See "Risk Factors--Seasonality and Quarterly
Fluctuations."
<TABLE>
<CAPTION>
1996 1998
QUARTERS ENDED 1997 QUARTERS ENDED QUARTERS ENDED
----------------- ---------------------------------- -----------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Equipment rentals....... $25,212 $26,476 $27,527 $36,800 $47,222 $59,155 $ 70,179 $ 96,572
Sales of parts, supplies
and new equipment...... 5,890 5,469 9,165 17,787 20,167 23,838 27,227 33,826
Sales of used
equipment.............. 3,529 3,314 4,617 3,967 5,080 5,938 11,257 10,652
------- ------- ------- ------- ------- ------- -------- --------
Total revenues.......... 34,631 35,259 41,309 58,554 72,469 88,931 108,663 141,050
COST OF REVENUES:
Cost of equipment
rentals, excluding
equipment rental
deprecation............ 14,977 14,225 14,316 19,361 23,829 30,046 37,073 48,951
Depreciation, equipment
rentals................ 4,586 5,465 6,306 7,730 10,457 12,920 15,461 20,038
Cost of sales of parts,
supplies and new
equipment.............. 4,225 3,783 6,737 13,869 15,777 18,356 21,249 25,978
Cost of sales of used
equipment.............. 2,525 2,668 2,972 2,724 3,565 3,666 7,944 7,635
------- ------- ------- ------- ------- ------- -------- --------
Total cost of revenues.. 26,313 26,141 30,331 43,684 53,628 64,988 81,727 102,602
------- ------- ------- ------- ------- ------- -------- --------
Gross profit............ 8,318 9,118 10,978 14,870 18,841 23,943 26,936 38,448
Selling, general and
administrative
expense................ 3,299 3,193 3,784 4,685 4,975 7,552 5,659 8,745
Depreciation and
amortization, excluding
equipment rental
depreciation........... 651 1,006 1,068 1,219 1,502 1,584 2,024 2,302
Amortization of
intangibles............ 664 554 624 745 1,094 1,444 2,085 2,505
------- ------- ------- ------- ------- ------- -------- --------
Operating income........ 3,704 4,365 5,502 8,221 11,270 13,363 17,168 24,896
Interest expense, net... 2,135 1,244 1,597 3,030 4,236 6,014 7,583 12,425
------- ------- ------- ------- ------- ------- -------- --------
Income before income
taxes and extraordinary
items.................. 1,569 3,121 3,905 5,191 7,034 7,349 9,585 12,471
Provision for income
taxes.................. 617 1,311 1,722 2,336 3,114 3,158 4,101 5,336
------- ------- ------- ------- ------- ------- -------- --------
Income before
extraordinary items.... 952 1,810 2,183 2,855 3,920 4,191 5,484 7,135
Extraordinary items, net
of income tax benefit
of $822 in 1996 and
$386 in 1997........... (1,269) -- (534) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)....... (317) 1,810 1,649 2,855 3,920 4,191 5,484 7,135
Redeemable preferred
stock accretion........ 524 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)
available to common
stockholders........... $ (841) $ 1,810 $ 1,649 $ 2,855 $ 3,920 $ 4,191 $ 5,484 $ 7,135
======= ======= ======= ======= ======= ======= ======== ========
EARNINGS PER COMMON
SHARE:
Income (loss) before
extraordinary items... $ .07 $ .16 $ .19 $ .23 $ .26 $ .26 $ .27 $ .34
Extraordinary items.... (.21) -- (.04) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $ (.14) $ .16 $ .15 $ .23 $ .26 $ .26 $ .27 $ .34
======= ======= ======= ======= ======= ======= ======== ========
Weighted average common
shares................ 5,977 11,231 11,298 12,412 15,002 15,838 20,419 20,845
EARNINGS PER COMMON
SHARE, ASSUMING
DILUTION:
Income (loss) before
extraordinary items... $ .07 $ .16 $ .19 $ .23 $ .26 $ .26 $ .27 $ .34
Extraordinary items.... (.20) -- (.05) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- --------
Net income (loss) per
common share.......... $ (.13) $ .16 $ .14 $ .23 $ .26 $ .26 $ .27 $ .34
======= ======= ======= ======= ======= ======= ======== ========
Weighted average common
shares, assuming
dilution.............. 6,273 11,504 11,511 12,612 15,317 16,208 20,568 21,183
Net increase in
locations at period
end.................... 3 11 8 29 3 31 22 21
</TABLE>
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INCOME TAXES
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $18.4 million that expire in
years 2005 through 2012. In addition the Company had combined state net
operating loss carryforwards of approximately $20.1 million that expire in
years 1998 through 2012. Approximately $8.5 million of the federal
carryforwards and $800,000 of the state carryforwards are attributable to the
Company's acquisition of RHI. For financial reporting purposes a valuation
allowance of approximately $4.0 million and $3.7 million at December 31, 1996
and 1997, 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 future profitability of certain
subsidiaries of RHI.
The Company also has alternative minimum tax credit carryovers of
approximately $4.6 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. Approximately
$600,000 of the federal and all of the state alternative minimum tax credit
carryovers resulted from the Company's acquisition of RHI. For financial
reporting purposes a valuation allowance of approximately $800,000 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.
Any tax benefit resulting from the utilization of the net operating loss
carryforwards or the tax credit carryovers obtained in the acquisition of RHI
will be accounted for as a reduction of the purchase price in the periods they
are realized.
INFLATION AND GENERAL ECONOMIC CONDITIONS
Although the Company cannot accurately anticipate the effect of inflation on
its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its results of
operations. The Company's operating results may be adversely affected by
events or conditions in a particular region, such as regional economic,
weather and other factors. In addition, the Company's operating results may be
adversely affected by increases in interest rates that may lead to a decline
in economic activity, while simultaneously resulting in higher interest
payments by the Company under its variable rate credit facilities.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing computer and software systems as the Year 2000 approaches. The Year
2000 problem is pervasive and complex, as virtually every computer operation
could be affected in some way by the rollover of the two-digit year value to
"00." The issue is whether systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause complete
system failures. The Company has received confirmation from all of its current
systems' vendors that each of their systems will properly handle the rollover
to the Year 2000. Although there can be no assurance, management believes the
Year 2000 problem will not have a material effect on the financial position,
results of operations or cash flows of the Company.
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<PAGE>
BUSINESS
GENERAL
The Company is a leading consolidator in the rapidly-growing equipment
rental industry, with a demonstrated track record of 60 business acquisitions
since its formation in 1992. The Company serves the needs of a wide variety of
industrial, manufacturing, construction, government and homeowner markets
through a network of 225 rental locations in 26 states and Canada (as of
August 7, 1998). 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 60 businesses comprised of 188 locations and has
opened 62 start-up locations through August 7, 1998. 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 and profitability across its locations through fleet expansion,
improved asset utilization and targeted marketing efforts. Management believes
RSC is well-positioned to capitalize on the substantial consolidation
opportunities in the equipment rental industry, and to take advantage of the
growing demand for rental equipment as businesses increasingly outsource non-
core operations.
INDUSTRY OVERVIEW
The equipment rental industry serves a wide variety of industrial,
manufacturing, construction, governmental and homeowner markets. Equipment
available for rent ranges from construction and industrial equipment to
general tools and homeowners' equipment. A survey conducted for the Associated
Equipment Distributors estimates that industry rental revenues were
approximately $13 billion in 1993, which the author of the survey estimated
would increase to $15 billion in 1995. The Company's management estimates that
1996 and 1997 industry rental revenues were approximately $18 billion and $21
billion, respectively.
Management believes the equipment rental industry benefits from the trend
among businesses to outsource non-core operations in order to reduce capital
investment and minimize the downtime, maintenance, repair and storage
associated with equipment ownership. While customers traditionally rented
equipment for specific purposes such as supplementing capacity during peak
periods and using equipment in connection with special projects, customers are
increasingly looking to rental operators to provide an ongoing comprehensive
supply of equipment which can enable customers to benefit from the economic
advantages and convenience of rental. Many of the businesses that rent
equipment also purchase complementary tools and supplies from MRO
distributors. The Company believes such customers would be interested in a
one-stop solution consisting of both equipment rental and MRO supplies.
The Company believes the equipment rental industry offers substantial
consolidation opportunities for large, well capitalized equipment rental
companies such as RSC. The equipment rental industry is highly fragmented,
primarily consisting of relatively small entities serving discrete local
market areas and a number or multi-location regional or national firms. This
fragmentation is demonstrated by the following statistics derived from the
Rental Equipment Register (the "RER") for 1997: (i) the largest 100 equipment
rental companies had total rental revenues of approximately $4.2 billion,
which would account for approximately 20% of the management-estimated $21
billion in industry rental revenues; (ii) no one company had a market share
greater than 5%; (iii) the industry had approximately 17,000 participants; and
(iv) there were only ten equipment rental companies having rental revenues in
excess of $100 million.
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
44
<PAGE>
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. Relative
to smaller companies with only one or two rental locations, the Company
believes RSC benefits from several competitive advantages, including
sophisticated management information systems, volume purchasing discounts,
professional management, a diverse customer base and geographic locations, a
modern and well maintained rental fleet, the ability to transfer equipment
among rental locations to satisfy customer demand and national brand identity.
In addition, the Company believes national operators are less sensitive to
localized cyclical downturns and can justify significant investments in
professional management and information systems. As a result of consolidation
and industry growth, 1997 rental revenues of the top 100 rental equipment
companies increased over 1996 rental revenues by approximately 35%, to more
than $4.2 billion, according to estimates by the RER. See "--Competition."
BUSINESS STRATEGY
The Company's goal is to increase revenues and profitability by taking
advantage of its strong market position and pursuing a business strategy that
includes the following key elements:
Small- to Medium-Sized Market Focus. The Company focuses on operating rental
locations in underserved small- to medium-sized rental markets where the
Company can capitalize on its competitive advantages relative to the small,
local equipment rental businesses and equipment dealers who have traditionally
served such markets. In addition, the Company believes small- to medium-sized
markets provide an extensive selection of acquisition candidates and
attractive start-up locations. The Company believes future acquisitions and
start-up locations will provide opportunities to achieve greater geographic
and customer diversification. Through its geographic diversification, the
Company believes it can more effectively manage economic fluctuations than
single-location businesses by transferring equipment to regions with higher
demand. See "--Locations" and "--Growth Strategy."
Cluster Strategy. Under its cluster strategy, RSC establishes a
comprehensive pool of rental equipment at a central, readily-accessible "hub"
location, and surrounds the hub with smaller "satellite" locations 30 to
150 miles away, which draw on this equipment pool to serve local customers'
needs. The hub locations provide full-service rental fleet maintenance and
repair operations for the satellite locations. The Company believes this
strategy increases fleet utilization and allows RSC to bring the benefits of a
large, high-quality and diversified rental equipment fleet to markets with
populations as small as 25,000 where a full-scale rental facility might not
otherwise be justified. See "--Fleet Management."
Advanced Information Systems. The Company has made substantial investments
in its management information systems in order to improve asset utilization
and financial performance. Every rental location has on-line access to a
centralized computer system that provides real-time transaction processing,
extensive fleet management tools and financial management reports. Use of
these systems allows the Company to improve its asset utilization by deploying
assets to locations generating higher returns and identifying underperforming
assets for disposition. These systems also allow an employee at any location
to identify and reserve a specific piece of equipment anywhere in a region,
and schedule delivery (generally within 24 hours) to a customer's job site.
With the acquisition of Center, the Company obtained Center's proprietary
information system, which, among other enhancements, automatically prioritizes
equipment for maintenance based on type, age and recent use. The Company
believes Center's system is scalable over a large number of locations, and
expects to add it to the Company's existing systems. See "--Fleet Management,"
"--Information Systems" and "Prospectus Summary--Recent Developments--
Acquisition of Center Rental."
Decentralized Management. Under the Company's decentralized management
structure, RSC's region vice presidents and district managers, who currently
average over 20 years of rental experience, are responsible for management,
customer service, marketing strategies and business growth, including pursuing
acquisitions and start-up locations, in their regions. Each region vice
president and district manager is compensated through a
45
<PAGE>
stock option program and cash bonus plan tied directly to the region's
performance. A small corporate staff at the Company's headquarters focuses on
corporate planning, financial reporting and analysis and overseeing execution
of the Company's growth strategy. The Company has also centralized its
purchasing and equipment disposal functions in order to maximize purchase
discounts sale prices for used rental equipment.
Superior Customer Service. The Company believes it differentiates itself
from many of its competitors by providing responsive customer service, a broad
selection of high-quality rental equipment and "one-stop shopping" for a wide
range of supplies, tools, parts and equipment. Depending upon market needs,
RSC also offers value-added services to its customers such as a radio-
dispatched transportation fleet and 24 hours-a-day, seven days-a-week support
services, including on-site maintenance and repair. The Company believes its
rapid response time in delivering, servicing or replacing equipment at job
sites generates customer loyalty. A cornerstone to the Company's customer
service commitment is its extensive training system, RSU, which provides
formal training to Company employees relating to customer service, strategy,
finance, information systems, fleet management, safety and risk management and
human resources. See "--Products" and "--Sales and Marketing."
GROWTH STRATEGY
RSC's growth strategy is to continue to expand its presence in existing
markets and capitalize on opportunities to enter new geographic markets
through a combination of acquisitions and start-up locations. The Company is
systematic in its selection of new markets for expansion and, together with
Arthur D. Little, Inc., has developed a proprietary model to guide future
expansion efforts by identifying and ranking desirable locations based on more
than 25 demographic characteristics found in the Company's most successful
geographic markets. The Company also seeks to increase revenues at new and
existing locations through fleet expansion, improved asset utilization and
targeted marketing efforts. The Company also has begun to increase revenues
across existing locations by cross-selling both equipment rental services and
MRO tools and supplies to its industrial customers.
Acquisitions. RSC's acquisition efforts focus on acquiring stable, respected
businesses in markets the Company believes offer opportunities for additional
growth. The Company primarily targets acquisitions of businesses in small- to
medium-sized markets where an existing owner has limited resources to expand
the rental equipment fleet and/or the owner's decision to sell coincides with
the decision to retire. The Company believes it can capitalize in such markets
on its competitive advantages relative to the small, local equipment rental
businesses and equipment dealers who have traditionally served such markets.
Immediately after completing an acquisition, the Company generally integrates
the operations of the acquired business into its management information
systems, consolidates its equipment purchasing and disposal functions, and
centralizes its fleet management, while seeking to provide consistent, high-
quality service to the acquired business' customers. The Company has a proven
track record in completing and integrating acquisitions. Proprietors of
smaller businesses often place significant emphasis on the Company's
reputation in these areas, and the Company believes this reputation provides
it access to additional acquisition opportunities. Since its formation in
1992, RSC has acquired 60 businesses consisting of 188 locations (through
August 7, 1998). See "--Business Strategy--Small- to Medium-Sized Market
Focus" and "--Locations."
Start-Up Locations. RSC also enters targeted markets through start-up
locations where there is no quality business available for acquisition or
where such a business cannot be acquired on terms acceptable to the Company.
The Company's decision to open a start-up location is based upon its review of
demographic information, business growth projections and the level of existing
competition. RSC enhances the flexibility of start-up locations by entering
into real estate leases with short initial terms and multiple option periods.
In addition, RSC typically minimizes capital expenditures at a start-up
location by redeploying and sharing equipment with an existing hub. If a
start-up location does not meet expectations, the Company can redeploy the
equipment elsewhere. Since the Company opened its first start-up location in
October 1994, the Company has opened 61 additional start-up locations (through
August 7, 1998). See "--Business Strategy--Cluster Strategy" and "--
Locations."
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<PAGE>
Internal Growth. The Company focuses on achieving internal growth through an
emphasis on disciplined fleet expansion, improved asset utilization and
targeted marketing efforts. The Company intends to replace assets in, and
increase the breadth and depth of, its existing rental equipment fleet through
capital expenditures. In addition, RSC's information systems provide the data
necessary to improve asset deployment based upon such factors as price
realization, time utilization and individual asset return on investment.
Through its national accounts marketing program, the Company targets large
petrochemical, industrial and commercial customers. The Company offers these
customers IPM services whereby RSC locates equipment at a customer's facility
and assumes complete responsibility for the maintenance of such equipment. The
IPM program allows the Company to eliminate operating expenses such as
equipment transportation and delivery, and to improve asset utilization rates.
In addition, the Company has increased its MRO supply business and its tool
room management and small tool trailer business. The Company has also created
an Industrial Division, with a dedicated and specially trained sales force
focusing exclusively on industrial customers. See "--Fleet Management," "--
Information Systems" and "--Sales and Marketing."
PRODUCTS
The Company believes it has one of the most comprehensive and well-
maintained rental equipment fleets in the industry. The Company sells parts,
supplies and used rental equipment, and acts as a distributor for new
equipment on behalf of certain national equipment manufacturers.
Rental Equipment. The Company rents over 50 categories of equipment on a
daily, weekly or monthly basis, and occasionally for periods of up to one
year. The Company's rental equipment fleet of over 92,000 units includes a
broad selection of equipment ranging from small items such as pumps,
generators, welders, electric hand tools and concrete finishing equipment to
larger equipment such as air compressors, dirt equipment, booms, aerial
manlifts, forklifts, scissor lifts, skid-steer loaders and backhoes. Each of
the Company's rental locations has access to a product mix tailored to satisfy
the needs and preferences of the local customer base.
Sales of Parts, Supplies and Equipment. In addition to rental equipment,
most RSC locations carry a wide range of parts and supplies, including
"convenience consumables" used in conjunction with rental equipment, such as
safety equipment, diamond saw blades and sandpaper. This sales activity allows
the Company to attract and retain customers by offering the convenience of
"one-stop shopping." In addition, RSC is a distributor for new equipment on
behalf of certain national equipment manufacturers, including Black & Decker,
Genie, Honda, Ingersoll-Rand, JLG, Kobelco, Lull, Multiquip, Norton, Sky-Jack,
Sky Trak, Snorkel, Stanley Proto, Terramite, Wacker and Weldon Pumps. The
Company also offers its customers a one-source catalog for a variety of
equipment, tools and supplies.
The Company also routinely sells used rental equipment in order to maintain
an economically competitive fleet and to adjust to fluctuations in the demand
for specific rental products. The Company has developed a proprietary
algorithm, the "CAPCOM" model, which is designed to determine the optimal
timing for the sale and replacement of equipment given, among other things,
original purchase price, maintenance expense, rental demand and prices in the
used rental equipment market. RSC is able to realize attractive prices on used
equipment sales due to its strong preventative maintenance program, ability to
use offshore, retail and direct mail distribution channels to redirect
disposals to markets where the equipment is in highest demand, and ability to
negotiate attractive fee arrangements with third-party auctioneers. In
addition, the Company markets its used rental equipment via the Internet, and
is also currently evaluating additional disposal alternatives.
FLEET MANAGEMENT
The Company believes its advanced information systems, combined with its
cluster strategy and ability to redeploy equipment among locations, allow RSC
to better manage its fleet and achieve higher equipment utilization rates than
many of its competitors. Under this strategy, an employee at any location can
locate a specific piece of equipment throughout the region, whether on rent
(in which case the estimated date available is provided), in transit, in the
service bay or ready for rent. Once identified, the equipment can be reserved
for a
47
<PAGE>
customer through the system and scheduled for delivery (generally within 24
hours) to the job site or store location by the Company's radio-dispatched
transportation fleet of trucks, trailers and independent carriers. The Company
is able to further increase fleet utilization and moderate capital
expenditures through its "use-it-or-lose-it" policy, whereby equipment is
deployed to areas where it can provide the highest return. Through its
information systems, the Company generates a monthly management report
showing, for each region, every rental asset that had an unacceptable
utilization rate for the most recent 90-day period. Region managers have
30 days to correct the problem or the asset may be redeployed to another
region where demand exceeds supply or sold, depending on the age of the asset.
The Company's information systems also track each individual rental asset and
automatically schedule preventative maintenance, frequently in advance of that
suggested by the manufacturer. As a result, the Company believes it is able to
enhance the reliability and extend the useful life of its rental equipment
fleet, and obtain favorable prices when used rental equipment is sold.
INFORMATION SYSTEMS
Each rental location is networked with a commonly configured PC equipped
with electronic links to all other RSC locations and the Company's central
databases. The Company has developed a comprehensive set of management
information databases covering financial performance, fleet utilization, sales
and pricing. Company management can access these databases 24 hours a day at
all locations via the Internet to analyze such items as: (i) price trends by
store, region, salesperson, end-user, equipment category or customer; (ii)
sales trends by store, customer, region or end-user; (iii) fleet utilization
by individual asset or asset class; (iv) financial results and (v) performance
of selected acquisitions and start-up locations. In addition, all rental
transactions are processed in real-time through a centralized AS400 system
located at corporate headquarters, which can be accessed by the employee at
the point of sale to determine equipment availability. Local, regional and
corporate management can access this information to monitor current business
activity, including daily sales volume and fleet availability. The Company
also has a proprietary tool management software system which controls the
issuance, return and management of tools and equipment used by plant personnel
and contractors. With the acquisition of Center, the Company obtained Center's
proprietary information system, which allows Center to operate on a nearly
paperless basis. This system automatically prioritizes equipment for
maintenance based on the type, age and recent use. Repair personnel merely log
on to the system to get their assignments. Simultaneously, the system forwards
a list of the required parts and supplies to the parts department at each
Center location, so those parts and supplies can be waiting for the repair
personnel to pick them up. The Company believes Center's system is scaleable
over a large number of locations, and expects to add it to the Company's
existing systems. The Company believes its use of advanced information
technology will continue to create profit improvement opportunities and
improve equipment utilization. The Company believes the Year 2000 will not be
a material issue with respect to the Company's information systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
CUSTOMERS
In 1997, the Company rented equipment to over 100,000 customers, with no one
customer accounting for more than 0.5% of the Company's total revenues, and
the top ten customers representing less than 3% 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. The Company believes the loss of any one customer would not have a
material adverse effect on the Company's business. Through the formation of
its Industrial Division, the Company believes industrial customers will
account for an increased portion of the Company's total revenues in the
future. See "--Growth Strategy--Internal Growth."
SALES AND MARKETING
The Company markets its products and services through a sales force of
approximately 607 salespeople as of August 7, 1998 (excluding the employees
of Center). The Company's field-based sales force calls regularly
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<PAGE>
on contractors' job sites and industrial facilities with the objective of
building strong business relationships and ensuring that such customers'
rental and supply needs are fulfilled. The Company's store-based sales force
handles telephone inquiries and assists customers at each rental location to
select the proper equipment and supplies to meet their needs. In addition,
through its national accounts program, the Company targets large
petrochemical, industrial and commercial customers in order to develop
national relationships and increase awareness of its IPM program. The
Company's sales force attends RSU in order to develop extensive product
knowledge and refine their customer service skills. See "--Business Strategy--
Superior Customer Service."
The Company supplements its sales and marketing activities through
participation in industry trade shows and conferences, direct mail, and
advertising in local industry publications and the yellow pages in the markets
it serves. In addition, the Company maintains a home page on the Internet
describing the Company's products and services, geographic locations and used
rental equipment for sale. RSC's home page can be found at
"http://www.rentalservice.com."
LOCATIONS
As of August 7, 1998, the Company operated 225 rental locations in Canada
(5) and the following 26 states: Alabama (13), Arizona (8), Arkansas (14),
Colorado (8), Delaware (1), Florida (23), Georgia (23), Illinois (9), Indiana
(1), Iowa (6), Kansas (4), Louisiana (8), Maryland (3), Minnesota (5),
Mississippi (11), Missouri (9), Nebraska (3), New Mexico (5), North Carolina
(3), Oklahoma (8), Pennsylvania (1), South Carolina (9), Tennessee (11),
Texas (29), Virginia (4) and Wisconsin (1). As of August 7, 1998, the Company
was party to non-binding letters of intent to acquire seven equipment rental
businesses with a combined 14 locations in the following nine states: Arizona
(1), Idaho (2), Illinois (3), Maryland (1), Nevada (1), New Mexico (1),
Oklahoma (1), Utah (1) and Wisconsin (3).
The Company's locations are generally situated in industrial, commercial or
mixed-use zones. The buildings range from approximately 1,500 to 47,000 square
feet, consist of a customer showroom, an equipment service area and storage
facilities, and are located on parcels of one to seven acres of land. Eight of
the Company's rental locations are owned, with the remaining locations subject
to leases with terms expiring from 1998 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., BET
Plant Services U.S.A. and United Rentals, Inc.); regional competitors that
operate in a few states; small, independent businesses with one or two rental
locations; and equipment vendors and dealers who both sell and rent equipment
directly to customers. Additionally, United Rentals, Inc. and U.S. Rentals,
Inc. have announced plans for a merger, which is expected to close in
September 1998. The industry's fragmented nature has attracted new
competitors. Through its acquisition of Prime Service, Inc., Atlas Copco has
entered into the equipment rental business, and the Company believes equipment
manufacturers, such as Caterpillar and John Deere, and equipment dealers such
as Neff, have entered or may enter equipment rental business as well. The
Company also competes against MRO suppliers, including large companies (such
as W.W. Grainger and McMaster Carr), as well as regional and independent
competitors. Certain competitors have greater financial resources, are more
geographically diverse and have greater name recognition than the Company.
There can be no assurance that the Company will not encounter increased
competition from existing competitors or new market entrants that may be
significantly larger and have greater financial and marketing resources. In
addition, to the extent existing or future competitors seek to gain or retain
market share by reducing prices, the Company may be required to lower its
prices, thereby impacting operating results.
Existing or future competitors also may seek to compete with the Company for
acquisition candidates which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates.
Management believes such competition has already increased the prices obtained
by businesses
49
<PAGE>
acquired by the Company and its competitors. In addition, such competitors may
also compete with the Company for start-up locations, thereby limiting the
number of attractive locations for expansion. Competition in the rental or MRO
business and competition in making acquisitions could have a material adverse
effect on the Company. See "Risk Factors--Competition."
The equipment rental business is highly service-oriented. The success of an
individual rental operator is predicated on its customer handling and problem
solving abilities; quality, condition and servicing of its equipment; and
overall operation of its business. Other components of competition include
location, availability of equipment (both depth and breadth) and price. The
Company believes it competes in the markets it serves primarily on the basis
of responsive customer service, a broad selection of high-quality rental
equipment and supplies, and competitive prices. Relative to smaller companies
with only one or two rental locations, the Company believes RSC benefits from
several competitive advantages, including sophisticated management information
systems, volume purchasing discounts, professional management, a diverse
customer base and geographic locations, a modern and well maintained rental
fleet, the ability to transfer equipment among rental locations to satisfy
customer demand, the ability to service national accounts and national brand
identity. In addition, the Company believes national operators are less
sensitive to localized cyclical downturns and can justify significant
investments in professional management and information systems.
GOVERNMENT AND ENVIRONMENTAL REGULATION
The Company and its operations are subject to a variety of federal, state
and local laws and regulations governing, among other things, worker safety,
air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. In connection with its
acquisitions and start-up locations, the Company usually obtains Phase I
environmental assessment reports prepared by independent environmental
consultants. A Phase I assessment consists of a site visit, historical record
review, interviews and a report, with the purpose of identifying potential
environmental conditions associated with the subject real estate. There can be
no assurance, however, that acquired or leased locations have been operated in
compliance with environmental laws and regulations or that future uses or
conditions will not result in the imposition of environmental liability upon
the Company or expose the Company to third-party actions such as tort suits.
The Company dispenses petroleum products from underground and above-ground
storage tanks located at certain rental locations that it owns or leases. The
Company maintains an environmental compliance program that includes the
implementation of required technical and operational activities designed to
minimize the potential for leaks and spills, maintenance of records and the
regular testing and monitoring of tank systems for tightness. There can be no
assurance, however, that these tank systems have been or will at all times
remain free from leaks or that the use of these tanks has not or will not
result in spills or other releases. The Company incurs ongoing expenses
associated with the removal of older underground storage tanks and other
activities to come into compliance with environmental laws, and the
performance of appropriate remediation at certain locations. The Company does
not believe such removal and remediation will have a material adverse effect
on the Company's operating results or financial position. The Company also
uses hazardous materials such as solvents to clean and maintain its rental
equipment fleet. In addition, the Company generates and disposes waste such as
used motor oil, radiator fluid and solvents, and may be liable under various
federal, state and local laws for environmental contamination at facilities
where its waste is or has been disposed. The Company believes it 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.
50
<PAGE>
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.
EMPLOYEES
At August 7, 1998 the Company employed 2,843 people, including 607
salespeople, 2,141 operational employees and 95 corporate and regional
management employees. With the acquisition of Center, the Company added
approximately 331 employees, which are not included in the above totals. The
Company's employees generally are not represented by a union or a collective
bargaining agreement; however, approximately 65 of the Company's employees are
represented by a union. The Company considers its labor relations to be good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal and financial liability of the Company with
respect to such pending litigation cannot be estimated with certainty but the
Company believes, based on its examination of such matters, that such ultimate
liability will not have a material adverse effect on its business or financial
condition.
51
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information with respect to the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- --- -----
<S> <C> <C>
Martin R. Reid.......... 55 Chairman of the Board and Chief Executive Officer
Robert M. Wilson........ 40 Senior Vice President, Chief Financial Officer, Secretary and Treasurer
Ronald Halchishak....... 51 Senior Vice President of Operations
David G. Ledlow......... 39 Senior Vice President of Operations
John Markle............. 42 Senior Vice President of Operations
Douglas A. Waugaman..... 40 Senior Vice President of Operations
David B. Harrington..... 44 Senior Vice President of Human Resources
Milfred E. Howard....... 51 Senior Vice President of Sales and Marketing
William M. Barnum,
Jr. ................... 44 Director
James R. Buch........... 44 Director
David P. Lanoha......... 48 Director
Christopher A.
Laurence............... 31 Director
Eric L. Mattson......... 46 Director
Britton H. Murdoch...... 41 Director
John M. Sullivan........ 63 Director
</TABLE>
MARTIN R. REID was elected as a director and Chief Executive Officer of the
Company in June 1994 and became Chairman of the Board in October 1995. From
October 1993 to February 1998, Mr. Reid served as 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.
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.
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, Inc. ("Walker Jones") in 1992. Mr. Ledlow had been
employed by Walker Jones since 1982, serving most recently as its Vice
President of Marketing. Mr. Ledlow was promoted to Regional Vice President of
Operations of the Company in February 1993, and to Senior Vice President of
Operations in December 1996.
JOHN MARKLE has served as a Senior Vice President of Operations of the
Company since January 1998. Mr. Markle joined the Company in conjunction with
the Center Acquisition in December 1997. Prior to joining the Company, Mr.
Markle served as President of Center since 1989. Prior to joining Center,
Mr. Markle spent ten years with Power Rental.
52
<PAGE>
DOUGLAS A. WAUGAMAN has served as Senior Vice President of Operations of the
Company since April 1997. From January 1994 through April 1997, Mr. Waugaman
served as Vice President, Chief Financial Officer, Secretary and Treasurer of
the Company. From June 1993 until joining the Company, Mr. Waugaman served as
Operations Manager for Plastiglide Manufacturing Corporation, a subsidiary of
Illinois Tool Works. From September 1991 until June 1993, Mr. Waugaman was
Vice President of Finance for Knapp Communications Corporation, a magazine
publisher. From September 1989 until September 1991, Mr. Waugaman was
Controller for Plastiglide Manufacturing Corporation. Mr. Waugaman is a
Certified Public Accountant, and has public accounting experience with Arthur
Andersen and Co.
DAVID B. HARRINGTON joined the Company in June 1997 as Senior Vice President
of Human Resources. Prior to joining the Company, Mr. Harrington worked for 19
years at General Electric ("GE") in various positions, including the most
recent six years as Senior Vice President of Human Resources for GE Capital
Technology Management Services. Mr. Harrington serves on the board of the
Atlanta chapter of the Human Resources Planning Society.
MILFRED E. HOWARD has served as Senior Vice President of Sales and Marketing
of the Company since August 1998. From June 1997 through July 1998, Mr. Howard
served as the Vice President of Sales for the Company's Industrial Division.
Prior to joining the Company, Mr. Howard served as Vice President of Sales for
Hertz Equipment Rental Corporation.
WILLIAM M. BARNUM, JR. has served as a director of the Company since its
formation in 1992 and served as Chairman of the Board from June 1993 through
October 1995. Mr. Barnum is a general partner of Brentwood Buyout Partners,
L.P. ("BBP"), the general partner of Brentwood RSC Partners, L.P. ("Brentwood
RSC Partners"). See "Principal Stockholders." Mr. Barnum was an associate at
Morgan Stanley & Co. Incorporated from October 1981 until joining Brentwood
Associates, an affiliate of Brentwood RSC Partners, in July 1984. Mr. Barnum
is a director of Quiksilver, Inc., and several privately held companies.
JAMES R. BUCH has served as a director of the Company since October 1995.
From October 1990 through May 1996, Mr. Buch served as President and Chief
Executive Officer of Evans Rents, Inc. Since April 1997, Mr. Buch has been the
Chief Executive Officer of Classroom Holdings, Inc. Previously, he served as
Director of U.S. Operations for Brittania Security Group.
DAVID P. LANOHA has served as a director of the Company since January 1998.
Mr. Lanoha initially joined the Company as Senior Vice President of Operations
in conjunction with the Center Acquisition. Mr. Lanoha served in various
capacities at Center, most recently as Chairman of the Board, from October
1989 to December 1997, and President, from May 1984 to October 1989.
CHRISTOPHER A. LAURENCE has served as a director of the Company since
October 1995. Mr. Laurence is a general partner of Brentwood Associates and a
member of Brentwood Private Equity LLC. Prior to joining Brentwood Associates
in 1991, Mr. Laurence was an analyst at Morgan Stanley & Co. Incorporated.
Mr. Laurence is a director of HDA Parts System, Inc.
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. Since October 1996, Mr. Murdoch has been Chief Financial Officer of
Internet Capital Group, LLP, a privately held company. 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. Mr. Murdoch is
also a director of Susquehanna Banc Shares, Inc.
JOHN M. SULLIVAN has served as a director of the Company since July 1997. He
is presently a director of The Scotts Company and Cobblestone Holdings, Inc.
From October 1987 to January 1993, Mr. Sullivan was Chairman of the Board and
Chief Executive Officer of Prince Holdings, Inc. ("Prince"). Prior to that,
and since September 1984, Mr. Sullivan was President of Prince and Vice
President of Chesebrough-Pond's, Inc.
53
<PAGE>
Messrs. Reid, Waugaman and Barnum were also directors and/or executive
officers of RHI at the time RHI filed its prepackaged bankruptcy plan under
Chapter 11 of the United States Bankruptcy Code. See "Risk Factors--RHI's
Bankruptcy; Increase in Indebtedness."
The Board of Directors presently consists of 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.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has the following standing committees: the Audit Committee, the
Compensation Committee, the Acquisition Committee and the Nominating
Committee. The Audit Committee was established on August 20, 1996 to make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the scope and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees and review the
adequacy of the Company's internal accounting controls. The Audit Committee
consists of Messrs. Buch, Mattson and Lanoha. The Compensation Committee was
established on December 5, 1996 to establish remuneration levels for executive
officers of the Company and implement the Company's stock option plans and any
other incentive programs. The Compensation Committee consists of
Messrs. Murdoch and Sullivan. The Audit Committee met two times and the
Compensation Committee met four times during 1997. The Acquisition Committee
was established on September 30, 1997 to approve acquisitions in which the
consideration to be paid by the Company is less than $10 million. The
Acquisition Committee consists of Messrs. Reid and Laurence. The Nominating
Committee was established on February 25, 1998 to make recommendations
regarding the nomination of members of the Board. The Nominating Committee
consists of Messrs. Barnum, Mattson and Murdoch.
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 an executive officer of Tuboscope until April 1996. He
served on the Executive Committee of the Board of Directors of Tuboscope,
which is responsible for Tuboscope's compensation policies, until February
1998. Eric L. Mattson, a director of the Company, is a director of Tuboscope.
COMPENSATION OF DIRECTORS
The Company did not pay any fees or remuneration to directors for their
service on the Board or any Board committee in 1997; however, the Company
reimbursed directors for their out-of-pocket expenses incurred in connection
with attending meetings of the Board.
Effective January 1, 1997, in addition to reimbursement for out-of-pocket
expenses, all non-employee members of the Board will receive $10,000 per year
(payable $2,500 per quarter) as compensation for serving on the Board, plus
$1,500 for attendance at each Board meeting and $500 for attendance at each
committee meeting. Each committee chairman will receive an additional $1,500
per year. All non-employee directors receive non-qualified stock options under
the 1996 Plan (as defined) as described under "--Equity Participation Plans."
54
<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the General Corporation Law of
the State of Delaware (the "DGCL"). The provision has no effect on any non-
monetary remedies that may be available to the Company or its stockholders,
nor does it relieve the Company or its directors from compliance with federal
or state securities laws. The Bylaws of the Company generally provide that the
Company shall indemnify, to the fullest extent permitted by law, any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit, investigation, administrative hearing or
any other proceeding (each, a "Proceeding") by reason of the fact that he is
or was a director or officer of the Company, or is or was serving at the
request of the Company as a director, officer, employee or agent of another
entity, against expenses (including attorneys' fees) and losses, claims,
liabilities, judgments, fines and amounts paid in settlement actually incurred
by such person in connection with such Proceeding. In addition, the Company
has obtained director and officer liability insurance that insures the
Company's directors and officers against certain liabilities.
55
<PAGE>
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 Company's four
other most highly compensated executive officers (collectively, the "Named
Executive Officers") for all services rendered in all capacities to the
Company during the fiscal years ended December 31, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------- ------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) COMPENSATION($) OPTIONS(#)
--------------------------- ---- --------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief Executive Officer.. 1997 339,361 300,000 10,122(2) 200,000(3)
1996 294,231 84,375 5,641(2) --
1995(4) 220,674 140,625 -- --
Robert M. Wilson
Senior Vice President, Chief Financial
Officer, Secretary and Treasurer...... 1997 99,300 -- 75,287(5) 75,000
1996 -- -- -- --
1995 -- -- -- --
Douglas A. Waugaman
Senior Vice President of Operations... 1997 166,531 200,000 2,121(2) 100,000
1996 155,923 42,900 7,149(2) --
1995(4) 139,550 48,050 126,940(6) --
Ronald Halchishak
Senior Vice President of Operations... 1997 148,260 75,000 1,408(2) --
1996 150,000 100,000 910(2) 71,250
1995(4) 147,115 26,520 -- 16,740
David G. Ledlow
Senior Vice President of Operations... 1997 137,132 75,000 16,754(2) --
1996 117,692 36,709 4,200(2) 71,250
1995 85,827 38,472 -- 16,740
</TABLE>
- --------
(1) The amount of bonus earned in each fiscal year is paid, and accounted for
in this table, in the next succeeding fiscal year. Bonuses earned with
respect to fiscal 1997 were as follows: Mr. Reid, $500,000; Mr. Wilson,
$103,185; Mr. Waugaman, $149,960; Mr. Halchishak, $123,058 and Mr. Ledlow,
$120,000. Such fiscal 1997 bonuses were paid during April 1998.
(2) Consists of one or more of the following: (i) an automobile allowance,
(ii) relocation expenses reimbursed by the Company, and (iii) insurance
premiums paid by the Company for life insurance and disability policies
covering such officer.
(3) In January 1998, Mr. Reid entered into an employment agreement with the
Company. In connection with such agreement, Mr. Reid's 200,000 outstanding
options to purchase Common Stock became immediately exercisable.
Additionally, Mr. Reid was granted stock options to purchase 190,000
shares of Common Stock, vesting in equal installments over four years (or
earlier if certain performance criteria are met), and was granted 10,000
shares of restricted stock, vesting in equal installments over four years.
On February 25, 1998, Mr. Reid surrendered to the Company options to
purchase 57,000 shares of Common Stock in order to ensure the number of
shares of Common Stock available for issuance pursuant to the 1996 Plan
was sufficient to allow certain grants of stock options to other officers.
On April 29, 1998, Mr. Reid was granted stock options to purchase 40,411
shares of Common Stock, vesting in equal installments over four years (or
earlier if certain performance criteria are met), and was granted 16,589
shares of restricted stock, vesting in equal installments over four years.
(4) Includes amounts paid by RHI.
(5) Consists of relocation expenses reimbursed by the Company ($70,309), an
automobile allowance and insurance premiums paid by the Company for life
insurance and disability policies covering Mr. Wilson.
(6) Consists of relocation expenses reimbursed by the Company ($19,598), a
relocation bonus ($100,000) and insurance premiums paid by the Company for
life insurance and disability policies covering Mr. Waugaman.
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<PAGE>
Stock Options Granted in Fiscal 1997. The following table sets forth
information concerning individual grants of stock options made by the Company
during the fiscal year ended December 31, 1997 to each of the Named Executive
Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM
UNDERLYING TO EMPLOYEES BASE PRICE ---------------------
NAME OPTIONS GRANTED(#) IN FISCAL YEAR ($/SH) EXP. DATE 5%($) 10%($)
---- ------------------ ---------------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... 200,000(1)(2) 27.9% $20.25 2007 2,547,023 6,454,657
Robert M. Wilson
Senior Vice President,
Chief Financial
Officer, Secretary and
Treasurer.............. 75,000(1) 10.4% $18.00 2007 849,008 2,151,552
Douglas A. Waugaman
Senior Vice President
of Operations.......... 100,000(1) 13.9% $20.25 2007 1,273,512 3,227,328
Ronald Halchishak
Senior Vice President
of Operations.......... -- -- -- -- -- --
David G. Ledlow
Senior Vice President
of Operations.......... -- -- -- -- -- --
</TABLE>
- --------
(1) Such options vest equally over four years from the date of grant.
(2) In connection with his employment agreement in January 1998, the vesting of
Mr. Reid's previously outstanding options was accelerated, and such options
became immediately exercisable.
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<PAGE>
Aggregated Option Exercises. The following table sets forth information (on
an aggregated basis) concerning each exercise of stock options during the year
ended December 31, 1997 by each of the Named Executive Officers and the year-
end value of unexercised options.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS
SHARES END AT FISCAL YEAR-END(1)
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Martin R. Reid
Chairman and Chief
Executive Officer...... -- -- 200,000(2) -- (2) 862,500(2) --
Robert M. Wilson
Senior Vice President,
Chief Financial
Officer, Secretary and
Treasurer.............. -- -- -- 75,000 -- 492,188
Douglas A. Waugaman
Senior Vice President
of Operations.......... -- -- -- 100,000 -- 431,250
Ronald Halchishak
Senior Vice President
of Operations.......... -- -- 27,120 55,290 171,861 260,156
David G. Ledlow
Senior Vice President
of Operations.......... -- -- 21,753 55,503 177,091 333,887
</TABLE>
- --------
(1) Options are "in-the-money" at the fiscal year end if the fair market value
(based on the closing price of the Common Stock on the NYSE on December
31, 1997 of $24.5625 per share, less the exercise price) of the underlying
securities on such date exceeds the exercise or base price of the option.
(2) In connection with his employment agreement in January 1998, the vesting
of all of Mr. Reid's previously outstanding options was accelerated, and
such options became immediately exercisable.
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
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payment on death, disability, retirement or termination of employment. In
certain circumstances, participants may receive loans and hardship withdrawals
from their accounts in the 401(k) Plan.
EQUITY PARTICIPATION PLANS
The Company currently maintains two plans, the Stock Option Plan for Key
Employees (the "1995 Plan") and the 1996 Equity Participation Plan (the "1996
Plan"), pursuant to which certain employees or directors may obtain options or
other awards that enable them to participate in the Company's equity. The
Board adopted the 1996 Plan on December 5, 1996, and the 1996 Plan was
approved by the Company's stockholders on February 5, 1997. The principal
purposes of the 1996 Plan are to provide incentives for officers, directors,
key employees and consultants of the Company and its subsidiaries through
granting options, restricted stock and other awards, thereby stimulating their
personal and active interest in the Company's development and financial
success, and inducing 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 July 31, 1998, none 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 2,000,000 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise or vesting of any Awards. As of July 31, 1998, 888,044 shares of
Common Stock were available for future 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.
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 150 officers and other employees are currently
eligible to participate in the 1996 Plan. During the term of the 1996 Plan and
pursuant to a formula, (a) each non-employee director is automatically granted
an NQSO 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 an NQSO to purchase 2,500 shares of Common Stock at each subsequent
annual meeting at which he is reelected to the Board.
59
<PAGE>
MANAGEMENT INCENTIVE COMPENSATION PLAN
The Company maintains an annual bonus plan (the "Management Incentive
Compensation Plan") under which the chief executive officer and certain of the
Company's other executives ("Covered Employees") are eligible to receive bonus
payments. The Management Incentive Compensation Plan is intended to provide an
incentive for superior work, to motivate Covered Employees toward even higher
achievement and business results, to tie their goals and interests to those of
the Company and its stockholders and to enable the Company to attract and
retain highly qualified senior employees.
The Management Incentive Compensation Plan will be administered by a
committee consisting of at least two members of the Board of Directors of the
Company who qualify as "outside directors" under Code Section 162(m) (the
"Bonus Committee"). Initially, the Bonus Committee will be the members of the
Compensation Committee. The Bonus Committee will have the sole discretion and
authority to administer and interpret such portion of the Management Incentive
Compensation Plan.
A Covered Employee may receive a bonus payment based upon the attainment of
performance objectives established by the Bonus Committee and related to one
or more of the following corporate business criteria, which may be limited,
where applicable with respect to any Covered Employee, to store-level or
regional operations: pre-tax income, operating income, cash flow, earnings per
share, EBITDA, return on equity, return on invested capital or assets, cost
reductions and savings, return on revenues, collection of accounts receivable
or productivity. The actual amount of future bonus payments under the
Management Incentive Compensation Plan is not presently determinable. However,
the Management Incentive Compensation Plan provides that the maximum bonus for
a Covered Employee shall not exceed $1,000,000 with respect to any fiscal
year.
The Management Incentive Compensation Plan is designed to ensure that the
annual bonuses paid thereunder to Covered Employees are deductible by the
Company, without limit under Code Section 162(m). Section 162(m), which was
added to the Code in 1993, places a limit of $1,000,000 on the amount of
compensation that may be deducted by the Company in any tax year with respect
to Covered Employees. However, certain performance-based compensation is not
subject to the deduction limit. The Management Incentive Compensation Plan is
designed to provide this type of performance-based compensation to Covered
Employees.
Bonuses paid to Covered Employees will be based upon bonus formulas that tie
bonuses to one or more objective performance standards. Bonus formulas for
Covered Employees will be adopted in each performance period by the Bonus
Committee no later than the latest time permitted by Code Section 162(m). No
bonuses will be paid to Covered Employees unless and until the Bonus Committee
makes a certification in writing with respect to the attainment of the
objective performance standards as required by Code Section 162(m); and,
although the Bonus Committee may in its sole discretion reduce a bonus payable
to a Covered Employee, the Bonus Committee has no discretion to increase the
amount of a Covered Employee's bonus. The Bonus Committee has the discretion
to apply or not apply the foregoing provisions to bonuses paid to eligible
employees who have not been designated as Covered Employees.
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
60
<PAGE>
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.
EXECUTIVE DEFERRED COMPENSATION PLAN AND SURVIVOR PROTECTION PROGRAM
In January 1998, the Board of Directors approved the Executive Deferred
Compensation Plan (the "EDCP") and Survivor Protection Program (the "SPP"),
pursuant to which senior executives of the Company may defer portions of their
cash compensation and senior executives and certain other senior management of
the Company received life insurance policies.
Senior executives of the Company may defer the receipt of a portion of their
cash compensation pursuant to the EDCP, whereby amounts, while deferred, earn
interest at a rate of (i) for the first five years of the program, the greater
of 10% or the average long-term bond yield and (ii) after the first five years
of the program, the average of the long-term bond yield. In addition, an
annual deferral incentive rate will be determined each year, beginning with
the third year of the program, which rate will be added to the rates described
in the previous sentence. Participants will receive payments under the EDCP
upon the later of retirement or upon reaching age 55 with at least seven years
of service to the Company. If a participant's employment is terminated by the
Company, such participant will receive payments under the EDCP upon reaching
age 62. The payments will be made over a fifteen-year period, subject to the
one-time right of participants to elect to receive 90% of their EDCP account
balance and forfeit the remainder. The trust administering the EDCP has
purchased life insurance policies to fund future payments under the EDCP,
which policies are owned by the trust.
Pursuant to the SPP, the Company has purchased life insurance policies for
the benefit of the survivors of senior executive and other senior management.
The amount of the benefit under the SPP will be three times annual base salary
(less $100,000) for senior executives and two times base salary (less
$100,000) for other senior management participants, with a maximum benefit of
$500,000 for both groups. In addition, a bonus will be paid to participants in
the amount of any tax due on imputed income associated with the life
insurance. The life insurance benefits under the SPP will continue after a
participant's retirement from the Company, with eligibility to begin upon the
earlier of (i) the participant reaching age 62 or (ii) the participant
reaching age 55 with at least seven years of service to the Company.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN
In 1997, the Company adopted its Employee Qualified Stock Purchase Plan (the
"QSP Plan"). In general, the QSP Plan authorizes employees of the Company and
its subsidiaries to purchase shares of the Company's Common Stock, through
payroll deductions, at a purchase price of 85% of the fair market value of
such shares. 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.
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<PAGE>
Each employee of the Company who has been employed by the Company for not
less than six months 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
1,900 employees who are eligible to participate in the QSP Plan.
The per share exercise price of each purchase right shall be an amount equal
to the lesser of 85% of the fair market value of a share of Common Stock on
the first day of the Offering Period in which the eligible employee began
participating in the QSP Plan or 85% of the fair market value of a share of
Common Stock on the date of exercise of an installment of the purchase right.
The QSP Plan commenced on July 1, 1997. As of July 31, 1998, 229,118 shares of
Common Stock remain available under the QSP Plan.
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<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 July 31, 1998 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 executive officer
of the Company; (iii) all directors and executive officers of the Company as a
group; and (iv) the Selling Stockholders. 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 NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR SHARES BEING OWNED AFTER
TO OFFERING(1) OFFERED OFFERING(1)
-------------------- ------------ --------------------
NAME NUMBER PERCENTAGE NUMBER NUMBER PERCENTAGE
---- --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
William M. Barnum,
Jr.(2)(3).............. 644,425 3.1% -- 644,425 2.7%
Martin R.
Reid(3)(4)(5).......... 271,461 1.3 -- 271,461 1.1
Robert M. Wilson(3)(4).. 18,825 * -- 18,825 *
Ronald
Halchishak(3)(4)....... 39,340 * -- 39,340 *
David G. Ledlow(3)(4)... 34,761 * -- 34,761 *
John Markle(3)(6)....... 43,029 * -- 43,029 *
Douglas A.
Waugaman(3)(4)......... 84,177 * -- 84,177 *
David B.
Harrington(3)(4)....... 6,250 * -- 6,250 *
Milfred E.
Howard(3)(4)(7)........ 6,250 * -- 6,250 *
James R. Buch(3)(4)..... 3,850 * -- 3,850 *
David P. Lanoha(3)(6)... 146,730 * -- 146,730 *
Christopher A.
Laurence(2)(3)......... 3,736 * -- 3,736 *
Eric L. Mattson(3)(8)... 2,500 * -- 2,500 *
Britton H.
Murdoch(3)(9).......... 4,500 * -- 4,500 *
John M. Sullivan(3)(4).. 2,500 * -- 2,500 *
National Christian
Charitable Foundation,
Inc., Dave and
Marcia Lanoha Fund(6).. 62,040 * 62,040 -- --
The Jerome Group,
Ltd.(11)............... 8,660 * 5,328 3,332 *
Tharco, Inc.(4)(10)..... 8,506 * 8,000 506 *
Allen Equipment,
Inc.(4)(10)............ 4,267 * 4,267 -- --
George L.
Scigousky(4)(10)....... 1,846 * 445 1,401 *
All directors and
executive officers as a
group(15
persons)(2)(3)(5)(7)... 1,312,334 6.2 -- 1,312,334 5.5
</TABLE>
- --------
*Less than 1.0%.
(1) A person is deemed as of any date to have "beneficial ownership" of any
security that such person has a right to acquire within 60 days after
such date. Shares that each identified stockholder has the right to
acquire within 60 days of the date of the table set forth above are
deemed to be outstanding in calculating the percentage ownership of such
stockholder, but are not deemed to be outstanding as to any other person.
(2) Mr. Barnum, a director of the Company, is a general partner of BBP, the
general partner of Brentwood RSC Partners, which owns 617,972 shares of
Common Stock; accordingly, Mr. Barnum may be deemed to be the beneficial
owner of the shares owned by BBP and for purposes of this table they are
included. Mr. Barnum disclaims beneficial ownership of such shares. The
address of Brentwood RSC Partners, Mr. Barnum and Mr. Laurence is 11150
Santa Monica Boulevard, Suite 1200, Los Angeles, California 90025.
(3) Excludes shares issuable upon exercise of options that are not
exercisable within 60 days of the date of the table set forth above, as
follows: Mr. Barnum--10,000 shares; Mr. Reid--173,411 shares; Mr.
Wilson--72,250 shares; Mr. Halchishak--64,750 shares; Mr. Ledlow--64,750
shares; Mr. Markle--25,000 shares;
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<PAGE>
Mr. Waugaman--91,000 shares; Mr. Harrington--27,275 shares; Mr. Howard--
24,214 shares; Mr. Buch--8,650 shares; Mr. Lanoha--12,500 shares;
Mr. Laurence--10,000 shares; Mr. Mattson--10,000 shares; Mr. Murdoch--
10,000 shares; and Mr. Sullivan--10,000 shares.
(4) The address of such person is c/o Rental Service Corporation, 6929 E.
Greenway Parkway, Suite 200, Scottsdale, Arizona 85254.
(5) Includes shares subject to vesting that may be repurchased by the Company
if they fail to vest.
(6) The address of such person is c/o Center Rental & Sales, 11250 East 40th
Avenue, Denver, Colorado 60239.
(7) Mr. Howard became an officer of the Company on August 1, 1998.
(8) The address of such person is c/o Baker Hughes Incorporated, 3900 Essex
Lane, Suite 1200, Houston, Texas 77027.
(9) The address of such person is c/o Internet Capital Group, LLP, 800 The
Safeguard Building, 435 Devon Park Drive, Suite 411, Wayne, Pennsylvania
19087.
(10) Such person is a current employee of the Company or is controlled by a
current employee of the Company. The shares of Common Stock being sold by
such person represents Common Stock issued in connection with an
acquisition by the Company.
(11) The address of such person is 1001 W. Glen Oaks Lane, Suite 102, Mequon,
Wisconsin 53092.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
Pursuant to a Corporate Development and Administrative Services Agreement
(the "Services Agreement"), the Company, prior to its initial public offering
in September 1996, paid BBP a monitoring fee in connection with management,
consulting and financial advisory services equal to one percent (1%) per annum
of the aggregate amount of debt and equity investment in the Company of or by
BBP and any persons or entities associated with BBP (collectively, the
"Brentwood Entities"), and investors in any of the Brentwood Entities, plus
reimbursement of customary costs and expenses. In 1996, the Company paid BBP a
monitoring fee of $235,000 pursuant to the Services Agreement. From time to
time, BBP has also received investment banking fees from the Company in
connection with the Company's acquisitions, calculated at 1.5% of the total of
the purchase price plus acquisition costs and net capital expenditures.
Investment banking fees paid to BBP totaled $388,000, $1,084,000 and $0 during
the years ended December 31, 1996 and 1997 and the six months ended June 30,
1998, respectively. The Company's obligation to pay such monitoring and
investment banking fees terminated upon completion of its initial public
offering; however, the Company, at its discretion, may utilize the
stockholder's investment banking services under the same fee arrangement. Mr.
Barnum, a general partner of BBP, who also serves as a director of the
Company, does not receive additional compensation from BBP for service as a
director.
EMPLOYMENT AGREEMENT WITH MARTIN R. REID
RSC and Martin R. Reid are parties to an employment agreement pursuant to
which Mr. Reid is employed as Chairman of the Board and Chief Executive
Officer (the "Employment Agreement"). The term of the Employment Agreement
initially is through December 31, 2001, but is automatically extended for one
additional year at the end of each calendar year unless earlier terminated
(the "Term of the Employment Agreement"). The Employment Agreement provides
for a base salary of no less than $500,000. Subject to stockholder approval of
an Executive Incentive and Bonus Plan, Mr. Reid is also eligible to receive a
yearly bonus of up to $500,000 pursuant to such plan, if certain performance
criteria are met. In addition, Mr. Reid is entitled to four weeks vacation and
all benefits generally available to other RSC executives. In January 1998, Mr.
Reid was granted options to purchase 190,000 shares of Common Stock, vesting
in equal installments over four years (or earlier if certain performance
criteria are met), and 10,000 shares of restricted stock, vesting in equal
installments over four years. However, the options will vest immediately if
Mr. Reid presents a chief executive officer succession plan which is approved
by the Board, but in no event earlier than one year from the grant of such
options. On February 25, 1998, Mr. Reid surrendered to the Company options to
purchase 57,000 shares of Common Stock in order to ensure the number of shares
of Common Stock available for issuance pursuant to the 1996 Plan was
sufficient to allow certain grants of stock options to other officers. On
April 29, 1998, Mr. Reid was granted options to purchase 40,411 shares of
Common Stock and 16,589 shares of restricted stock. These options and
restricted stock are subject to the same vesting as those granted in January
1998.
The Employment Agreement may be terminated by Mr. Reid or the Company at any
time, with or without cause. In addition, if requested by the Board of
Directors, Mr. Reid will resign as Chief Executive Officer (a "Resignation"),
but will remain as Chairman of the Board and devote at least 50% of his time
to the Company. Beginning with the first full year after his Resignation, Mr.
Reid's base salary and corresponding bonus opportunity will each be reduced to
$250,000. However, if the Board of Directors also asks him to step down as
Chairman of the Board (a "Step Down"), Mr. Reid will remain an RSC employee at
a base salary not in excess of $125,000, depending on the time he devotes.
Except where there has been a Change of Control, if Mr. Reid's active
employment in all capacities is terminated by RSC without "cause" (as defined
in the Employment Agreement), Mr. Reid will be entitled to receive severance
pay equal to his then-current base salary through the remaining Term of the
Employment Agreement plus the maximum bonus opportunity available if he had
continued in the position from which he was terminated. Additionally, Mr. Reid
will be entitled to immediate vesting of all his unvested options and
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<PAGE>
restricted stock. In addition, for the remainder of the Term of the Employment
Agreement, Mr. Reid will be treated as an active employee for purposes of all
benefits and the exercise of his options, and Mr. Reid will be entitled to
health insurance coverage until age 65. No severance pay or benefit
continuation will be available if Mr. Reid is terminated for "cause" or if he
resigns other than due to the Company's breach or at the Board of Directors'
request as a Resignation or Step Down.
Upon a Change of Control (as defined in the Employment Agreement), all of
Mr. Reid's unvested stock options and restricted stock will vest. In addition,
if within 24 months after a Change of Control, Mr. Reid is terminated without
"cause" or voluntarily terminates his employment for "good reason" (as defined
in the Employment Agreement), then, in place of other severance payments, he
will receive a payment equal to two and one-half times his highest base salary
and annual bonus opportunity during the Term of the Employment Agreement prior
to the Change of Control. The Company must also continue to provide Mr. Reid
health and life insurance comparable to that in effect on the date of the
Change of Control for 30 months or until he is re-employed and eligible for
health and life insurance benefits from a new employer that are at least as
favorable as those provided by RSC. In addition, Mr. Reid will either be fully
vested in his account under the 401(k) Plan upon the Change of Control or
receive payment equal to the unvested portion of such account. RSC must also
transfer to Mr. Reid the company-owned car he was using at the time of the
Change of Control or pay him two and one-half times his annual car allowance.
During the Term of the Employment Agreement, and for four years after any
termination of employment for any reason, Mr. Reid cannot directly or
indirectly engage in any business that competes with RSC, whether as an owner,
director, officer, employee, consultant or otherwise, subject to limited
investments in public companies and a pre-existing loan to a family member.
Upon Mr. Reid's death or disability, all of his unvested options and
restricted stock will vest, and he or his estate will receive his unpaid base
salary through the date of such death or disability plus a pro rata portion of
his maximum bonus opportunity for that year.
In connection with the Employment Agreement, in January 1998 the Company
accelerated the vesting of Mr. Reid's 200,000 outstanding options to purchase
Common Stock and such options became immediately exercisable.
OTHER ARRANGEMENTS
In connection with the Center Acquisition, the Company entered leases for
certain of Center's facilities with David P. Lanoha, a director of the
Company, and certain partnerships affiliated with Mr. Lanoha. The leases
initially expire in 2002, with options to extend for three periods of five
years each. The aggregate annual rent under such leases is $720,000. The
Company believes the terms of these leases are no less favorable than those
that could be obtained from unaffiliated third parties. Prior to the Center
Acquisition, these locations had been leased by Center from Mr. Lanoha and his
affiliates. The previous leases were terminated in connection with the Center
Acquisition.
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.
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The Company has entered into a severance agreement with each of Messrs.
Halchishak, Harrington, Ledlow and Wilson providing for certain benefits upon
termination of employment either by the Company without cause or by such named
executive officer due to a reduction in base salary and benefits (other than
across the board salary cuts for employees at such named executive officer's
level or changes in benefits). These benefits include a lump sum severance
payment equal to 100% of such named executive officer's base salary, plus a
pro rata portion of the current-year bonus opportunity, plus life, disability,
accident and group health insurance benefits substantially similar to those
received by such named executive officer immediately prior to termination for
a twelve (12) month period. In addition, all stock options granted prior to
1996, all stock options that are scheduled to vest in the year of termination
and one-third of all other stock options held by him, if any, shall become
vested and exercisable effective as of the day immediately prior to the date
of termination of such named executive officer. As consideration for these
benefits, each of Messrs. Halchishak and Ledlow agreed that during the term of
the severance agreement and for twenty-four (24) months after termination of
employment for any reason they would not solicit any customers of the Company
or hire or offer employment to any employee of the Company. Messrs. Harrington
and Wilson agreed that during the term of the severance agreement and for
twelve (12) months after termination of employment for any reason they would
not solicit any customers of the Company or hire or offer employment to any
employee of the Company. The severance agreements with Messrs. Halchishak and
Ledlow will continue in effect through December 31, 2001, that with Mr. Wilson
will continue in effect through April 2000 and that with Mr. Harrington will
continue in effect through June 2000.
The Company has also entered into an executive severance agreement ("1998
Severance Agreements") with each of Messrs. Halchishak, Harrington, Ledlow,
Waugaman and Wilson. The agreements provide that upon a change of control (as
defined in the 1998 Severance Agreements) of the Company, such executive
officers will be entitled to certain benefits upon the subsequent termination
of employment within two years following such change of control, unless such
termination is due to death or disability or if such termination is by the
Company for "cause" or by the officer other than for "good reason" (each as
defined in the 1998 Severance Agreements). The benefits under the agreements
include, in lieu of any other severance obligation of the Company, severance
payments equal to 200% of such executive officer's base salary, plus an
additional lump sum payment equal to the maximum bonus for the current year
plus the following two years, plus certain "gross-up" payments if any of the
other payments would be subject to "golden parachute" excise taxes. The
benefits also include continuation of health and life insurance for 18 months
following termination (unless earlier provided by another employer) and
vesting of all 401(k) plan accounts. In addition, all stock options accelerate
and become immediately vested and exercisable, and all restricted stock
immediately vests. The agreements also provide that, for twelve months
following a termination which gives rise to the benefits under the agreements,
such executive officers will not compete with the Company. The 1998 Severance
Agreements are, except as specifically provided therein, in addition to the
severance agreements described above.
FUTURE TRANSACTIONS
The Company has adopted a policy that it will not enter into any material
transaction in which a Company director or officer has a direct or indirect
financial interest, unless the transaction is determined by the Company's
Board of Directors to be fair to the Company or is approved by a majority of
the Company's disinterested directors or by the Company's stockholders, as
provided for under Delaware law. In addition, the Company's debt instruments
generally prohibit the Company from entering into any affiliate transaction on
other than arm's length terms.
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DESCRIPTION OF THE BANK FACILITY
The Company's bank credit facility consists of a $500.0 million revolving
credit facility (the "Revolver") and a $100.0 million seven-year term loan
facility (the "Term Loan" and together with the Revolver, the "Bank
Facility"). The Revolver contains provisions to periodically adjust the prime
and Eurodollar interest rate margins based on the Company's achievement of
specified total debt to EBITDA ratios. The total amount of credit available
under the Revolver is limited to a borrowing base equal to the sum of (i) 85%
of eligible accounts receivable of the Company's subsidiaries and (ii) 100% of
the value (lower of net book value or orderly liquidation value) of eligible
rental equipment through December 31, 1998; 90% of the value of eligible
rental equipment from January 1, 1999 through December 31, 1999; 85% of the
value of eligible rental equipment from January 1, 2000 through December 31,
2000; and 80% of the value of eligible rental equipment from January 1, 2001
through the expiration date of the Revolver. The Revolver expires December 2,
2002.
The Term Loan consists of a $100.0 million seven-year term loan facility,
which requires mandatory principal payments of $1.0 million on each of its
first six anniversaries, with the remaining principal balance due at maturity.
The Term Loan matures on December 2, 2004. Interest on the Term Loan is
payable monthly at either the prime rate plus 1.0% or the Eurodollar rate plus
2.5% (at the Company's option).
The Bank Facility has financial covenants for RSC regarding debt incurrence,
interest coverage, capital expenditures and investments (including
acquisitions), rental equipment utilization and minimum EBITDA levels. The
Bank Facility also contains covenants and provisions that restrict, among
other things, the ability of the Company and its subsidiaries to: (i) incur
additional indebtedness; (ii) incur liens on their property, (iii) enter into
contingent obligations; (iv) make certain capital expenditures and
investments; (v) engage in certain sales of assets; (vi) merge or consolidate
with or acquire another person or engage in other fundamental changes;
(vii) enter into leases; (viii) engage in certain transactions with
affiliates; and (ix) declare or pay dividends.
Borrowings under the Bank Facility are secured by all of the personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Bank Facility, and has granted liens
on substantially all of its assets (including the stock of its subsidiaries)
to secure such guaranty. The Bank Facility also restricts the Company from
declaring or paying dividends on its Common Stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Bank Facility. The Bank Facility also includes a $2.0 million letter of
credit facility. A commitment fee equal to 0.25% of the unused commitment,
excluding the face amount of all outstanding and undrawn letters of credit, is
also payable monthly in arrears. The obligation of the lenders to make loans
or issue letters of credit under the Bank Facility is subject to certain
customary conditions.
At August 7, 1998, the principal amount outstanding under the Revolver was
approximately $424.6 million, the average interest rate on such borrowings was
approximately 7.2%, and approximately $75.4 million was available to the
Company under the Revolver. Additionally, $100.0 million was outstanding under
the Term Loan at an interest rate of approximately 8.1% at August 7, 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RSC Canada, a wholly owned subsidiary of RSC, is negotiating a secured
revolving credit facility with lenders (or affiliates) who are parties to the
Bank Facility. The new Canadian facility is anticipated to be in an amount of
up to Cdn. $30.0 million, subject to certain borrowing base limitations. The
Canadian credit facility will be secured by substantially all of the assets of
RSC Canada and any subsidiary of RSC Canada and guaranteed by RSC, with the
guarantee being secured by the stock of RSC Canada. The Canadian credit
facility will expire on December 2, 2002, and will contain other terms
substantially similar to those contained in the Bank Facility.
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DESCRIPTION OF SENIOR SUBORDINATED NOTES
In May 1998, the Company consummated its offering of $200.0 million
aggregate principal amount of its 9% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes"). The Senior Subordinated Notes are general
unsecured obligations of the Company and will mature on May 15, 2008. The
Senior Subordinated Notes bear interest at a rate of 9% per annum, payable
semi-annually on May 15 and November 15 of each year, commencing on November
15, 1998. The Senior Subordinated Notes are redeemable, in whole or in part,
at the option of the Company from time to time on and after May 15, 2003, at
specified redemption prices. In addition, on or prior to May 15, 2001 the
Company, at its option, may redeem up to 35% of the principal amount of the
Senior Subordinated Notes originally issued with the net cash proceeds of one
or more equity offerings at a redemption price equal to 109% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date
of redemption, provided that at least 65% of the principal amount of Senior
Subordinated Notes issued under the Indenture remains outstanding immediately
after any such redemption. Upon a change of control, each holder of the Senior
Subordinated Notes will have the right to require the Company to purchase all
or a portion of such holder's Senior Subordinated Notes at a price equal to
101% of the principal amount thereof, plus accrued interest thereon, if any,
to the date of purchase. In addition, in certain circumstances, the Company
will be obligated to offer to purchase the Senior Subordinated Notes at 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase in the event of certain asset sales.
The Senior Subordinated Notes are subordinated in right of payment to all
existing and future senior indebtedness of the Company and rank pari passu in
right of payment with all future senior subordinated indebtedness of the
Company. The Senior Subordinated Notes are guaranteed on a senior subordinated
unsecured basis by all of the Company's domestic subsidiaries. The indenture
governing the Senior Subordinated Notes (the "Indenture") contains covenants
that, among other things, limit the ability of the Company and its restricted
subsidiaries to (i) incur additional indebtedness, (ii) pay dividends or make
other distributions with respect to capital stock of the Company and its
restricted subsidiaries, (iii) create certain liens, (iv) sell material assets
of the Company or its restricted subsidiaries, (v) engage in transactions with
affiliates and (vi) enter into certain mergers and consolidations.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Certificate of Incorporation authorizes 40,000,000 shares of Common
Stock, par value $.01 per share, and 500,000 shares of Preferred Stock, par
value $.01 per share. As of August 7, 1998, no shares of Preferred Stock and
20,797,396 shares of Common Stock were issued and outstanding, 1,255,824
shares of Common Stock were issuable upon exercise of outstanding options,
1,117,162 shares of Common Stock were reserved for issuance pursuant to the
Company's stock option and stock purchase plans and up to 393,518 shares of
Common Stock were reserved for issuance in connection with certain of the
Company's acquisitions.
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 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
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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--Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offerings, the Company will have outstanding an
aggregate of 23,467,316 shares of Common Stock (23,879,816 shares if the
Underwriters' overallotment option is exercised in full). All of the shares
sold in the Offerings will be freely tradable by persons other than affiliates
of the Company which will be subject to the resale limitations of Rule 144
adopted under the Securities Act.
REGISTRATION RIGHTS
Pursuant to the Stockholders' Agreement, certain of the Company's
stockholders have been granted piggyback registration rights with respect to
Common Stock owned by such stockholders. Such piggyback registration rights
may be exercised by such stockholders, subject to the 90-day lock-up period
described under "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 shares issued as a portion of the consideration for certain pending
and completed acquisitions.
Upon the consummation of the Offerings, there will be 2,500,171 shares of
Common Stock 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
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aggregate of 2,574,000 shares of Common Stock for issuance pursuant to the
1995 Plan, the 1996 Plan and the QSP Plan (collectively, the "Plans"). As of
August 7, 1998, the Company has issued options to purchase an aggregate of
1,388,757 shares of Common Stock (excluding options which have been cancelled)
under the 1995 Plan and the 1996 Plan, of which options for 132,933 shares
have been exercised. Additionally, the Company has issued 26,589 shares of
restricted stock under the 1996 Plan, and 20,882 shares of Common Stock under
the QSP Plan. To the extent not held by affiliates or subject to a lock-up
agreement, shares of Common Stock issued under the Plans will be available for
sale in the public market without restriction. See "Management."
RULE 144
In general, Rule 144, as currently in effect, provides that a person (or
persons whose sales are aggregated) who is an affiliate of the Company or who
has beneficially owned shares which are issued and sold in reliance upon
exemptions from registration under the Securities Act ("Restricted Shares")
for at least one year is entitled to sell within any three-month period a
number of shares that does not exceed the greater of one percent (1%) of the
then outstanding shares of Common Stock (beginning on the 91st day immediately
after the Offerings) or the average weekly trading volume in the Common Stock
during the four calendar weeks preceding the filing of a notice of intent to
sell. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not deemed to have
been an "affiliate" of the Company at any time during the three months
preceding a sale, and who has beneficially owned Restricted Shares for at
least two years, would be entitled to sell such shares under Rule 144(k)
without regard to volume limitations, manner-of-sale provisions, notice
requirements or the availability of current public information about the
Company. The Company, the Selling Stockholders, the Company's directors and
executive officers and certain of the Company's other present stockholders
have, subject to certain exceptions in the case of the Company, agreed that
they will not, directly or indirectly, offer, sell, contract to sell or
otherwise dispose of or transfer any shares of capital stock of the Company,
or any security convertible into, or exercisable or exchangeable for, such
capital stock, for a period of 90 days after the date of this Prospectus,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. 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."
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CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
GENERAL
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a Non-U.S. Holder, as defined below. As used herein, the term "Non-
U.S. Holder" means a holder that for United States federal income tax purposes
is an individual or entity other than (i) a citizen or individual resident of
the United States, (ii) a corporation or partnership created or organized in
or under the laws of the United States or of any political subdivision
thereof, (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source or (iv) a trust if both (A) a U.S. court is
able to exercise primary supervision over the administration of the trust and
(B) one or more U.S. persons have the authority to control all substantial
decisions of the trust. This discussion does not address all aspects of United
States federal income and estate taxes and does not deal with foreign, state
and local consequences that may be relevant to Non-U.S. Holders in light of
their personal circumstances, or to certain types of Non-U.S. Holders which
may be subject to special treatment under United States federal income tax
laws (for example, insurance companies, tax-exempt organizations, financial
institutions and broker-dealers). Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed regulations promulgated thereunder and administrative
and judicial interpretations thereof, all as of the date hereof, and all of
which are subject to change, possibly with retroactive effect. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISERS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF SHARES OF COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a resident
alien (as opposed to a nonresident alien) by virtue of being present in the
United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth
of the days present in the second preceding year). Resident aliens are subject
to U.S. federal income tax as if they were U.S. citizens.
DIVIDENDS
The Company does not anticipate paying cash dividends on its capital stock
in the foreseeable future. See "Price Range of Common Stock and Dividend
Policy." In the event, however, that dividends are paid on shares of Common
Stock, dividends paid to a Non-U.S. Holder of Common Stock will be subject to
withholding of United States federal income tax at a 30% rate, or such lower
rate as may be provided by an income tax treaty between the United States and
a foreign country if the Non-U.S. Holder is treated as a resident of such
foreign country within the meaning of the applicable treaty, unless (i) the
dividends are effectively connected with the conduct of a trade or business of
the Non-U.S. Holder within the United States and the Non-U.S. Holder provides
the payor with proper documentation and (ii) if a tax treaty applies, the
dividends are attributable to a United States permanent establishment
maintained by the Non-U.S. Holder. Dividends that are effectively connected
with the conduct of a trade or business within the United States and, if a tax
treaty applies, are attributable to such a United States permanent
establishment, are subject to United States federal income tax on a net income
basis (that is, after allowance for applicable deductions) at applicable
graduated individual or corporate rates. Any such effectively connected
dividends received by a foreign corporation may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.
Dividends paid before January 1, 2000 to an address outside the United
States will be presumed to be paid to a resident of the country of such
address for purposes of the withholding tax rules discussed above (unless the
payor has knowledge to the contrary) and, under the current interpretation of
United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. However, under newly issued Treasury
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regulations, in the case of dividends paid after December 31, 1999, a Non-U.S.
Holder generally will be subject to United States withholding tax at a 31%
rate under the backup withholding rules described below, rather than at a 30%
rate or a reduced rate under an income tax treaty, as described above, unless
certain Internal Revenue Service ("IRS") certification procedures (or, in the
case of payments made outside the United States with respect to an offshore
account, certain IRS documentary evidence procedures) are complied with.
Further, in order to claim the benefit of an applicable tax treaty rate for
dividends paid after December 31, 1999, a Non-U.S. Holder must comply with IRS
certification requirements. Certain IRS certification and disclosure
requirements must be complied with in order to be exempt from withholding
under the effectively connected income exemption. The new regulations also
provide special rules for dividend payments made to foreign intermediaries.
U.S. or foreign wholly owned entities that are disregarded for U.S. federal
income tax purposes and entities that are treated as fiscally transparent in
the United States, the applicable income tax treaty jurisdiction, or both.
Prospective investors should consult with their tax advisers concerning the
effect, if any, of the adoption of these new Treasury regulations on an
investment in the Common Stock.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) (a) the gain is effectively connected with a trade or
business conducted by the Non-U.S. Holder within the United States, and (b) if
a tax treaty applies, the gain is attributable to a United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-
U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, (iii) the Non-U.S. Holder is subject to tax pursuant to certain
provisions of the Code applicable to United States expatriates or (iv) the
Company is or has been a "U.S. real property holding corporation" for United
States federal income tax purposes at any time within the shorter of the five-
year period preceding such disposition or the period such Non-U.S. Holder held
the Common Stock. A corporation is a "U.S. real property holding corporation"
if the fair market value of the United States real property interests held by
the corporation is 50% or more of the aggregate fair market value of certain
assets of the corporation. The Company believes that it has not been and is
not currently a "U.S. real property holding corporation." If the Company were,
or were to become, a U.S. real property holding corporation, gains realized
upon a disposition of Common Stock by a Non-U.S. Holder which did not directly
or indirectly own more than 5% of the Common Stock during the shorter of the
periods described above generally would not be subject to United States
federal income tax so long as the Common Stock is "regularly traded" on an
established securities market. The Company believes that the Common Stock will
be treated as "regularly traded."
If a Non-U.S. Holder who is an individual falls under clause (i) above, such
individual generally will be taxed on the net gain derived from a sale of
Common Stock under regular graduated United States federal income tax rates.
If an individual Non-U.S. Holder falls under clause (ii) above, such
individual generally will be subject to a flat 30% tax on the gain derived
from a sale, which may be offset by certain United States capital losses
(notwithstanding the fact that such individual is not considered a resident
alien of the United States). Thus, individual Non-U.S. Holders who have spent
(or expect to spend) more than a de minimis period of time in the United
States in the taxable year in which they contemplate a sale of Common Stock
are urged to consult their tax advisers prior to the sale as to the U.S. tax
consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated
United States federal income tax rates and, in addition, will be subject to
the branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty.
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FEDERAL ESTATE TAX
Common Stock owned or treated as owned by an individual who is neither a
United States citizen nor a United States resident (as defined for United
States federal estate tax purposes) at the time of death will be included in
the individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax or other treaty provides otherwise and,
therefore, may be subject to United States federal estate tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, the Company must report annually
to the IRS and to each Non-U.S. Holder the amount of dividends paid to such
holder and the tax withheld with respect to such dividends. These information
reporting requirements apply even if withholding was not required because the
dividends were effectively connected with a trade or business in the United
States of the Non-U.S. Holder or withholding was reduced or eliminated by an
applicable income tax treaty. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder is a resident under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply (i) to dividends paid to Non-U.S.
Holders that are subject to the 30% withholding discussed above (or that are
not so subject because a tax treaty applies that reduces or eliminates such
30% withholding) or (ii) before January 1, 2000, to dividends paid to a Non-
U.S. Holder at an address outside of the United States. However, under newly
issued Treasury regulations, in the case of dividends paid after December 31,
1999, a Non-U.S. Holder generally will be subject to backup withholding at a
31% rate, unless certain IRS certification procedures (or, in the case of
payments made outside the United States with respect to an offshore account,
certain IRS documentary evidence procedures) are complied with, directly or
through an intermediary.
Backup withholding and information reporting generally will apply to
dividends paid to addresses inside the United States on shares of Common Stock
to beneficial owners that are not "exempt recipients" and that fail to provide
in the manner required certain identifying information.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Common Stock effected at a foreign
office of a broker. Before January 1, 2000, however, if such broker is, for
United States federal income tax purposes, a U.S. person, a controlled foreign
corporation or a foreign person, 50% or more of whose gross income for certain
periods is derived from activities that are effectively connected with the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a Non-U.S. Holder and certain other conditions are met or
(ii) the beneficial owner otherwise establishes an exemption. Further after
December 31, 1999, under the newly issued Treasury regulations referred to
above, information reporting and backup withholding may apply to payments of
the gross proceeds from the sale or redemption of Common Stock effected
through foreign offices of brokers having any of a broader class of
connections with the United States unless certain IRS certification
requirements are complied with. Prospective investors should consult with
their tax advisers regarding these Treasury regulations, and in particular
with respect to whether the use of a particular broker would subject the
investor to these rules.
Payment by a United States office of a broker of the proceeds of a sale of
Common Stock is subject to both backup withholding and information reporting
unless the beneficial owner certifies under penalties of perjury that it is a
Non-U.S. Holder or otherwise establishes an exemption. Backup withholding is
not an additional tax. Any amounts withheld under the backup withholding rules
will be allowed as a refund or a credit against such holder's United States
federal income tax liability provided the required information is furnished to
the IRS.
75
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
William Blair & Company, L.L.C., Morgan Stanley & Co. Incorporated, BT Alex.
Brown Incorporated and Legg Mason Wood Walker, Incorporated are acting as
representatives (the "U.S. Representatives") of each of the Underwriters named
below (the "U.S. Underwriters"). Subject to the terms and conditions set forth
in a U.S. purchase agreement (the "U.S. Purchase Agreement") among the
Company, the Selling Stockholders and the U.S. Underwriters, and concurrently
with the sale of 550,000 shares of Common Stock to the International Managers
(as defined below), the Company and the Selling Stockholders have agreed to
sell to the U.S. Underwriters, and each of the U.S. Underwriters severally and
not jointly has agreed to purchase from the Company and the Selling
Stockholders, the number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
William Blair & Company, L.L.C. ...................................
Morgan Stanley & Co. Incorporated..................................
BT Alex. Brown Incorporated .......................................
Legg Mason Wood Walker, Incorporated ..............................
---------
Total........................................................ 2,200,000
=========
</TABLE>
The Company and the Selling Stockholders have also entered into an
international purchase agreement (the "International Purchase Agreement") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters") for
whom Merrill Lynch International, William Blair & Company, L.L.C., Morgan
Stanley & Co. International Limited, BT Alex. Brown International, a division
of Bankers Trust International PLC and Legg Mason Wood Walker, Incorporated
are acting as lead managers (the "Lead Managers"). Subject to the terms and
conditions set forth in the International Purchase Agreement, and concurrently
with the sale of 2,200,000 shares of Common Stock to the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, the Company and the Selling
Stockholders have agreed to sell to the International Managers, and the
International Managers severally have agreed to purchase from the Company and
the Selling Stockholders, an aggregate of 550,000 shares of Common Stock. The
public offering price per share and the total underwriting discount per share
of Common Stock are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances, under the U.S.
Purchase Agreement and the International Purchase Agreement, the commitments
of non-defaulting Underwriters may be increased. The closings with respect to
the sale of shares of Common Stock to be purchased by the U.S. Underwriters
and the International Managers are conditioned upon one another.
The U.S. Representatives have advised the Company and the Selling
Stockholders that the U.S. Underwriters propose initially to offer the shares
of Common Stock to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After
the public offering, the public offering price, concession and discount may be
changed.
The Company has granted options to the U.S. Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
330,000 additional shares of Common Stock at the public offering price set
forth on the cover page of this Prospectus, less the underwriting discount.
The U.S. Underwriters may
76
<PAGE>
exercise these options solely to cover over-allotments, if any, made on the
sale of the Common Stock offered hereby. To the extent that the U.S.
Underwriters exercise these options, each U.S. Underwriter will be obligated,
subject to certain conditions, to purchase a number of additional shares of
Common Stock proportionate to such U.S. Underwriter's initial amount reflected
in the foregoing table. The Company also has granted options to the
International Managers, exercisable for 30 days after the date of this
Prospectus, to purchase up to an aggregate of 82,500 additional shares of
Common Stock to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
The Company and the Company's executive officers and directors have agreed
not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of or otherwise dispose of or
transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, without the prior written consent of Merrill Lynch on
behalf of the Underwriters for a period of 90 days after the date of this
Prospectus other than (x) in connection with the sale to the Underwriters of
the shares of Common Stock offered hereby or under the accompanying
International Prospectus or (y) 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 1996 Plan and the issuance of shares in connection with acquisitions. See
"Shares Eligible for Future Sale."
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares
of Common Stock to each other for purposes of resale at the public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to persons who are non-U.S. or non-Canadian persons or to persons
they believe intend to resell to persons who are non-U.S. or non-Canadian
persons, and the International Managers and any dealer to whom they sell shares
of Common Stock will not offer to sell or sell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. or Canadian persons, except in the case of transactions pursuant to the
Intersyndicate Agreement.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and International Managers may be required to
make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the U.S. Representatives are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection
with the Offerings, i.e., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the U.S. Representatives may reduce
that short position by purchasing Common Stock in the open market. The U.S.
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment option described above.
77
<PAGE>
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce
the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the Common Stock to the extent
that it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Certain of the Underwriters or their affiliates, including the U.S.
Representatives, have performed from time to time, and may perform in the
future, various general financing and banking services and transactions for
the Company and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary compensation. This offering
is being made pursuant to the provisions of Conduct Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc.
78
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby and certain other legal
matters in connection with the Offerings will be passed upon for the Company
by Latham & Watkins, Los Angeles, California. Certain partners of Latham &
Watkins, members of their families, related persons and others have an
indirect interest in, through a limited partnership, less than 1% of the
Common Stock of the Company. Such persons do not have the power to vote or
dispose of such shares. Certain legal matters in connection with the Offerings
will be passed upon for the Underwriters by Simpson Thacher & Bartlett.
EXPERTS
The consolidated financial statements and financial statement schedules of
Rental Service Corporation as of December 31, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing herein
and are included in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing. The consolidated financial
statements of Acme Holdings Inc. as of December 31, 1993 and 1994, and for
each of the three years in the period ended December 31, 1994, appearing in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
herein 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 herein and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The financial statements of Brute Equipment Co., d/b/a Foxx Hy-
Reach, Inc., as of December 31, 1995 and 1996, and for the years then ended,
appearing in this Prospectus and Registration Statement, have been audited by
McGladrey & Pullen, LLP, independent auditors, as set forth in their report
thereon appearing herein 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 Rent-It-Center, Inc. and Affiliates d/b/a
Center Rental & Sales as of October 31, 1996, and 1997, and for each of the
three years in the period ended October 31, 1997, appearing in this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing herein
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing. The financial statements of
JDW Enterprises, Inc. d/b/a Valley Rentals as of December 31, 1996 and 1997
and for the years then ended, appearing in this Prospectus and Registration
Statement, have been audited by Weintraub & Morrison, P.C., independent
auditors, as set forth in their report thereon appearing herein and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with 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 of the information set forth in the
Registration Statement, certain portions of which are omitted as permitted by
the rules and regulations of the Commission. For further information
pertaining to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement, including the exhibits thereto and the
financial statements, notes and schedules filed as a part thereof. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
79
<PAGE>
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports,
proxy statements and other information, as well as the Registration Statement
and the exhibits and schedules thereto, may be inspected, without charge, at
the public reference facility maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. Such materials can
also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005 or on the Commission's site on the Internet
at http://www.sec.gov.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Rental Service Corporation
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets--December 31, 1996 and 1997, and June 30,
1998 (unaudited)....................................................... F-4
Consolidated Statements of Operations--for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 and
1998 (unaudited)....................................................... F-5
Consolidated Statements of Redeemable Preferred Stock and Common
Stockholders' Equity (Deficit)--for the years ended December 31, 1995,
1996 and 1997, and for the six months ended June 30, 1998 (unaudited).. F-6
Consolidated Statements of Cash Flows--for the years ended December 31,
1995, 1996 and 1997, and for the six months ended June 30, 1997 and
1998 (unaudited)....................................................... F-7
Notes to Consolidated Financial Statements--December 31, 1997, and June
30, 1998 (unaudited)................................................... F-8
Consolidated Financial Statements of Acme Holdings Inc.
Report of Independent Auditors.......................................... F-29
Consolidated Balance Sheets--December 31, 1993 and 1994, and June 30,
1995 (unaudited)....................................................... F-30
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-31
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-32
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-33
Notes to Consolidated Financial Statements--December 31, 1994, and June
30, 1995 (unaudited)................................................... F-35
Combined Financial Statements of Industrial Air Tool
Report of Independent Auditors.......................................... F-47
Combined Balance Sheets--March 31, 1996 and 1997........................ F-48
Combined Statements of Operations--for the years ended March 31, 1996
and 1997 .............................................................. F-49
Combined Statements of Redeemable Stock and Other Stockholders' and
Partners' Equity--for the years ended March 31, 1996 and 1997 ......... F-50
Combined Statements of Cash Flows--for the years ended March 31, 1996
and 1997 .............................................................. F-51
Notes to Combined Financial Statements--March 31, 1997.................. F-52
Financial Statements of Brute Equipment Co. d/b/a Foxx Hy-Reach
Independent Auditor's Report............................................ F-57
Balance Sheets--December 31, 1995 and 1996, and March 31, 1997
(unaudited)............................................................ F-58
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-59
Statements of Stockholders' Equity--for the years ended December 31,
1995 and 1996, and for the three months ended March 31, 1997
(unaudited) ........................................................... F-60
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-61
Notes to Financial Statements--December 31, 1996, and March 31, 1997
(unaudited)............................................................ F-62
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Financial Statements of Rent-It-Center, Inc. and Affiliates d/b/a
Center Rental and Sales Report of Independent Auditors................... F-67
Combined Balance Sheets--October 31, 1996 and 1997...................... F-68
Combined Statements of Operations--for the years ended October 31, 1995,
1996 and 1997.......................................................... F-69
Combined Statements of Stockholders' and Members' Equity (Deficit)--for
the years ended October 31, 1995, 1996 and 1997 ....................... F-70
Combined Statements of Cash Flows--for the years ended October 31, 1995,
1996 and 1997.......................................................... F-71
Notes to Combined Financial Statements--October 31, 1997................ F-72
Financial Statements of JDW Enterprises, Inc. d.b.a. Valley Rentals
Independent Auditor's Report............................................ F-81
Balance Sheets--December 31, 1996 and 1997.............................. F-82
Statements of Operations--for the years ended December 31, 1996 and
1997................................................................... F-83
Statements of Changes in Stockholders' Equity--for the years ended
December 31, 1996 and 1997............................................. F-84
Statements of Cash Flows--for the years ended December 31, 1996 and
1997................................................................... F-85
Notes to the Financial Statements--December 31, 1997.................... F-87
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying consolidated balance sheets of Rental
Service Corporation (the "Company") as of December 31, 1996 and 1997, 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, 1997. 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, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
February 12, 1998
F-3
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997 JUNE 30, 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
------
Cash and cash equivalents........... $ 1,452,000 $ 8,932,000 $ 3,559,000
Accounts receivable, net of
allowance for doubtful accounts of
$2,165,000 and $2,925,000 at
December 31, 1996 and 1997,
respectively, and $3,642,000 at
June 30, 1998...................... 20,856,000 62,028,000 82,507,000
Other receivables and prepaid
expense............................ 3,170,000 3,217,000 9,727,000
Income tax receivable............... 1,563,000 638,000 2,000
Parts and supplies inventories, net
of reserve for obsolescence of
$782,000 and $2,181,000 at
December 31, 1996 and 1997,
respectively, and $3,355,000 at
June 30, 1998...................... 10,099,000 31,714,000 39,025,000
Deferred taxes (Note 11)............ 8,645,000 15,241,000 15,017,000
Rental equipment, principally
machinery, at cost, net of
accumulated depreciation of
$24,743,000 and $54,506,000 at
December 31, 1996 and 1997,
respectively, and $89,373,000 at
June 30, 1998 (Note 6)............. 116,921,000 314,696,000 543,363,000
Operating property and equipment, at
cost, net (Note 4)................. 20,043,000 35,799,000 46,969,000
Intangible assets, net (Note 5)..... 34,801,000 220,166,000 345,878,000
Other assets, primarily deferred
financing costs, net............... 1,383,000 6,895,000 12,704,000
------------ ------------ --------------
$218,933,000 $699,326,000 $1,098,751,000
============ ============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable.................... $ 20,302,000 $ 34,911,000 $ 51,206,000
Payroll and other accrued expenses.. 21,540,000 31,937,000 27,914,000
Accrued interest payable............ 514,000 2,179,000 4,215,000
Income taxes payable (Note 11)...... 48,000 1,686,000 7,218,000
Deferred taxes (Note 11)............ 12,863,000 30,857,000 33,159,000
Bank debt and long term obligations
(Note 6)........................... 68,594,000 306,975,000 654,658,000
------------ ------------ --------------
Total liabilities................... 123,861,000 408,545,000 778,370,000
Commitments and contingencies (Notes
6 and 9)
Stockholders' equity (Note 7):
Preferred stock, $.01 par value:
Authorized shares--500,000
Issued and outstanding shares--
none............................. -- -- --
Common stock, $.01 par value:
Authorized shares--40,000,000
Issued and outstanding shares--
11,376,378 and 19,833,437 at
December 31, 1996 and 1997,
respectively, and 20,784,666 at
June 30, 1998.................... 114,000 198,000 208,000
Additional paid-in capital........ 93,917,000 270,927,000 291,749,000
Common stock issuable--284,108
shares at December 31, 1997 and
132,834 shares at June 30, 1998.. -- 6,000,000 2,780,000
Deferred compensation expense..... -- -- (631,000)
Retained earnings................. 1,041,000 13,656,000 26,275,000
------------ ------------ --------------
Total stockholders' equity.......... 95,072,000 290,781,000 320,381,000
------------ ------------ --------------
$218,933,000 $699,326,000 $1,098,751,000
============ ============ ==============
</TABLE>
See accompanying notes.
F-4
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... $47,170,000 $94,218,000 $170,704,000 $64,327,000 $166,751,000
Sales of parts,
supplies and new
equipment............. 14,621,000 21,919,000 70,957,000 26,952,000 61,053,000
Sales of used
equipment............. 4,126,000 12,217,000 19,602,000 8,584,000 21,909,000
----------- ----------- ------------ ----------- ------------
Total revenues....... 65,917,000 128,354,000 261,263,000 99,863,000 249,713,000
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 27,854,000 55,202,000 87,552,000 33,677,000 86,024,000
Depreciation,
equipment rentals..... 7,691,000 17,840,000 37,413,000 14,036,000 35,499,000
Cost of sales of
parts, supplies and
new equipment......... 10,439,000 15,582,000 54,739,000 20,606,000 47,227,000
Cost of sales of used
equipment............. 2,178,000 8,488,000 12,927,000 5,696,000 15,579,000
----------- ----------- ------------ ----------- ------------
Total cost of
revenues............ 48,162,000 97,112,000 192,631,000 74,015,000 184,329,000
----------- ----------- ------------ ----------- ------------
Gross profit............ 17,755,000 31,242,000 68,632,000 25,848,000 65,384,000
Selling, general and
administrative
expense................ 6,421,000 12,254,000 20,996,000 8,469,000 14,404,000
Depreciation and
amortization, excluding
equipment rental
depreciation........... 1,186,000 2,835,000 5,373,000 2,287,000 4,326,000
Amortization of
intangibles............ 718,000 2,379,000 3,907,000 1,369,000 4,590,000
----------- ----------- ------------ ----------- ------------
Operating income........ 9,430,000 13,774,000 38,356,000 13,723,000 42,064,000
Interest expense, net... 3,314,000 7,063,000 14,877,000 4,627,000 20,008,000
----------- ----------- ------------ ----------- ------------
Income before income
taxes and extraordinary
items.................. 6,116,000 6,711,000 23,479,000 9,096,000 22,056,000
Provision for income
taxes (Note 11)........ 2,401,000 2,722,000 10,330,000 4,058,000 9,437,000
----------- ----------- ------------ ----------- ------------
Income before
extraordinary items.... 3,715,000 3,989,000 13,149,000 5,038,000 12,619,000
Extraordinary items,
loss on extinguishment
of debt less applicable
income tax benefit of
$305,000, $822,000 and
$386,000 in 1995, 1996
and 1997, respectively
(Note 6)............... 478,000 1,269,000 534,000 534,000 --
----------- ----------- ------------ ----------- ------------
Net income.............. 3,237,000 2,720,000 12,615,000 4,504,000 12,619,000
Redeemable preferred
stock accretion........ 1,717,000 1,643,000 -- -- --
----------- ----------- ------------ ----------- ------------
Net income available to
common stockholders.... $ 1,520,000 $ 1,077,000 $ 12,615,000 $ 4,504,000 $ 12,619,000
=========== =========== ============ =========== ============
Earnings per common
share (Note 3):
Income before
extraordinary items... $ .50 $ .34 $ .96 $ .43 $ .61
Extraordinary items.... (.12) (.18) (.04) (.05) --
----------- ----------- ------------ ----------- ------------
Net income............. $ .38 $ .16 $ .92 $ .38 $ .61
=========== =========== ============ =========== ============
Weighted average common
shares................. 4,032,315 6,875,618 13,652,933 11,857,720 20,633,406
=========== =========== ============ =========== ============
Earnings per common
share, assuming
dilution (Note 3):
Income before
extraordinary items... $ .49 $ .33 $ .94 $ .42 $ .60
Extraordinary items.... (.12) (.18) (.03) (.05) --
----------- ----------- ------------ ----------- ------------
Net income............. $ .37 $ .15 $ .91 $ .37 $ .60
=========== =========== ============ =========== ============
Weighted average common
shares, assuming
dilution............... 4,116,412 7,179,980 13,927,414 12,064,501 20,877,050
=========== =========== ============ =========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
-----------------------------------
TREASURY
SHARES AMOUNT STOCK
-------- ------------ -----------
<S> <C> <C> <C>
Balance at
December 31,
1994............ 256,061 $ 27,861,000 $(1,177,000)
Issuance of
common stock.... -- -- --
Retirement of
treasury stock.. (11,256) (1,177,000) 1,177,000
Redeemable
preferred stock
accretion....... -- 1,717,000 --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1995............ 244,805 28,401,000 --
Issuance of
redeemable
preferred
stock........... 75,000 7,500,000 --
Issuance of
common stock,
net of issuance
costs of
$8,723,000...... -- -- --
Exercise of
stock options... -- -- --
Redemption of
redeemable
preferred
stock........... (319,805) (37,874,000) --
Preferred stock
adjustment...... -- 330,000 --
Repurchase of
common stock
warrants........ -- -- --
Redeemable
preferred stock
accretion....... -- 1,643,000 --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1996............ -- -- --
Issuance of
common stock,
net of issuance
costs of
$9,937,000...... -- -- --
Issuance of
common stock in
connection with
acquisitions.... -- -- --
Common stock
issuable in
connection with
acquisitions.... -- -- --
Exercise of
stock options... -- -- --
Tax benefit of
stock options... -- -- --
Net income...... -- -- --
-------- ------------ -----------
Balance at
December 31,
1997............ -- -- --
Issuance of
common stock in
connection with
acquisitions
(unaudited)..... -- -- --
Issuance of
common stock
issuable in
connection with
acquisitions
(unaudited)..... -- -- --
Exercise of
stock options
(unaudited)..... -- -- --
Issuance of
restricted stock
(unaudited)..... -- -- --
Amortization of
deferred
compensation
expense for
restricted stock
issuances
(unaudited)..... -- -- --
Issuance of
common stock in
connection with
the QSP Plan
(unaudited)..... -- -- --
Net income
(unaudited)..... -- -- --
-------- ------------ -----------
Balance at June
30, 1998
(unaudited)..... -- $ -- $ --
======== ============ ===========
<CAPTION>
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------
COMMON STOCK
-------------------------------- ADDITIONAL COMMON DEFERRED RETAINED
TREASURY PAID-IN STOCK COMPENSATION EARNINGS
SHARES AMOUNT STOCK CAPITAL ISSUABLE EXPENSE (DEFICIT) TOTAL
----------- --------- ---------- ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............ 4,675,320 $ 47,000 $(523,000) $ 52,000 $ -- $ -- $(1,050,000) $ (1,474,000)
Issuance of
common stock.... 278,685 2,000 -- (2,000) -- -- -- --
Retirement of
treasury stock.. (706,275) (7,000) 523,000 (10,000) -- -- (506,000) --
Redeemable
preferred stock
accretion....... -- -- -- -- -- -- (1,717,000) (1,717,000)
Net income...... -- -- -- -- -- -- 3,237,000 3,237,000
----------- --------- ---------- ------------- ------------ ------------ ------------ -------------
Balance at
December 31,
1995............ 4,247,730 42,000 -- 40,000 -- -- (36,000) 46,000
Issuance of
redeemable
preferred
stock........... -- -- -- -- -- -- -- --
Issuance of
common stock,
net of issuance
costs of
$8,723,000...... 7,094,358 71,000 -- 95,152,000 -- -- -- 95,223,000
Exercise of
stock options... 34,290 1,000 -- -- -- -- -- 1,000
Redemption of
redeemable
preferred
stock........... -- -- -- -- -- -- -- --
Preferred stock
adjustment...... -- -- -- (330,000) -- -- -- (330,000)
Repurchase of
common stock
warrants........ -- -- -- (945,000) -- -- -- (945,000)
Redeemable
preferred stock
accretion....... -- -- -- -- -- -- (1,643,000) (1,643,000)
Net income...... -- -- -- -- -- -- 2,720,000 2,720,000
----------- --------- ---------- ------------- ------------ ------------ ------------ -------------
Balance at
December 31,
1996............ 11,376,378 114,000 -- 93,917,000 -- -- 1,041,000 95,072,000
Issuance of
common stock,
net of issuance
costs of
$9,937,000...... 7,345,224 73,000 -- 153,901,000 -- -- -- 153,974,000
Issuance of
common stock in
connection with
acquisitions.... 1,081,514 11,000 -- 22,788,000 -- -- -- 22,799,000
Common stock
issuable in
connection with
acquisitions.... -- -- -- -- 6,000,000 -- -- 6,000,000
Exercise of
stock options... 30,321 -- -- 85,000 -- -- -- 85,000
Tax benefit of
stock options... -- -- -- 236,000 -- -- -- 236,000
Net income...... -- -- -- -- -- -- 12,615,000 12,615,000
----------- --------- ---------- ------------- ------------ ------------ ------------ -------------
Balance at
December 31,
1997............ 19,833,437 198,000 -- 270,927,000 6,000,000 -- 13,656,000 290,781,000
Issuance of
common stock in
connection with
acquisitions
(unaudited)..... 696,892 7,000 -- 16,193,000 -- -- -- 16,200,000
Issuance of
common stock
issuable in
connection with
acquisitions
(unaudited)..... 151,274 2,000 -- 3,218,000 (3,220,000) -- -- --
Exercise of
stock options
(unaudited)..... 68,134 1,000 -- 564,000 -- -- -- 565,000
Issuance of
restricted stock
(unaudited)..... 26,589 -- -- 675,000 -- (675,000) -- --
Amortization of
deferred
compensation
expense for
restricted stock
issuances
(unaudited)..... -- -- -- -- -- 44,000 -- 44,000
Issuance of
common stock in
connection with
the QSP Plan
(unaudited)..... 8,340 -- -- 172,000 -- -- -- 172,000
Net income
(unaudited)..... -- -- -- -- -- -- 12,619,000 12,619,000
----------- --------- ---------- ------------- ------------ ------------ ------------ -------------
Balance at June
30, 1998
(unaudited)..... 20,784,666 $208,000 $ -- $291,749,000 $ 2,780,000 $(631,000) $26,275,000 $320,381,000
=========== ========= ========== ============= ============ ============ ============ =============
</TABLE>
See accompanying notes.
F-6
<PAGE>
RENTAL SERVICE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ----------------------------
1995 1996 1997 1997 1998
------------ ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 3,237,000 $ 2,720,000 $ 12,615,000 $ 4,504,000 $ 12,619,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 9,595,000 23,054,000 46,693,000 17,692,000 44,415,000
Extraordinary items.... 478,000 1,269,000 534,000 534,000 --
Interest paid in
kind.................. 710,000 1,706,000 -- -- --
Provision for losses
on accounts
receivable............ 1,040,000 1,692,000 2,596,000 1,010,000 1,291,000
Amortization of
deferred compensation
expense for
restricted stock
issuances............. -- -- -- -- 44,000
Gain on sale of used
equipment............. (1,948,000) (3,729,000) (6,675,000) (2,888,000) (6,330,000)
Changes in operating
assets and
liabilities, net of
effect of business
acquisitions:
Accounts receivable.. (3,346,000) (5,725,000) (20,923,000) (7,882,000) (8,735,000)
Other receivables and
prepaid expenses.... (1,182,000) (1,703,000) 845,000 226,000 1,356,000
Income tax
receivable.......... -- (1,563,000) 925,000 446,000 636,000
Other assets......... 1,351,000 379,000 792,000 (182,000) (115,000)
Parts and supplies
inventories......... (1,403,000) (2,444,000) (8,826,000) (866,000) (21,210,000)
Accounts payable..... 1,866,000 10,077,000 9,712,000 20,247,000 15,387,000
Payroll and other
accrued expenses.... (1,000,000) (3,523,000) (2,776,000) 1,093,000 (13,423,000)
Accrued interest
payable............. 737,000 (257,000) 1,665,000 910,000 2,036,000
Income taxes
payable............. (375,000) (172,000) 1,591,000 3,394,000 5,535,000
Deferred taxes, net.. 132,000 1,713,000 7,217,000 -- 238,000
------------ ------------- ------------- ------------- -------------
Net cash provided by
operating activities... 9,892,000 23,494,000 45,985,000 38,238,000 33,744,000
INVESTING ACTIVITIES
Acquisitions of rental
operations, net of cash
acquired (Note 2)...... (42,057,000) (27,270,000) (278,883,000) (119,550,000) (205,056,000)
Cash purchases of rental
equipment and operating
property and
equipment.............. (23,632,000) (86,842,000) (165,123,000) (100,781,000) (195,883,000)
Proceeds from sale of
used equipment......... 4,126,000 12,695,000 19,602,000 8,584,000 21,909,000
Proceeds from assets
held for sale.......... 2,652,000 16,668,000 -- -- --
------------ ------------- ------------- ------------- -------------
Net cash used in
investing activities... (58,911,000) (84,749,000) (424,404,000) (211,747,000) (379,030,000)
FINANCING ACTIVITIES
Proceeds from bank
debt................... 114,826,000 225,335,000 628,478,000 261,160,000 544,888,000
Payments on bank debt... (69,108,000) (213,511,000) (489,870,000) (138,705,000) (399,528,000)
Payments of debt
issuance costs......... (2,024,000) (984,000) (6,402,000) (3,202,000) (5,675,000)
Proceeds from long term
obligations............ 10,000,000 -- 100,000,000 -- 200,000,000
Payments on long term
obligations............ (3,873,000) (13,493,000) (366,000) (195,000) (509,000)
Proceeds from issuance
of redeemable preferred
stock.................. -- 7,500,000 -- -- --
Redemption of redeemable
preferred stock........ -- (37,874,000) -- -- --
Proceeds from issuance
of common stock, net of
issuance costs......... -- 95,223,000 153,974,000 55,643,000 --
Proceeds from exercise
of stock options....... -- 1,000 85,000 -- 565,000
Proceeds from QSP Plan
offering............... -- -- -- -- 172,000
Repurchase of common
stock warrants......... -- (945,000) -- -- --
------------ ------------- ------------- ------------- -------------
Net cash provided by
financing activities... 49,821,000 61,252,000 385,899,000 174,701,000 339,913,000
------------ ------------- ------------- ------------- -------------
Net increase (decrease)
in cash and cash
equivalents............ 802,000 (3,000) 7,480,000 1,192,000 (5,373,000)
Cash and cash
equivalents at
beginning of period.... 653,000 1,455,000 1,452,000 1,452,000 8,932,000
------------ ------------- ------------- ------------- -------------
Cash and cash
equivalents at end of
period................. $ 1,455,000 $ 1,452,000 $ 8,932,000 $ 2,644,000 $ 3,559,000
============ ============= ============= ============= =============
Supplemental disclosure
of cash flow
information:
Cash paid for interest.. $ 1,863,000 $ 5,614,000 $ 13,212,000 $ 3,716,000 $ 17,972,000
Cash paid for income
taxes.................. $ 1,545,000 $ 1,850,000 $ 279,000 $ 74,000 $ 3,020,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND JUNE 30, 1998
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE
SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. ACCOUNTING POLICIES
Basis of Presentation
Rental Service Corporation ("RSC" or the "Company"), a Delaware corporation,
operates in a single industry segment: the short-term rental of equipment,
including ancillary sales of parts, supplies and equipment, through a network
of rental locations throughout the United States. The nature of the Company's
business is such that short-term obligations are typically met by cash flow
generated from long-term assets. Consequently, consistent with industry
practice, the accompanying consolidated balance sheets are presented on an
unclassified basis.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Certain amounts in the prior year financial statements have been
reclassified to conform with the current year financial statement
presentation.
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the consolidated statements of operations includes
revenues earned on equipment rentals, fuel sales and rental equipment delivery
fees. Revenue from the sale of parts, supplies and new equipment and revenue
from the sale of used equipment is recorded at the time of delivery to or
pick-up by the customer.
Credit Policy
Most 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 26 states and Canada. The Company maintains
reserves it believes are adequate for potential credit losses.
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, commodity type
supplies and small- to medium-sized equipment for sale. All inventories are
valued at the lower of cost (first-in, first-out) or market.
F-8
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
using the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................. 3-7 years
Operating property and equipment............................. 3-36 years
Leasehold improvements....................................... Term of lease
</TABLE>
Rental equipment and operating property and equipment is depreciated to a
salvage value of 10% of cost. Amortization of assets under capital leases is
included in depreciation expense.
Intangible Assets
Intangible assets are recorded at cost and are amortized using the straight-
line method over their estimated useful lives; usually one to three years for
covenants not to compete and 30 to 40 years for goodwill. The recoverability
of goodwill attributable to the Company's acquisitions is analyzed annually
based on actual and projected levels of profitability and cash flows of the
locations acquired on an undiscounted basis.
Income Taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. Recognition of deferred tax
assets is limited to amounts considered by management to be more likely than
not 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
$491,000, $1,050,000, $1,108,000, $489,000 and $1,179,000 in advertising costs
during the years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998, respectively.
Debt Costs
Deferred financing costs are amortized using the straight-line method over
the lives of the related debt. Recorded deferred financing costs are written
off 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 6) was determined based on the average
effective interest rate payable over the period in which the debt was expected
to be outstanding, which was three years.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and,
accordingly, recognizes no compensation expense for stock option grants.
F-9
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions located throughout the country in order to limit exposure to any
one institution. The Company performs periodic evaluations of the relative
credit standing of those financial institutions considered in the Company's
investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers.
Fair Values of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities approximate fair value because of the immediate or short-term
maturity of these financial instruments. The fair value of long-term debt is
determined using current applicable interest rates as of the balance sheet
date and approximates the carrying value of such debt because the underlying
instruments are at variable rates which are repriced frequently.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. Earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the requirements
of SFAS No. 128, as well as Staff Accounting Bulletin No. 98 (issued by the
Securities and Exchange Commission in February 1998), which amends the
determination of and accounting for "cheap stock" in periods prior to an
initial public offering. The effect of dilutive securities is computed using
the treasury stock method.
Interim Financial Statements
The accompanying consolidated balance sheet at June 30, 1998 and the
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity and cash flows for the six-month periods ended June 30,
1997 and 1998 are unaudited and have been prepared on the same basis as the
audited consolidated financial statements included herein. In the opinion of
management, such unaudited consolidated financial statements include all
adjustments necessary to present fairly the information set forth therein,
which consist solely of normal recurring adjustments. The results of
operations for such interim periods are not necessarily indicative of results
for the full year.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which was required to be adopted in the first quarter of 1998. SFAS No. 130
established standards for the reporting and display of comprehensive income
and its components. Comprehensive income includes certain non-owner changes in
equity that are currently excluded from net income. Because the Company
historically has not experienced transactions that would be included in
comprehensive income, the adoption of SFAS No. 130 did not have a material
effect on the consolidated financial position, results of operations or cash
flows of the Company.
F-10
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company is required to adopt the
provisions of SFAS No. 131 in 1998. SFAS No. 131 establishes a new method by
which companies will report operating segment information. This method is
based on the manner in which management organizes the segments within a
company for making operating decisions and assessing performance. The Company
is evaluating the provisions of SFAS No. 131 and, upon adoption, may report
operating segments.
2. BUSINESS ACQUISITIONS
A principal component of the Company's business strategy is to continue to
grow through acquisitions that augment its present operations as well as
provide entry into new geographic markets. In keeping with this strategy, the
Company has made several acquisitions of rental operations. These acquisitions
have been accounted for as purchases and, accordingly, the acquired tangible
and identifiable intangible assets and liabilities have been recorded at their
estimated fair values at the dates of acquisition with any excess purchase
price reflected as goodwill in the accompanying consolidated financial
statements. Purchase accounting values for all acquisitions are assigned on a
preliminary basis, and are subject to adjustment when final information as to
the fair values of the net assets acquired is available. The operations of the
acquired businesses are included in the consolidated statements of operations
from the date of acquisition, except as described below.
The following table sets forth, for the periods indicated, the net assets
acquired, liabilities assumed, common stock issued or issuable and cash
purchase price for these acquisitions.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1995 1996 1997 1998
------------ ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Assets acquired......... $ 50,109,000 $20,316,000 $142,043,000 $106,296,000
Goodwill and covenants
not to compete......... 19,513,000 12,221,000 189,206,000 127,606,000
Less: common stock
issued or issuable..... -- -- (28,799,000) (16,200,000)
Less: liabilities
assumed................ (27,565,000) (5,267,000) (23,567,000) (12,646,000)
------------ ----------- ------------ ------------
Cash purchase price..... $ 42,057,000 $27,270,000 $278,883,000 $205,056,000
============ =========== ============ ============
Number of acquisitions.. 5 11 22 13
</TABLE>
F-11
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the unaudited pro forma results of operations
for each year in which acquisitions occurred and for the immediately preceding
year as if the above acquisitions were consummated at the beginning of the
immediately preceding year:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------- JUNE 30,
1995 1996 1997 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Total revenues.......... $118,954,000 $320,897,000 $459,172,000 $265,038,000
Income before non-
recurring and
extraordinary items ... 1,660,000 2,256,000 12,618,000 12,689,000
Net income.............. 47,030,000 (a) 987,000 12,084,000 12,689,000
Earnings (loss) per com-
mon share:
Income (loss) before
non-recurring and
extraordinary items.. (.01) .07 .83 .61
Net income (loss)..... 11.24 (a) (.08) .79 .61
Earnings (loss) per
common share, assuming
dilution:
Income (loss) before
non-recurring and
extraordinary items.. (.01) .07 .81 .60
Net income (loss)....... 11.01 (a) (.08) .78 .60
</TABLE>
- --------
(a) Net income in 1995 includes non-recurring and extraordinary items related
to RHI's prepackaged bankruptcy of $45,370,000 ($11.25 per share; $11.02
per share, assuming dilution), including a gain on extinguishment of debt
of $52,079,000 and charges for fresh start accounting adjustment and
reorganization items of $6,709,000.
On September 12, 1995, the Company acquired all of the assets and assumed
all of the liabilities of Acme Holdings Inc. (renamed as RSC Holdings, Inc.)
("RHI") and its subsidiaries. RHI and its subsidiaries had filed a prepackaged
joint plan of reorganization under Chapter 11 of title 11 of the United States
Code on July 13, 1995, which was subsequently approved by the court on August
24, 1995 and became effective on September 12, 1995. Pursuant to the approved
plan, RHI was merged into a wholly owned subsidiary of the Company, the
Company entered into the Revolver and Bank Note agreements (see Note 6), and
used proceeds therefrom of $35,350,000 to pay in full satisfaction old
outstanding notes payable of RHI that had an aggregate principal balance at
that time of approximately $78,000,000. Additionally, the Company paid RHI's
debtor-in-possession facility of approximately $3,795,000 and assumed the
remaining liabilities of RHI in exchange for full releases from substantially
all of RHI's note holders.
In connection with the acquisition of RHI, the Company decided to sell,
close or dispose of RHI's rental locations in California, as they did not meet
the Company's financial performance criteria and were not part of the
Company's strategic plans. The assets related to those rental locations,
consisting primarily of rental equipment and accounts receivable, were
classified as assets held for sale in the Company's 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
F-12
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company sold or closed all of the California locations, and had a remaining
balance in the accrual of $912,000 at December 31, 1996. During the year ended
December 31, 1997, the remaining accrual was utilized for expenses relating to
the disposal of the California locations.
On April 25, 1997, the Company acquired all of the outstanding stock of
Comtect, Inc. and subsidiaries d/b/a Industrial Air Tool ("IAT") for $32.6
million in cash and 189,189 shares of RSC common stock. Up to an additional
108,108 shares of RSC common stock may be paid to the sellers over a three
year period if certain performance objectives are met, of which 36,036 shares
were issuable at December 31, 1997 and were issued during the first quarter of
1998. Such contingent shares are valued and recorded at the date such
contingencies are resolved. IAT was an "on-site" small tool provider, rental
management company and maintenance, repair and operations ("MRO") supplier,
operating in Texas and Louisiana. IAT's balance sheet was consolidated with
the Company's as of April 25, 1997. This acquisition resulted in approximately
$25.1 million in goodwill, which is being amortized over 40 years. Pursuant to
the acquisition agreement, the Company assumed effective control of IAT's
operations on March 1, 1997 and has included IAT's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
On June 5, 1997, the Company acquired substantially all of the assets of
Brute Equipment Co. d/b/a Foxx Hy-Reach Company ("Foxx") for $32.7 million in
cash and 284,250 shares of RSC common stock, of which 233,034 shares were
issued to the seller at closing, with the remaining 51,216 shares issued to
the seller 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, of which 29,877 shares were
issuable at December 31, 1997 and were issued during the first quarter of
1998. Such contingent shares are valued and recorded at the date such
contingencies are resolved. Foxx specialized in the rental and sale of aerial
equipment to construction and industrial customers and operated in Iowa and
Illinois. This acquisition resulted in approximately $22.3 million in
goodwill, which is being amortized over 40 years.
On June 17, 1997, the Company acquired substantially all of the assets of
Central States Equipment, Inc. and Equipment Lessors, Inc. (collectively,
"Central") for approximately $18.0 million in cash and 204,867 shares of RSC
common stock, of which 102,435 shares of RSC common stock will be issued to
the sellers over a five year period, and may be accelerated to three years if
certain performance objectives are met (of which 34,145 shares were issuable
at December 31, 1997 and were issued during the first quarter of 1998).
Central specialized in the rental and sale of aerial equipment, ladders and
scaffolding and operated in Kansas, Missouri and Oklahoma. This acquisition
resulted in approximately $11.7 million in goodwill, which is being amortized
over 40 years.
On December 2, 1997, the Company acquired all of the outstanding stock of
Rent-It-Center, Inc. d/b/a Center Rentals and Sales and substantially all of
the assets of certain affiliated entities (collectively, "Center") for
approximately $116.9 million in cash (including the payoff of approximately
$16.0 million of assumed debt) and 482,315 shares of RSC common stock (of
which 64,544 shares will be issued over seven years, subject to earlier
issuance within three years if certain performance objectives are achieved).
Center was an independent equipment rental company that also sold a variety of
equipment ranging from small tools to heavy equipment, including related
commodity supplies. Center operated in Colorado, New Mexico, Texas, Kansas,
Missouri and Nebraska. Center's balance sheet was consolidated with the
Company's as of December 2, 1997. This acquisition resulted in approximately
$90.6 million in goodwill, which is being amortized over 40 years. Pursuant to
the acquisition agreements, the Company assumed effective control of Center's
operations on November 1, 1997 and has included Center's revenues, costs and
expenses from such date in its consolidated statements of operations, net of
related imputed purchase price adjustments.
On December 12, 1997, the Company acquired all of the outstanding stock of
Siems Rental & Sales Co., Inc. ("Siems") for approximately $21.3 million in
cash (including the payoff of approximately $13.3 million of
F-13
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
assumed debt) and 126,315 shares of RSC common stock. Siems was an independent
equipment rental company engaged in the rental, sales and service of various
types of construction and industrial equipment, operating in Maryland,
Delaware, Pennsylvania and Virginia. Siems' balance sheet is consolidated with
the Company's as of December 12, 1997. This acquisition resulted in
approximately $6.8 million in goodwill, which is being amortized over 40
years. Pursuant to the acquisition agreement, the Company assumed effective
control of Siems' operations on November 1, 1997 and has included Siems'
revenues, costs and expenses from such date in its consolidated statements of
operations, net of related imputed purchase price adjustments.
On February 3, 1998, the Company acquired substantially all of the assets of
JDW Enterprises, Inc. d/b/a Valley Rentals ("Valley") for $93.6 million in
cash and 435,602 shares of RSC common stock. Valley was an independent
equipment rental company operating in Arizona and New Mexico. This acquisition
resulted in approximately $57.0 million in goodwill, which is being amortized
over 40 years.
On April 1, 1998, the Company acquired all of the outstanding stock of
James S. Peterson Enterprises, Inc. d/b/a Metroquip Rental Centers
("Metroquip") for approximately $51.2 million in cash (including the payoff of
assumed debt) and 193,090 shares of RSC common stock. Up to an additional
95,727 shares of RSC common stock may be paid to the seller over a three-year
period if certain performance objectives are met. Such contingent shares will
be valued and recorded at the date such contingencies are resolved. Metroquip
rented, sold and supported aerial work platforms and contractors' equipment,
and operated in Minnesota and Nebraska. Metroquip's balance sheet was
consolidated with the Company's as of April 1, 1998. This acquisition resulted
in approximately $33.0 million in goodwill, which is being amortized over
40 years. Pursuant to the acquisition agreement, the Company assumed effective
control of Metroquip's operations on March 1, 1998 and has included
Metroquip's revenues, costs and expenses from such date in its consolidated
statements of operations, net of related imputed purchase price adjustments.
On April 2, 1998, the Company acquired all of the outstanding stock of
T&M Rental, Inc. ("T&M") for approximately $21.9 million in cash (including
the payoff of assumed debt). Up to 33,132 shares of RSC common stock may be
paid to the seller over a three-year period if certain performance objectives
are met. Such contingent shares will be valued and recorded at the date such
contingencies are resolved. T&M was an independent rental company operating in
Indiana. T&M's balance sheet was consolidated with the Company's as of
April 2, 1998. This acquisition resulted in approximately $15.7 million in
goodwill, which is being amortized over 40 years. Pursuant to the acquisition
agreement, the Company assumed effective control of T&M's operations on
March 1, 1998 and has included T&M's revenues, costs and expenses from such
date in its consolidated statements of operations, net of related imputed
purchase price adjustments.
The common stock issuable in the accompanying consolidated balance sheets is
associated with the common stock relating to the acquisitions of Foxx (51,216
shares), Central (102,435 shares) and Center (64,544 shares) that vests over
future time periods, and the common stock relating to the acquisitions of IAT
(36,036 shares) and Foxx (29,877 shares) that was earned and payable at
December 31, 1997 based on the achievement of performance objectives. During
the first six months of 1998, 151,274 shares of the common stock issuable were
paid to the sellers of IAT (36,036 shares), Foxx (81,093 shares) and Central
(34,145 shares).
F-14
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share and
earnings per share, assuming dilution:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Income before
extraordinary items.. $ 3,715,000 $ 3,989,000 $13,149,000 $ 5,038,000 $12,619,000
Preferred stock
accretion............ (1,717,000) (1,643,000) -- -- --
----------- ----------- ----------- ----------- -----------
Income before
extraordinary items
available to common
stockholders......... $ 1,998,000 $ 2,346,000 $13,149,000 $ 5,038,000 $12,619,000
=========== =========== =========== =========== ===========
Net income............ $ 3,237,000 $ 2,720,000 $12,615,000 $ 4,504,000 $12,619,000
Preferred stock
accretion............ (1,717,000) (1,643,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net income available
to common
stockholders......... $ 1,520,000 $ 1,077,000 $12,615,000 $ 4,504,000 $12,619,000
=========== =========== =========== =========== ===========
Denominator:
Weighted average
shares outstanding... 4,116,412 7,020,405 13,637,747 11,918,778 20,440,033
Common stock issuable
in connection with
acquisitions......... -- -- 89,088 14,352 211,211
Unvested restricted
stock outstanding.... (84,097) (144,787) (73,902) (75,410) (17,838)
----------- ----------- ----------- ----------- -----------
Denominator for earnings
per share.............. 4,032,315 6,875,618 13,652,933 11,857,720 20,633,406
Effect of dilutive
securities:
Add-back of unvested
restricted stock
outstanding.......... 84,097 144,787 73,902 75,410 17,838
Common stock options.. -- 120,414 182,016 131,371 219,535
Common stock issuable
in connection with
acquisitions based on
the achievement of
performance
objectives........... -- -- 16,478 -- --
Common stock to be
issued in connection
with the QSP Plan.... -- -- 2,085 -- 6,271
Common stock
warrants............. -- 39,161 -- -- --
----------- ----------- ----------- ----------- -----------
Dilutive potential
common shares...... 84,097 304,362 274,481 206,781 243,644
----------- ----------- ----------- ----------- -----------
Denominator for earnings
per share, assuming
dilution............... 4,116,412 7,179,980 13,927,414 12,064,501 20,877,050
=========== =========== =========== =========== ===========
</TABLE>
In accordance with SFAS No. 128, weighted average common shares excludes the
effects of the potential issuance of all shares contingent on the achievement
of performance objectives, until the related objectives have been achieved.
F-15
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment........ $14,638,000 $30,539,000 $44,250,000
Leasehold improvements................... 2,695,000 4,391,000 5,342,000
Furniture, fixtures and computer
equipment............................... 5,385,000 8,269,000 10,623,000
Land and buildings....................... 1,828,000 2,277,000 2,335,000
----------- ----------- -----------
Total.................................. 24,546,000 45,476,000 62,550,000
Less: accumulated depreciation and
amortization............................ 4,503,000 9,677,000 15,581,000
----------- ----------- -----------
$20,043,000 $35,799,000 $46,969,000
=========== =========== ===========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Covenants not to compete............... $ 2,281,000 $ 3,201,000 $ 3,514,000
Goodwill............................... 34,766,000 223,052,000 352,997,000
----------- ------------ ------------
Total................................ 37,047,000 226,253,000 356,511,000
Less: accumulated amortization......... 2,246,000 6,087,000 10,633,000
----------- ------------ ------------
$34,801,000 $220,166,000 $345,878,000
=========== ============ ============
</TABLE>
The Company has entered into non compete agreements with the former owners
of certain acquired businesses. The agreements are generally for terms of one
to three years and prohibit the former owners from competing with the Company
in the business of renting equipment in certain counties located in the area
of the acquired business.
F-16
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BANK DEBT AND LONG TERM OBLIGATIONS
Bank debt and long term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1996 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
$500,000,000 Revolving Line of Credit
(the "Revolver") with banks; interest at
the prime rate plus 0.25%, due monthly,
or the Eurodollar rate plus 1.75%, due
on demand, at the Company's option;
principal due December 2, 2002. The
interest rate in effect at December 31,
1996 and 1997 and June 30, 1998 was
8.3%, 7.8% and 7.1%, respectively....... $67,867,000 $206,475,000 $351,834,000
$100,000,000 Term Loan (the "Term Loan")
with banks; interest at the prime rate
plus 1.0%, due monthly, or the
Eurodollar rate plus 2.5%, due on
demand, at the Company's option;
principal due in annual installments of
$1,000,000 on each of the first six
anniversaries, with the remaining
principal balance due on December 2,
2004. The interest rate in effect at
December 31, 1997 and June 30, 1998 was
8.5% and 8.1%, respectively............. -- 100,000,000 100,000,000
$200,000,000 9% Senior Subordinated Notes
due 2008 (the "Senior Subordinated
Notes"); interest due semi-annually each
May 15 and November 15, beginning
November 15, 1998....................... -- -- 200,000,000
Other.................................... 727,000 500,000 2,824,000
----------- ------------ ------------
$68,594,000 $306,975,000 $654,658,000
=========== ============ ============
</TABLE>
On December 2, 1997, the Company amended and restated the Revolver to
increase its total available financing to $600.0 million. This increase
consisted of an increase in the availability under the Revolver to $500.0
million and the implementation of the new $100.0 million Term Loan (together
with the Revolver, the "Bank Facility"). In addition, this new financing
package extended the maturity date of the Revolver to December 2, 2002;
changed the methodology for determining the interest rate margins; increased
the allowed levels of capital expenditures and investments; and amended
several covenants, including the computation methodology of certain financial
covenants.
In connection with the issuance of the Senior Subordinated Notes in May
1998, the Company amended the Revolver to (i) reduce the interest rate margins
by 0.25%, (ii) increase the allowed levels of capital expenditures and
investments to $220.0 million in 1998, $235.0 million in 1999, $250.0 million
in 2000, $270.0 million in 2001 and $340.0 million in each of 2002, 2003 and
2004 (plus amounts reinvested from asset sales), (iii) change certain
financial and other covenants and (iv) permit the issuance of the Senior
Subordinated Notes.
The amended and restated Revolver contains provisions to periodically adjust
the prime and Eurodollar interest rate margins based on the Company's
achievement of specified total debt to EBITDA ratios. The total amount of
credit available under the Revolver is limited to a borrowing base equal to
the sum of (i) 85% of eligible accounts receivable of the Company's
subsidiaries and (ii) 100% of the value (lower of net book value or orderly
liquidation value) of eligible rental equipment through December 31, 1998; 90%
of the value of eligible rental equipment from January 1, 1999 through
December 31, 1999; 85% of the value of eligible rental
F-17
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
equipment from January 1, 2000 through December 31, 2000; and 80% of the value
of eligible rental equipment from January 1, 2001 through the expiration date
of the Revolver.
The Term Loan consists of a $100.0 million seven-year term loan facility,
which requires mandatory principal payments of $1.0 million on each of its
first six anniversaries, with the remaining principal balance due at maturity.
The Term Loan matures on December 2, 2004. Interest on the Term Loan is
payable monthly at either the prime rate plus 1.0% or the Eurodollar rate plus
2.5% (at the Company's option).
The Bank Facility has financial covenants for RSC regarding debt incurrence,
interest coverage, capital expenditures and investments (including
acquisitions), rental equipment utilization and minimum EBITDA levels. The
Bank Facility also contains covenants and provisions that restrict, among
other things, the ability of the Company and its subsidiaries to: (i) incur
additional indebtedness; (ii) incur liens on their property, (iii) enter into
contingent obligations; (iv) make certain capital expenditures and
investments; (v) engage in certain sales of assets; (vi) merge or consolidate
with or acquire another person or engage in other fundamental changes;
(vii) enter into leases; (viii) engage in certain transactions with
affiliates; and (ix) declare or pay dividends. For the period ended June 30,
1998, the Company is in compliance with all covenants of the Bank Facility.
Borrowings under the Bank Facility are secured by all of the personal
property of the Company's subsidiaries and a pledge of the capital stock and
intercompany debt of the Company's subsidiaries. RSC is a guarantor of the
obligations of its subsidiaries under the Bank Facility, and has granted liens
on substantially all of its assets (including the stock of its subsidiaries)
to secure such guaranty. The Bank Facility also restricts the Company from
declaring or paying dividends on its Common Stock. In addition, the Company's
subsidiaries are guarantors of the obligations of the other subsidiaries under
the Bank Facility. The Bank Facility includes a $2.0 million letter of credit
facility. A commitment fee equal to 0.25% of the unused commitment, excluding
the face amount of all outstanding and undrawn letters of credit, is also
payable monthly in arrears. The obligation of the lenders to make loans or
issue letters of credit under the Bank Facility is subject to certain
customary conditions.
The amounts outstanding under the Revolver at December 31, 1996 and 1997 and
June 30, 1998 were approximately $67.9 million, $206.5 million and $351.8
million, respectively, with approximately $28.9 million, $138.0 million and
$148.2 million, respectively, available based on the borrowing base.
On May 13, 1998, the Company issued the Senior Subordinated Notes in a
private placement pursuant to Rule 144A. The Senior Subordinated Notes call
for semi-annual interest payments on May 15 and November 15 of each year
(beginning November 15, 1998) and mature on May 15, 2008. The Senior
Subordinated Notes are guaranteed by substantially all of the Company's
current and future domestic subsidiaries, and contain covenants restricting
additional indebtedness, certain payments by the Company and its subsidiaries,
asset sales, liens, mergers and consolidations and transactions with
affiliates.
In connection with an amendment to the Revolver in January 1997, the Company
wrote-off the related unamortized deferred financing costs and recorded a loss
on extinguishment of debt of $920,000, net of income taxes of $386,000, which
has been classified as an extraordinary item in the accompanying consolidated
statements of operations for the year ended December 31, 1997.
In connection with the implementation of an amendment to the Revolver in
September 1996, the Company wrote off the related deferred financing costs and
recorded a loss on extinguishment of debt of $2.5 million 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
(the "Bank Note") on September 12, 1995 with a financial institution that
provided $10.0 million of 13% senior secured notes.
F-18
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additionally, the financial institution was issued warrants entitling the
purchase of 87,120 shares of common stock. On September 24, 1996, the Company
repaid the Bank Note and repurchased the related warrants for $13.0 million,
utilizing proceeds from its initial public offering. This repayment resulted
in a reduction of additional paid-in capital of $945,000 and a gain on
extinguishment of debt of $362,000, which has been classified as an
extraordinary item, net of income taxes of $142,000, in the accompanying
consolidated statements of operations for the year ended December 31, 1996.
In 1995, the Company paid off the borrowings under a previous revolver upon
entering into the Revolver, resulting in a loss on extinguishment of such debt
of $783,000, which has been classified as an extraordinary item, net of income
taxes of $305,000, in the accompanying consolidated statements of operations
for the year ended December 31, 1995.
The aggregate annual maturities of bank debt and long term obligations as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
REVOLVER TERM LOAN OTHER TOTAL
------------ ------------ -------- ------------
<S> <C> <C> <C> <C>
1998....................... $ -- $ 1,000,000 $238,000 $ 1,238,000
1999....................... -- 1,000,000 27,000 1,027,000
2000....................... -- 1,000,000 27,000 1,027,000
2001....................... -- 1,000,000 27,000 1,027,000
2002....................... 206,475,000 1,000,000 27,000 207,502,000
Thereafter................. -- 95,000,000 154,000 95,154,000
------------ ------------ -------- ------------
$206,475,000 $100,000,000 $500,000 $306,975,000
============ ============ ======== ============
</TABLE>
7. 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 (the "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 $37.9 million. 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.
Increase in Authorized Common Stock
On November 3, 1997, the Company began soliciting written consent of its
stockholders for the approval of an increase in the number of authorized
shares of its common stock, $.01 par value, from 20 million to 40 million
shares. Stockholder approval of the increase became effective on November 28,
1997. On December 11, 1997, the Company amended its Certificate of
Incorporation to effect such increase.
F-19
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Purchase Agreements
In 1995, the Company entered into stock purchase agreements with the current
chairman and a current senior vice president of operations (the former chief
financial officer) for the sale of 278,685 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 repurchase any unvested shares at the original issuance price.
At December 31, 1996 and 1997 and June 30, 1998, there were 81,923, 9,529
and none of these shares, respectively, which had not yet vested and were
subject to the Company's repurchase option at $.01 per share.
Stock Option Plans
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
On July 25, 1995, the Board of Directors of the Company adopted a Stock
Option Plan (the "1995 Plan") whereby 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. The aggregate number
of such shares that may be issued upon exercise of options under the 1995 Plan
may not exceed 324,000. Generally, the stock options granted under the 1995
Plan will expire ten years from the date such options were granted. The
options currently outstanding under the 1995 Plan 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. At June 30, 1998, no shares were available for
future stock option grants under the 1995 Plan.
On February 5, 1997, the Company's stockholders approved and the Company
adopted the 1996 Equity Participation Plan of Rental Service Corporation (the
"1996 Plan"). The 1996 Plan authorized 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"). On
April 29, 1998, the Company's stockholders approved a proposal to increase the
number of shares of the Company's common stock authorized for issuance under
the 1996 Plan to 2,000,000. 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. Generally, the stock options granted under the 1996 Plan
will expire ten years from the date such options were granted. The options
currently outstanding under the 1996 Plan generally become exercisable in
equal installments over a four-year period from the date of grant. At June 30,
1998, 916,440 shares of common stock were available for future Awards under
the 1996 Plan.
On January 14, 1998, the Company granted its current chairman, 190,000 stock
options and 10,000 shares of restricted stock under the 1996 Plan. The options
and restricted stock are subject to vesting in equal
F-20
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
installments over four years, however, the options may vest earlier if certain
performance criteria are met. The options were granted at an exercise price
equal to the fair market value of the Company's common stock on the date of
grant. The restricted stock was valued at the fair market value of the
Company's common stock on the date of grant, and the resulting deferred
compensation expense is being amortized over the vesting period. On February
25, 1998, the chairman surrendered to the Company options to purchase 57,000
shares of common stock in order to ensure the number of shares of common stock
available for issuance pursuant to the 1996 Plan was sufficient to allow
certain grants of stock options to other officers.
On April 29, 1998, the Company granted the chairman 40,411 stock options and
16,589 shares of restricted stock under the 1996 Plan. The options and
restricted stock are subject to vesting in equal installments over four years,
however, the options may vest earlier if certain performance criteria are met.
The options were granted at an exercise price equal to the fair market value
of the Company's common stock on the date of grant. The restricted stock was
valued at the fair market value of the Company's common stock on the date of
grant, and the resulting deferred compensation expense is being amortized over
the vesting period.
A summary of the Company's stock option activity, and related information,
for the years ended December 31, 1995, 1996 and 1997 and the six months ended
June 30, 1998 follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
AVAILABLE NUMBER EXERCISE PRICE PER
FOR OPTIONS OF SHARES PER SHARE SHARE
----------- --------- ---------------- --------
<S> <C> <C> <C> <C>
Balance at December 31,
1994........................ -- -- $ -- $ --
Authorized Shares--1995
Plan........................ 324,000 -- -- --
Grants--1995 Plan............ (129,690) 129,690 .01 .01
--------- --------- -------
Balance at December 31,
1995........................ 194,310 129,690 .01 .01
Grants--1995 Plan............ (209,190) 209,190 7.032--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............ (717,913) 717,913 18.00--26.875 20.66
Exercises--1995 Plan......... -- (30,321) .01--14.11 2.82
Forfeitures--1996 Plan....... 80,580 (80,580) 18.00--20.25 18.72
Cancellations--1995 Plan..... -- (5,400) 14.11 14.11
--------- --------- -------
Balance at December 31,
1997........................ 364,527 876,952 .01--26.875 19.09
Authorized Shares--1996 Plan
(unaudited)................. 1,000,000 -- -- --
Grants--1995 Plan
(unaudited)................. (1,860) 1,860 22.875 22.875
Grants--1996 Plan
(unaudited)................. (510,747) 510,747 20.1875-28.8125 22.52
Restricted Stock Grants--1996
Plan (unaudited)............ (26,589) 26,589 0.01 0.01
Exercises--1995 Plan
(unaudited)................. -- (41,360) .01--14.11 1.91
Exercises--1996 Plan
(unaudited)................. -- (26,774) 18.00--20.25 18.15
Forfeitures--1996 Plan
(unaudited)................. 91,109 (91,109) 20.1875--25.875 21.86
Cancellations--1995 Plan
(unaudited)................. -- (2,250) 14.11 14.11
--------- --------- -------
Balance at June 30, 1998
(unaudited)................. 916,440 1,254,655 $ .01--28.8125 $ 20.48
========= ========= =======
</TABLE>
F-21
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Options outstanding at December 31, 1997 have exercise prices ranging from
$.01 to $26.875 per share, with a weighted average exercise price of $19.09
per share, as outlined in the following table:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
EXERCISE AVERAGE EXERCISE
NUMBER OF PRICE REMAINING NUMBER OF PRICE
RANGE OF OPTIONS PER CONTRACTUAL OPTIONS PER
EXERCISE PRICES OUTSTANDING SHARE LIFE EXERCISABLE SHARE
--------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$.01.................. 45,675 $ .01 7.56 23,745 $ .01
$7.032--$14.11........ 73,944 12.16 8.19 19,325 12.06
$18.00--$21.00........ 637,070 19.99 9.12 55,000 19.64
$24.75--$26.875....... 120,263 25.81 9.70 -- --
------- ------ ---- ------ ------
Totals.............. 876,952 $19.09 9.04 98,070 $13.39
======= ====== ==== ====== ======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1995, 1996 and 1997 was $.01, $10.23 and $9.23, respectively.
Employee Stock Purchase Plan
On April 28, 1997, the Company's stockholders approved, and the Company
adopted, the Employee Qualified Stock Purchase Plan of Rental Service
Corporation (the "QSP Plan"). Under the QSP Plan, the Company has reserved
250,000 shares of common stock for sale to employees. The QSP Plan allows
eligible employees of the Company to purchase shares of common stock at the
lesser of 85% of the fair market value of such shares at the beginning of each
semiannual offering period or 85% of the fair market value of such shares on
the date of exercise of an installment of the purchase right. Purchases are
limited to 15% of an employee's eligible compensation, subject to a maximum
purchase of 1,500 shares in any semiannual offering period. The QSP Plan
commenced on July 1, 1997. At June 30, 1998, 241,660 shares of common stock
remain available under the QSP Plan.
Pro Forma Information
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, 1996 and 1997: risk-free interest rates of 6.28%, 6.28%
and 5.71%, respectively; a dividend yield of 0%; volatility factors of the
expected market price of the Company's Common Stock of .641, .641 and .415,
respectively; and a weighted average expected life of the option of five
years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's employee
stock options.
F-22
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1997
---------- ---------- -----------
<S> <C> <C> <C>
Pro forma net income................... $3,237,000 $2,597,000 $10,964,000
Pro forma net income per share......... .38 .14 .80
Pro forma net income per share,
assuming dilution..................... .37 .13 .79
</TABLE>
Because SFAS 123 is applicable only to options granted after December 31,
1994, its pro forma effect is not fully reflected until 1997. The effects of
applying SFAS 123 for the years ended December 31, 1995, 1996 and 1997 are not
likely to be representative of the effects on reported net income for future
years.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a Section 401(k) employee savings plan (Savings Plan)
covering substantially all full-time employees upon completion of at least
1,000 hours of service and nine months of continuous employment.
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, 1995, 1996 and
1997 and the six months ended June 30, 1997 and 1998, the Company made
discretionary contributions totaling $0, $150,000, $436,000, $181,000 and
$435,000, respectively.
9. COMMITMENTS AND CONTINGENCIES
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 $2,397,000, $3,081,000,
$5,353,000, $2,244,000 and $5,190,000 for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 8,018,000
1999........................................................... 7,136,000
2000........................................................... 6,089,000
2001........................................................... 4,797,000
2002........................................................... 3,282,000
Thereafter..................................................... 4,831,000
-----------
$34,153,000
===========
</TABLE>
Purchase Obligations
At July 10, 1998, the Company was obligated, under noncancellable purchase
commitments, to purchase $89.9 million of equipment.
F-23
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Risk Management
The Company currently has an insurance deductible of $5,000 per occurrence
for physical damage or loss to its rental equipment, and is self-insured for
physical damage or loss to its delivery vehicles. 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 per
occurrence and annual aggregate liability limits of $1.0 million, with excess
umbrella coverage up to $100.0 million.
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 $763,000, $652,000 and $456,000 at December 31, 1996 and 1997 and June
30, 1998, 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
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.
10. RELATED PARTY TRANSACTIONS
During 1995, the Company paid RHI approximately $742,000 in connection with
certain management services. Also during 1995, certain expenses incurred by
RHI were paid by the Company and vice versa.
One of the stockholders of the Company receives an investment banking fee
from the Company in connection with certain of the Company's acquisitions. The
fee was calculated at 1.5% of the total of the purchase price plus acquisition
costs plus planned first year capital expenditures less one-seventh of the
seller's original cost of rental equipment. Such fees paid to the stockholder
during the years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1997 and 1998 totaled $663,000, $388,000, $1,084,000,
$1,084,000 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, 1995, 1996 and
1997 totaled $235,000, $235,000 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, may utilize the stockholder's investment banking services
under the same fee arrangement.
F-24
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the acquisition of Center, the Company entered into
leases for certain of Center's facilities with David P. Lanoha, a director of
the Company, and certain partnerships affiliated with Mr. Lanoha. The leases
initially expire in 2002, with options to extend for three periods of five
years each. The aggregate annual rent under such leases is $720,000. Prior to
the acquisition of Center, these locations had been leased by Center from Mr.
Lanoha and his affiliates. The previous leases were terminated in connection
with the acquisition of Center.
From time to time, the Company also leases facilities from former owners of
acquired businesses, who may be current employees of the Company.
11. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal................................. $1,135,000 $ -- $ 2,669,000
State................................... 337,000 187,000 279,000
---------- ---------- -----------
1,472,000 187,000 2,948,000
Deferred:
Federal................................. 581,000 1,550,000 6,402,000
State................................... 43,000 163,000 594,000
---------- ---------- -----------
624,000 1,713,000 6,996,000
Extraordinary item........................ 305,000 822,000 386,000
---------- ---------- -----------
$2,401,000 $2,722,000 $10,330,000
========== ========== ===========
</TABLE>
For interim periods, the provision for income taxes is based upon the
estimated income tax rate for the full fiscal year.
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,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities........................... $ 3,310,000 $ 5,004,000
Inventory reserve............................. 677,000 1,496,000
Bad debt reserve.............................. 1,245,000 504,000
Net operating loss carryforwards.............. 6,563,000 7,948,000
Alternative minimum tax credit................ 1,590,000 4,776,000
Valuation allowance........................... (4,740,000) (4,487,000)
------------ ------------
8,645,000 15,241,000
Deferred tax liabilities:
Depreciation and amortization................. (12,863,000) (30,857,000)
------------ ------------
Net deferred tax liability...................... $ (4,218,000) $(15,616,000)
============ ============
</TABLE>
F-25
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's effective income tax rate varied from the statutory U.S.
federal income tax rate (34% in 1995 and 1996, 35% in 1997) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Expected provision using the statutory
tax rate............................. $ 2,079,000 $2,282,000 $ 8,218,000
State taxes, net of federal tax
benefit.............................. 290,000 204,000 753,000
Permanent differences, primarily
amortization of intangibles.......... 213,000 341,000 732,000
Other................................. (181,000) (105,000) 627,000
----------- ---------- -----------
$ 2,401,000 $2,722,000 $10,330,000
=========== ========== ===========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $18.4 million that expire in
years 2005 through 2012. In addition the Company had combined state net
operating loss carryforwards of approximately $20.1 million that expire in
years 1998 through 2012. Approximately $8.5 million of the federal
carryforwards and $800,000 of the state carryforwards are attributable to the
Company's acquisition of RHI. For financial reporting purposes a valuation
allowance of approximately $4.0 million and $3.7 million at December 31, 1996
and 1997, 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 future profitability of certain
subsidiaries of RHI.
In connection with the 1997 acquisitions of IAT, Center and Siems,
approximately $4.5 million of net deferred tax liabilities were assumed by the
Company. As a result of these acquisitions, the Company also obtained
approximately $500,000 of alternative minimum tax credit carryovers. The
separate company alternative minimum tax credit carryovers are subject to
restrictions in accordance with Internal Revenue Service Code Section 383, and
the ultimate utilization of the alternative minimum tax credits is further
limited based upon the future profitability of the acquired companies.
The Company also has alternative minimum tax credit carryovers of
approximately $4.6 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. Approximately
$600,000 of the federal and all of the state alternative minimum tax credit
carryovers resulted from the Company's acquisition of RHI. For financial
reporting purposes a valuation allowance of approximately $800,000 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 allowances decreased approximately $3.1 million in 1996 and
$253,000 in 1997. The decrease in the 1996 valuation allowance is principally
due to an approximately $9.5 million decrease in the estimated net operating
loss that is not expected to be realized from the Company's discontinued
California operations. The decrease in the 1997 valuation allowance is
principally due to a decrease in the estimated state net operating loss that
is not expected to be realized from the Company's discontinued California
operations.
Any tax benefit resulting from the utilization of the net operating loss
carryforwards or the tax credit carryovers obtained in the acquisition of RHI
will be accounted for as a reduction of the purchase price in the periods they
are realized.
F-26
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR-TO-
QUARTER QUARTER QUARTER QUARTER DATE
-------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total revenues:
1996........................... $ 27,197 $31,267 $34,631 $35,259 $128,354
1997........................... 41,309 58,554 72,469 88,931 261,263
1998........................... 108,663 141,050 N/A N/A 249,713
Gross profit:
1996........................... 6,048 7,758 8,318 9,118 31,242
1997........................... 10,978 14,870 18,841 23,943 68,632
1998........................... 26,936 38,448 N/A N/A 65,384
Income before extraordinary
items:
1996........................... 330 897 952 1,810 3,989
1997........................... 2,183 2,855 3,920 4,191 13,149
1998........................... 5,484 7,135 N/A N/A 12,619
Net income (loss):
1996........................... 330 897 (317) 1,810 2,720
1997........................... 1,649 2,855 3,920 4,191 12,615
1998........................... 5,484 7,135 N/A N/A 12,619
Earnings (loss) per common share:
1996
Income (loss) before
extraordinary items........... $ (.04) $ .06 $ .07 $ .16 $ .34
Extraordinary items............ -- -- (.21) -- (.18)
-------- ------- ------- ------- --------
Net income (loss).............. $ (.04) $ .06 $ (.14) $ .16 $ .16
======== ======= ======= ======= ========
1997
Income before extraordinary
items......................... $ .19 $ .23 $ .26 $ .26 $ .96
Extraordinary items............ (.04) -- -- -- (.04)
-------- ------- ------- ------- --------
Net income..................... $ .15 $ .23 $ .26 $ .26 $ .92
======== ======= ======= ======= ========
1998
Income before extraordinary
items......................... $ .27 .34 $ .61
Extraordinary items............ -- -- --
-------- ------- --------
Net income..................... $ .27 .34 N/A N/A $ .61
======== ======= ========
Earnings (loss) per common share,
assuming dilution:
1996
Income (loss) before
extraordinary items........... $ (.04) $ .06 $ .07 $ .16 $ .33
Extraordinary items............ -- -- (.20) -- (.18)
-------- ------- ------- ------- --------
Net income (loss).............. $ (.04) $ .06 $ (.13) $ .16 $ .15
======== ======= ======= ======= ========
1997
Income before extraordinary
items......................... $ .19 $ .23 $ .26 $ .26 $ .94
Extraordinary items............ (.05) -- -- -- (.03)
-------- ------- ------- ------- --------
Net income..................... $ .14 $ .23 $ .26 $ .26 $ .91
======== ======= ======= ======= ========
1998
Income before extraordinary
items......................... $ .27 .34 $ .60
Extraordinary items............ -- --
-------- ------- --------
Net income..................... $ .27 .34 N/A N/A $ .60
======== ======= ========
</TABLE>
The earnings per share amounts for 1996 and the first three quarters of 1997
have been restated to comply with the requirements of SFAS No. 128.
F-27
<PAGE>
RENTAL SERVICE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED)
On July 20, 1998, the Company amended the Bank Facility to allow for a
separate credit facility in Canada of up to Cdn. $45.0 million and to make
certain other changes.
On July 29, 1998, the Company acquired all of the outstanding stock of M.J.
Struckel & Company, Inc. ("Struckel") for approximately $21.2 million in cash
(including the payoff of assumed debt). Struckel rented and sold a variety of
aerial equipment to customers in the construction industry, and operated in
Illinois and Missouri. Struckel's balance sheet was consolidated with the
Company's as of July 29, 1998. Pursuant to the acquisition agreement, the
Company assumed effective control of Struckel's operations on July 1, 1998 and
has included Struckel's revenues, costs and expenses from such date in its
consolidated statements of operations, net of related imputed purchase price
adjustments.
Subsequent to June 30, 1998, the Company has completed two additional
acquisitions for a total combined purchase price of approximately $10.6
million in cash. The two acquired equipment rental companies operated in
Canada and Illinois.
As of August 7, 1998, the Company was party to non-binding letters of intent
to acquire seven equipment rental businesses for a total combined purchase
price of approximately $52.9 million in cash (including the assumption of
approximately $1.3 million of debt). These acquisitions are subject to a
number of closing conditions, including the execution of definitive purchase
agreements, RSC board of directors approval and, in some cases, expiration or
early termination of the waiting period under the Hart-Scott-Rodino Act.
F-28
<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-29
<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-30
<PAGE>
ACME HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1992 1993 1994 1994 1995
----------- ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals
(Note 1)............. $58,423,000 $ 55,504,000 $57,444,000 $28,296,000 $26,772,000
Sales of parts,
supplies and used
equipment............ 10,166,000 7,985,000 10,890,000 4,765,000 5,282,000
----------- ------------ ----------- ----------- -----------
Total revenues.......... 68,589,000 63,489,000 68,334,000 33,061,000 32,054,000
Costs and expenses:
Operating expenses.... 36,134,000 40,454,000 37,912,000 18,569,000 17,516,000
Cost of sales of
parts, supplies and
used equipment....... 7,074,000 6,087,000 8,188,000 3,565,000 3,912,000
General and
administrative
expense.............. 7,106,000 7,338,000 11,180,000 4,631,000 5,648,000
Depreciation and
amortization
expense.............. 10,494,000 11,347,000 9,933,000 5,132,000 4,765,000
Restructure costs
(Note 2)............. -- 1,887,000 -- -- --
Provision for rental
equipment
retirements.......... -- 880,000 -- -- --
----------- ------------ ----------- ----------- -----------
Total costs and
expenses............... 60,808,000 67,993,000 67,213,000 31,897,000 31,841,000
----------- ------------ ----------- ----------- -----------
Operating income
(loss)................. 7,781,000 (4,504,000) 1,121,000 1,164,000 213,000
Interest expense........ 8,422,000 9,279,000 9,927,000 4,897,000 5,198,000
----------- ------------ ----------- ----------- -----------
Loss before income
taxes.................. (641,000) (13,783,000) (8,806,000) (3,733,000) (4,985,000)
Provision for income
taxes (Note 9)......... 427,000 274,000 61,000 124,000 60,000
----------- ------------ ----------- ----------- -----------
Net loss................ $(1,068,000) $(14,057,000) $(8,867,000) $(3,857,000) $(5,045,000)
=========== ============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<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-32
<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-33
<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-34
<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
F-35
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes since 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.
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.
F-36
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-37
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-38
<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 default. Moreover, because the covenants are
based on the trailing 12 months' earnings, pursuant to
F-39
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Public Offering of Holdings' stock, up to 20% of the originally
issued aggregate principal amount of Senior
F-40
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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-41
<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-42
<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-43
<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-44
<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-45
<PAGE>
ACME HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1994, deferred income taxes reflect the tax effects of temporary
differences between the value of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of Holdings' net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1994
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 8,614,000 $ 11,899,000
Alternative minimum tax credit................. 754,000 754,000
Allowance for doubtful accounts................ 384,000 501,000
Accrued health & general insurance............. 1,298,000 1,257,000
State taxes, net............................... 297,000 123,000
Other accruals................................. 1,733,000 1,183,000
----------- ------------
Total deferred tax assets...................... 13,080,000 15,717,000
Valuation allowance for deferred tax assets.... (7,396,000) (11,596,000)
----------- ------------
Net deferred tax assets.......................... 5,684,000 4,121,000
Deferred tax liabilities:
Depreciation, tax over book.................... (5,904,000) (4,146,000)
Other accruals................................. (205,000) (350,000)
----------- ------------
Total deferred tax liabilities................... (6,109,000) (4,496,000)
----------- ------------
Net deferred tax liabilities..................... $ (425,000) $ (375,000)
=========== ============
</TABLE>
A reconciliation between the provision for income taxes computed by applying
the federal statutory tax rate to loss before taxes for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1992 1993 1994
--------- ----------- -----------
<S> <C> <C> <C>
Federal tax benefit at statutory
rate................................. $(218,000) $(4,686,000) $(2,994,000)
Losses without benefit............... 218,000 4,686,000 2,994,000
State taxes.......................... 427,000 274,000 61,000
--------- ----------- -----------
$ 427,000 $ 274,000 $ 61,000
========= =========== ===========
</TABLE>
At December 31, 1994, Holdings has approximately $29,300,000 of net
operating loss carryforwards for federal income tax purposes that expire
$9,500,000 in 2005, $6,000,000 in 2006, $1,700,000 in 2007 and $6,800,000 in
2008 and $5,300,000 in 2009. In addition, Holdings has net operating loss
carryforwards for California income tax purposes of approximately $17,800,000
which are available to offset taxable income starting in 1993 and expire
$4,300,000 in 1996, $5,800,000 in 1997, $3,900,0000 in 1998 and $3,800,000 in
1999. The ultimate realization of the benefit of these loss carryforwards is
dependent on Holdings achieving proper levels of operating profits in the
future.
Holdings also has alternative minimum tax credit carryovers of approximately
$590,000 for federal income tax purposes and $164,000 for California income
tax purposes which are available to offset future regular income tax that is
in excess of the alternative minimum tax in such year. The credits carry over
indefinitely.
Pursuant to the Tax Reform Act of 1986, use of Holdings' net operating loss
carryforwards and other tax attributes may be substantially limited if a
cumulative change in ownership of more than 50% occurs within any three year
period. As of December 31, 1994, a cumulative change of more than 50% occurred
which could significantly impact the future benefit of the federal and state
net operating loss carryforwards under Internal Revenue Service Code Section
382.
10. SUBSEQUENT EVENT
Holdings has decided to relocate its corporate office to Scottsdale, Arizona
during the second and third quarters of 1995.
F-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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.
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>
F-53
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-54
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-55
<PAGE>
INDUSTRIAL AIR TOOL
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS
Pursuant to a Purchase Agreement signed March 14, 1997, all of the
outstanding common and preferred stock of Comtect was purchased on April 25,
1997 by Rental Service Corporation (RSC), effective March 1, 1997, in exchange
for $32.6 million in cash and 189,189 shares of RSC Common Stock. Up to an
additional 108,108 shares of RSC Common Stock may be paid to the sellers over
a three year period if certain performance objectives are met. Under the terms
of the Purchase Agreement all previously factored accounts receivable sold to
GT Financial Ltd. were repurchased by Comtect, and all real estate owned by
Shield and leased to Comtect was purchased by Comtect, effective March 31,
1997, and Bayview ceased its affiliation with Comtect. The transaction closed
on April 25, 1997, and IAT's balance sheet was consolidated with RSC's under
the purchase method of accounting as of that date. Pursuant to the acquisition
agreement, RSC assumed effective control of IAT's operations on March 1, 1997
and has included IAT's revenues of $4,322,000 and costs and expenses of
$3,848,000 from such date in its consolidated statements of operations for the
three months ended March 31, 1997, net of related imputed purchase price
adjustments of $48,000.
F-56
<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/ McGLADREY & PULLEN, LLP
Moline, Illinois
April 26, 1997, except for the last
paragraph in Note 11 as to which
the date is May 1, 1998
F-57
<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-58
<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-59
<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-60
<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-61
<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.
F-62
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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-63
<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-64
<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. See Note 11 for subsequent settlement.
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-65
<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 EVENTS
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.
On May 1, 1998 the litigation referred to in Note 9 was settled prior to
final appeal. The Company's portion of the settlement was approximately
$250,000.
F-66
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Rental Service Corporation
We have audited the accompanying combined balance sheets as of October 31,
1997 and 1996, of Rent-It-Center, Inc. and Affiliates listed in Note 1, and
the related combined statements of operations, stockholders' and members'
equity (deficit) and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of
the companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position at October
31, 1997 and 1996, of Rent-It-Center, Inc. and Affiliates listed in Note 1,
and the combined results of their operations and their cash flows for each of
the three years in the period ended October 31, 1997 in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
November 7, 1997
F-67
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Cash..................................................... $ -- $ 283,407
Accounts receivable, net of allowances for doubtful
accounts of $96,000 and $192,000 at October 31, 1996 and
1997, respectively...................................... 4,854,397 5,409,613
Parts and supplies inventories........................... 2,013,637 2,993,454
Prepaid and recoverable income taxes..................... 208,668 243,284
Other receivables and prepaid expenses................... 385,177 138,917
Deferred income taxes.................................... 98,991 467,432
Rental equipment, principally machinery, at cost, net of
accumulated depreciation of $13,526,000 and $17,849,000
at October 31, 1996 and 1997, respectively.............. 37,134,177 33,752,745
Operating property and equipment, at cost, net........... 3,755,028 4,908,510
Intangible assets, net of accumulated amortization of
$79,000 and $203,000 at October 31, 1996 and 1997,
respectively............................................ 1,561,279 1,437,954
Cash surrender value of life insurance policies.......... 161,013 --
----------- -----------
Total assets......................................... $50,172,367 $49,635,316
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' AND MEMBERS' EQUITY
-------------------------------------------------
<S> <C> <C>
Bank overdraft........................................... $ 43,263 $ --
Accounts payable......................................... 2,854,990 3,064,990
Payroll and other accrued expenses....................... 1,904,166 1,279,896
Bank debt and long-term obligations...................... 21,182,250 16,729,243
Deferred income taxes.................................... 3,215,192 4,944,750
----------- -----------
Total liabilities.................................... 29,199,861 26,018,879
----------- -----------
Commitments and contingencies
Stockholders' and members' equity:
Common stock........................................... 11,600 11,600
Retained earnings...................................... 20,377,616 22,460,867
Members' equity........................................ 583,290 1,143,970
----------- -----------
20,972,506 23,616,437
----------- -----------
Total liabilities and stockholders' and members'
equity.............................................. $50,172,367 $49,635,316
=========== ===========
</TABLE>
See accompanying notes.
F-68
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Equipment rentals..................... $21,225,254 $25,279,134 $34,791,441
Sales of parts, supplies and new
equipment............................ 9,117,503 10,518,131 12,411,690
Sales of used equipment............... 1,852,560 1,253,608 2,593,140
----------- ----------- -----------
Total revenue....................... 32,195,317 37,050,873 49,796,271
Cost of revenue:
Cost of equipment rentals, excluding
equipment depreciation............... 8,411,128 10,039,913 16,194,742
Rental equipment depreciation......... 3,147,577 4,426,614 6,364,659
Cost of sales of parts, supplies and
new equipment........................ 8,268,688 9,607,343 11,873,647
Cost of sales of used equipment....... 1,030,779 629,056 1,924,962
----------- ----------- -----------
Total cost of revenue............... 20,858,172 24,702,926 36,358,010
----------- ----------- -----------
Gross profit........................ 11,337,145 12,347,947 13,438,261
Selling, general and administrative
expenses............................. 4,557,859 5,149,382 7,058,017
Operating property and equipment
depreciation and amortization........ 356,917 503,245 889,215
Amortization of intangibles........... 21,793 30,301 123,325
----------- ----------- -----------
Operating income.................... 6,400,576 6,665,019 5,367,704
Other income (expense):
Charitable contributions.............. (306,222) (311,970) (6,996)
Interest income....................... 51,362 35,855 30,900
Interest expense...................... (316,368) (588,880) (1,599,573)
----------- ----------- -----------
Income before income taxes.......... 5,829,348 5,800,024 3,792,035
Provision for income taxes............ 2,017,136 1,985,530 1,328,504
----------- ----------- -----------
Net income.......................... $ 3,812,212 $ 3,814,494 $ 2,463,531
=========== =========== ===========
</TABLE>
See accompanying notes.
F-69
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF STOCKHOLDERS' AND MEMBERS' EQUITY (DEFICIT)
YEARS ENDED OCTOBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
RENT-IT-CENTER, INC.
--------------------------
LANOHA LEASING
LIMITED LIABILITY
COMPANY, D/B/A
COMMON STOCK, CENTER RENTAL AND
$1 PAR VALUE, SALES-- CENTER RENTAL AND
50,000 SHARES KANSAS CITY, SALES--OMAHA, ZUNI RENTAL
AUTHORIZED L.L.C. L.L.C. ENTERPRISES, L.L.C.
-------------- ----------------- ----------------- -------------------
RETAINED MEMBERS' EQUITY MEMBERS' EQUITY MEMBERS' EQUITY
SHARES AMOUNT EARNINGS (DEFICIT) (DEFICIT) (DEFICIT) TOTALS
------ ------- ----------- ----------------- ----------------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at November 1,
1994................... 11,600 $11,600 $13,699,475 $(81,323) $(144,752) $ -- $13,485,000
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Net income............. -- -- 3,360,550 332,137 119,525 -- 3,812,212
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1995................... 11,600 11,600 16,990,425 250,814 (25,227) -- 17,227,612
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Net income (loss)...... -- -- 3,456,791 160,798 225,178 (28,273) 3,814,494
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1996................... 11,600 11,600 20,377,616 411,612 199,951 (28,273) 20,972,506
Cash dividends paid.... -- -- (69,600) -- -- -- (69,600)
Capital contribution... -- -- -- -- -- 250,000 250,000
Net income (loss)...... -- -- 2,152,851 (83,678) 335,538 58,820 2,463,531
------ ------- ----------- -------- --------- -------- -----------
Balances at October 31,
1997................... 11,600 $11,600 $22,460,867 $327,934 $ 535,489 $280,547 $23,616,437
====== ======= =========== ======== ========= ======== ===========
</TABLE>
See accompanying notes.
F-70
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Operating activities
Net income........................... $ 3,812,212 $ 3,814,494 $ 2,463,531
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provisions for (reductions in)
allowances for losses on accounts
receivable........................ 6,000 (12,832) 96,332
Provision for inventory
obsolescence...................... -- -- 156,182
Depreciation and amortization...... 3,526,287 4,960,160 7,377,199
Gain on sales of used equipment.... (821,781) (624,552) (668,178)
Deferred income tax expense........ 226,336 1,104,508 1,361,117
Changes in operating assets and
liabilities, net of the effect of
a business acquisition:
Accounts receivable.............. (269,520) (211,783) (651,548)
Parts and supplies inventories... (170,870) (340,376) (1,135,999)
Prepaid and recoverable income
taxes........................... (150,286) (58,382) (34,616)
Other receivables and prepaid
expenses........................ (63,726) (12,893) 246,260
Accounts payable................. 623,131 550,700 210,000
Payroll and other accrued
expenses........................ 469,401 223,242 (624,270)
Accrued income taxes............. (59,695) -- --
----------- ------------ -----------
Net cash provided by operating
activities.................... 7,127,489 9,392,286 8,796,010
Investing activities
Acquisition of rental operations, net
of cash acquired.................... -- (12,945,607) --
Purchases of rental equipment and
operating property and equipment.... (8,497,199) (15,053,391) (6,950,886)
Proceeds from sales of used
equipment........................... 1,852,560 1,253,608 2,593,140
Decrease (increase) in cash surrender
value of life insurance policies.... (49,524) (52,432) 161,013
----------- ------------ -----------
Net cash used in investing
activities.................... (6,694,163) (26,797,822) (4,196,733)
Financing activities
Principal borrowings under long-term
debt arrangements................... $ 650,000 $ 22,953,961 $ 2,175,000
Principal payments on long-term
debt................................ (1,796,800) (5,313,841) (6,628,007)
Increase (decrease) in bank
overdraft........................... 208,247 (164,984) (43,263)
Capital contribution................. -- -- 250,000
Cash dividends paid.................. (69,600) (69,600) (69,600)
----------- ------------ -----------
Net cash provided by (used in)
financing activities.......... (1,008,153) 17,405,536 (4,315,870)
----------- ------------ -----------
Net increase (decrease) in
cash.......................... (574,827) -- 283,407
Cash at beginning of year.............. 574,827 -- --
----------- ------------ -----------
Cash at end of year.................... $ -- $ -- $ 283,407
=========== ============ ===========
Supplemental cash flow information:
Cash paid for interest............... $ 316,368 $ 482,569 $ 1,664,418
=========== ============ ===========
Cash paid for income taxes........... $ 2,000,781 $ 939,404 $ 2,003
=========== ============ ===========
</TABLE>
See accompanying notes.
F-71
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1997
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Rent-It-Center, Inc. and Affiliates d/b/a Center Rental and Sales
(hereinafter collectively referred to as "Center") operate in a single
industry segment: the short-term rental of equipment, including ancillary
sales of parts, supplies and rental equipment, through a network of fourteen
rental center locations in Colorado, Kansas, Missouri, Nebraska, New Mexico
and Texas.
Basis of Presentation
The accompanying combined financial statements include the accounts of Rent-
It-Center, Inc., a Colorado corporation authorized to do business in Colorado
and Wyoming, and the following Affiliates: Lanoha Leasing Limited Liability
Company, d/b/a Center Rental and Sales--Kansas City, L.L.C. ("Lanoha
Leasing"), a Wyoming limited liability company authorized to do business in
Kansas and Missouri, Center Rental and Sales--Omaha, L.L.C. ("Center Rental"),
a Colorado limited liability company authorized to do business in Nebraska and
Iowa and, effective October 7, 1996, Zuni Rental Enterprises, L.L.C. ("Zuni
Rental"), a Colorado limited liability company authorized to do business in
Texas and New Mexico. The four entities are controlled by one family and
managed by a common executive group. All material inter-affiliate accounts and
transactions have been eliminated.
The operating agreements for the limited liability companies generally limit
each member's personal liability for any debts or losses of the company to the
member's corresponding capital contributions. The limited liability companies
have only one class of members' interest with equivalent rights, preferences
and privileges for all members; however, under certain circumstances, the net
losses of the companies are not shared in proportion to the members' capital
sharing ratio. The following table summarizes certain information regarding
each of the limited liability companies, including the maximum allowable term
of the company pursuant to its underlying operating agreement.
<TABLE>
<CAPTION>
MANDATORY
MEMBERS' CAPITAL OPERATING AGREEMENT
CONTRIBUTIONS DISSOLUTION DATE
---------------- -------------------
<S> <C> <C>
Lanoha Leasing......................... $ 10,000 October 30, 2021
Center Rental.......................... 10,000 February 4, 2024
Zuni Rental............................ 250,000 September 20, 2026
</TABLE>
The nature of Center's business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying combined balance sheets
are presented on an unclassified basis.
The accompanying combined financial statements give no effect to the
proposed transaction described in Note 9 herein.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-72
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Equipment rental revenue is recorded as earned under the operating method.
Equipment rentals in the combined statements of operations includes revenues
earned on equipment rentals and rental equipment delivery fees. Revenue from
the sale of parts, supplies and new equipment, which includes fuel sales, is
recorded at the time of delivery or pick-up by the customer.
Credit Policy
A significant portion of Center's business is on a credit basis. Center
extends credit to its commercial customers based on evaluations of their
financial condition and their ability to pay. Generally, no collateral is
required. Center has diversified its customer base by operating rental
locations in six states. Center maintains reserves it believes adequate for
potential credit losses.
Parts and Supplies Inventories
Parts and supplies inventories consist principally of parts, commodity-type
supplies and small to medium-sized equipment for sale. All inventories are
valued at the lower of cost or market, with cost determined by the weighted
average method of inventory costing.
Depreciation and Amortization
Rental equipment and operating property and equipment are being depreciated
using the straight-line method over the estimated useful lives of the
underlying assets. Leasehold improvements are amortized using the straight-
line method over the lesser of the term of the related lease or the estimated
useful lives of the assets. For financial statement purposes Center utilizes
the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................... 5 to 7 years
Vehicles, machinery and equipment.............................. 5 years
Leasehold improvements......................................... 5 to 15 years
</TABLE>
Rental equipment is depreciated to a salvage value of approximately 30-35%
of cost. Center expenses repairs and maintenance as incurred and all
acquisitions less than $1,000.
Intangible Assets
Goodwill is recorded at cost and amortized using the straight-line method
over 15 years. The recoverability of goodwill, which had a net book value of
approximately $1,421,000 at October 31, 1997, is analyzed annually based on
actual and projected levels of profitability and cash flows of the locations
acquired on an undiscounted basis.
Organizational costs are recorded at cost and amortized over a five year
period commencing with the opening of the related rental facility.
Income Taxes
Center utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, deferred taxes are determined based
on the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Recognition of deferred tax assets is
limited to amounts considered by management to be more likely than not of
realization in future periods.
F-73
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Lanoha Leasing, Center Rental, and Zuni Rental are treated as if they are
partnerships and, accordingly, the members of such companies recognize the
companies' net income or loss on their personal income tax returns in
proportion to their ownership interests therein.
Advertising
Costs of advertising, including radio, print and sales catalogue
expenditures, are expensed as incurred. Advertising expenses were
approximately $272,000, $336,000 and $570,000 for the years ended October 31,
1995, 1996 and 1997, respectively.
Concentrations of Credit Risk
Financial instruments that potentially subject Center to significant
concentrations of credit risk consist principally of cash investments and
trade accounts receivable.
Center maintains cash with various financial institutions located throughout
the country in order to limit exposure to any one institution; however, Center
occasionally maintains funds on deposit with banks which exceed the available
federally insured limits. Center performs periodic evaluations of the relative
credit standing of those financial institutions that are considered in
Center's investment strategy.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number and geographic diversity of Center's customer
base. Additionally, at October 31, 1996, approximately $830,000 of Center's
accounts receivable were subject to full recourse against the seller of the
rental business operations described in Note 6.
Fair Values of Financial Instruments
The carrying amounts reported in the combined balance sheets for cash,
accounts receivable, accounts payable and accrued liabilities approximate fair
value because of the immediate or short-term maturity of these financial
instruments. The fair value of long-term debt is determined using current
applicable interest rates as of the balance sheet date and approximates the
carrying value of such debt because the underlying instruments are at variable
rates which are repriced frequently or are at rates which reasonably
approximate Center's current rate of borrowing for similar secured and
unsecured financings.
Cash Surrender Value of Life Insurance Policies
Prior to October 31, 1997, Center maintained three split-dollar life
insurance policies on the combined group's chief executive officer. Center was
neither the owner nor the beneficiary of such policies; however, the chief
executive officer and Center had a verbal agreement whereby Center would be
reimbursed the lesser of the policies' cash surrender values or the cumulative
premiums paid by Center. In connection with such agreement, the chief
executive officer liquidated Center's interests in the life insurance policies
in October 1997 with a cash payment of approximately $215,000.
F-74
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. PARTS AND SUPPLIES INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Parts for resale................................... $ 1,329,060 $ 2,335,510
Parts and supplies for internal consumption........ 684,577 657,944
----------- -----------
$ 2,013,637 $ 2,993,454
=========== ===========
3. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consisted of the following:
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Vehicles, machinery and equipment.................. $ 4,665,594 $ 5,827,410
Leasehold improvements............................. 506,016 1,024,213
Other.............................................. 152,709 173,398
----------- -----------
5,324,319 7,025,021
Less accumulated depreciation and amortization..... 1,569,291 2,116,511
----------- -----------
$ 3,755,028 $ 4,908,510
=========== ===========
4. BANK DEBT AND LONG-TERM OBLIGATIONS
Bank debt and long-term obligations consisted of the following:
<CAPTION>
OCTOBER 31
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
Revolving line of credit........................... $15,153,957 $ 6,375,000
8.0% unsecured bank loans, principal and interest
due on December 31, 1997.......................... -- 6,225,000
9.3% secured bank loan, dated November 8, 1995,
principal and interest payable monthly, maturing
November 8, 2000.................................. 2,549,672 2,012,051
8.8% secured bank loan, dated June 18, 1996,
principal and interest payable monthly, maturing
June 18, 2001..................................... 2,361,933 1,933,359
Various secured equipment notes payable at interest
rates not exceeding 7.9%, maturing between
November 1996 and October 1998.................... 916,688 183,833
Note payable to a family member of a principal
stockholder/member with interest at 9.0%.......... 200,000 --
----------- -----------
$21,182,250 $16,729,243
=========== ===========
</TABLE>
Interest paid on the note payable to a family member of a principal
stockholder/member for the years ended October 31, 1995, 1996 and 1997 was
approximately $18,000, $18,000 and $15,000, respectively.
F-75
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Principal maturities of long-term debt for the years ending October 31 are
as follows:
<TABLE>
<S> <C>
1998........................................................... $ 7,467,280
1999........................................................... 1,159,513
2000........................................................... 1,769,891
2001........................................................... 6,332,559
-----------
Total........................................................ $16,729,243
===========
</TABLE>
Revolving Line of Credit and Unsecured Bank Loans
On September 26, 1996, Rent-It-Center, Inc. entered into an unsecured
revolving line of credit agreement with its principal bank in the amount of
$17.0 million to be used to acquire the net assets of the equipment rental
operations described in Note 6 and for working capital purposes. Effective
October 27, 1997, the revolving line of credit agreement was restructured
insofar as the then outstanding balance was converted to an unsecured line of
credit agreement with a maximum borrowing of $7.5 million by Rent-It Center,
Inc. and individual 8.0% unsecured term loans with each of the three limited
liability companies aggregating $7.0 million. At October 31, 1997, Center had
$6,375,000 and $6,225,000 outstanding under the revolving line of credit
agreement and the unsecured term loans, respectively. Accordingly, as of such
date, $1,125,000 remains available under the revolving line of credit
agreement. Effective October 31, 1997, certain stockholders/members of Center
assumed primary responsibility for the unsecured bank term loans held by the
Affiliates of Rent-It-Center, Inc.
The revolving line of credit, which expires on October 1, 2001, will be
permanently reduced to $7.0 million on or before October 1, 2000.
Additionally, excess cash flow, as defined in the line of credit agreement,
can accelerate the annual principal reduction. Furthermore, the bank, at its
sole discretion, can unilaterally demand repayment of the entire balance
outstanding under the line of credit agreement at any time; however, the bank
has not currently expressed any intent to subjectively accelerate repayment.
The line of credit terms provide for a variable rate of interest equal to
the bank's prime lending rate less one half of one percent (effective rates of
7.8% and 8.0% at October 31, 1996 and 1997, respectively). Through October 1,
2001, Rent-It-Center, Inc. has the option to permanently set the interest rate
on all or a portion of the outstanding principal balance at its discretion,
subject to the terms and conditions of the underlying loan agreement. Interest
is generally payable monthly.
Secured Bank and Other Borrowings
Lanoha Leasing maintains two long-term loans, which are secured by a first
security interest in the accounts receivable, inventories, equipment and
general intangible assets owned by such entity (aggregate net book value of
those assets were approximately $5.1 million at October 31, 1997). The total
outstanding balance of such secured loans at October 31, 1997 was $3,945,410.
The bank may accelerate payments of amounts due thereunder if the bank deems
itself insecure for any reason whatsoever; however, the bank has not currently
expressed any intent to subjectively accelerate repayment. Additionally, both
secured loans include partial and full prepayment penalty provisions that
range from 1/4% to 1/2% of the principal balance subject to prepayment
(partial prepayments impacted if they exceed $150,000). The prepayment
penalties are wholly eliminated in the fifth year of each loan term.
Zuni Rental also maintains various secured equipment notes payable, which
are collateralized by assets with a net book value of approximately $300,000
at October 31, 1997.
F-76
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Loan Covenants
Center's various debt agreements have financial covenants for Center and, in
certain instances, individual members of the combined group which cover
tangible net worth, leverage ratios, cash flow ratios and debt coverage
ratios, most of which are measurable at quarterly and annual intervals. The
debt agreements also contain covenants and provisions that restrict, among
other things, Center's or individual members of the combined group's ability
to i) incur additional indebtedness, ii) incur liens or encumbrances on its
property and equipment, iii) make certain investments, loans or guarantees
other than in the normal course of business, iv) declare or pay dividends from
Rent-It Center, Inc. in excess of $500,000 per annum, v) engage in certain
sales of assets, vi) merge, consolidate with or acquire other business
entities, and vii) fundamentally alter the underlying nature or scope of the
existing business. Additionally, the debt agreements require Center to
maintain its material cash accounts, including its cash concentration account,
at the lending bank. Substantially all of the debt agreements contain cross
default provisions. As of October 31, 1997, Center and the individual members
of the combined group are in compliance with all financial and operational
covenants of its debt agreements.
5. INCOME TAXES
Rent-It Center, Inc. is subject to federal and certain state income taxes.
The income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................ $1,548,305 $ 791,131 $ (32,613)
State.................................. 242,495 89,891 --
---------- ---------- ----------
1,790,800 881,022 (32,613)
Deferred:
Federal................................ 195,952 951,269 1,145,838
State.................................. 30,384 153,239 215,279
---------- ---------- ----------
226,336 1,104,508 1,361,117
---------- ---------- ----------
$2,017,136 $1,985,530 $1,328,504
========== ========== ==========
</TABLE>
The income tax expense differs from amounts currently payable because
certain revenue and expenses are reported in the statements of income in
periods that differ from those in which they are subject to taxation.
Reconciliations between the statutory federal income tax rate of 34% and
Center's effective tax rates are as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory income taxes....... $1,981,978 $1,972,008 $1,289,292
Earnings of Rent-It-Center, Inc.
Affiliates taxed to individual
members............................. (153,565) (121,619) (105,631)
State income taxes, net of federal
benefit............................. 180,100 160,466 142,084
Other................................ 8,623 (25,325) 2,759
---------- ---------- ----------
$2,017,136 $1,985,530 $1,328,504
========== ========== ==========
</TABLE>
F-77
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of Center's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
OCTOBER 31
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowances for doubtful accounts................... $ 33,750 $ 57,563
Inventory obsolescence reserves.................... -- 58,568
Inventory overhead capitalization.................. 11,989 17,300
Vacation accrual................................... 53,252 78,110
Alternative minimum tax credit carryforward........ -- 253,472
Other.............................................. -- 2,419
---------- ----------
98,991 467,432
---------- ----------
Deferred tax liabilities:
Rental equipment and operating property and
equipment, net.................................... 3,015,192 4,744,750
Other.............................................. 200,000 200,000
---------- ----------
3,215,192 4,944,750
---------- ----------
$3,116,201 $4,477,318
========== ==========
</TABLE>
Rent-It-Center, Inc. has an alternative minimum tax credit carryover of
approximately $253,000 for federal income tax purposes which is available to
offset future regular income tax that is in excess of the alternative minimum
tax in such year. If the transaction discussed in Note 9 occurs, the
utilization of these alternative minimum tax credits will be subject to
restrictions in accordance with Internal Revenue Service Code section 383 and
the ultimate utilization is further limited based on the profitability of
Rent-It-Center, Inc.; however, the carryforward period for an alternative
minimum tax credit carryover is unlimited.
At October 31, 1997, the aggregate reported bases for financial statement
purposes of Rent-It Center Inc.'s nontaxable affiliates (i.e., the limited
liability companies) exceed such entities corresponding bases for income tax
purposes by approximately $3.8 million. Such net difference is primarily
attributable to accelerated income tax depreciation and amortization.
6. BUSINESS COMBINATION
On October 7, 1996, Rent-It-Center, Inc. acquired all the operating assets
of three New Mexico and two Texas rental locations for approximately $12.9
million plus assumed liabilities of approximately $911,000. Rent-It-Center,
Inc. retained the acquired rental equipment and transferred all the other
acquired net assets to Zuni Rental. The acquired rental equipment is leased to
Zuni Rental. The transaction was financed through Center's revolving line of
credit agreement.
This acquisition has been accounted for as a purchase and, accordingly, the
acquired tangible and identifiable intangible assets and liabilities have been
recorded at their estimated fair values at the date of acquisition with any
excess purchase price reflected as goodwill in the accompanying combined
financial statements. The operations of the acquired business is included in
the combined statements of operations from the date of acquisition.
F-78
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the net assets acquired, liabilities assumed
and cash purchase price for the acquisition:
<TABLE>
<S> <C>
Assets acquired............................................... $12,324,726
Goodwill...................................................... 1,531,500
Less: liabilities assumed..................................... (910,619)
-----------
Cash purchase price........................................... $12,945,607
===========
</TABLE>
The following table sets forth the unaudited pro forma combined results of
operations for the years ended October 31, 1995 and 1996 as if the above
acquisition was consummated at the beginning of each fiscal year:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-----------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Total revenue...................................... $43,603,000 $45,802,000
Net income......................................... 5,650,000 4,210,000
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
Center leases certain operating premises and equipment under noncancellable
operating leases. Substantially all of the property leases require Center to
pay maintenance, insurance, taxes and certain other expenses in addition to
the stated rentals. Certain of the real property leases provide for escalation
of future rental payments based upon increases in the consumer price index.
Rental expense under such noncancellable operating leases totaled $251,000,
$326,000, and $713,000 for the years ended October 31, 1995, 1996 and 1997,
respectively. Future minimum lease payments, by the year ended October 31 and
in the aggregate, for noncancellable operating leases with initial or
remaining terms of one year or more are as follows:
<TABLE>
<S> <C>
1998............................................................ $ 743,959
1999............................................................ 668,039
2000............................................................ 621,999
2001............................................................ 577,666
2002............................................................ 76,500
Thereafter...................................................... 291,000
----------
$2,979,163
==========
</TABLE>
Additionally, Center leases certain real property from entities which are
partially or wholly-owned by stockholders, members and/or officers of Center.
Such noncancellable leases, which have various expiration dates through
January 2002, require future minimum lease payments for the years ending
October 31 and in the aggregate as follows:
<TABLE>
<S> <C>
1998............................................................ $ 720,000
1999............................................................ 720,000
2000............................................................ 720,000
2001............................................................ 720,000
2002............................................................ 420,000
----------
$3,300,000
==========
</TABLE>
F-79
<PAGE>
RENT-IT-CENTER, INC. AND AFFILIATES
D/B/A CENTER RENTAL AND SALES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense under the related party real property leases for the years
ended October 31, 1995, 1996 and 1997 was approximately $506,000, $436,000 and
$688,000, respectively. Additionally, pursuant to the terms and conditions of
such leases, Center is responsible for the insurance premiums, real property
taxes and certain other costs associated directly or indirectly with the
underlying real property.
Purchase Obligations
At October 31, 1997, Center was obligated under noncancellable purchase
commitments to purchase approximately $1.0 million of rental equipment and
inventories.
Legal Matters
Center is party to legal proceedings and potential claims arising in the
ordinary course of its business. The ultimate legal and financial liability of
Center with respect to such ongoing litigation cannot be estimated with any
certainty but, in the opinion of management, Center has adequate legal
defenses, reserves or insurance coverage with respect to those matters so that
the ultimate resolution will not have a material adverse effect on Center's
combined financial position, results of operations or cash flows.
Environmental Matters
Center and its operations are subject to a variety of environmental federal,
state and local laws and regulations governing, among other things, worker
safety, air emissions, water discharge and the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on
or in, or emanating from, such property, as well as related costs of
investigation and property damage. Center believes it is substantially in
compliance with the aforementioned environmental laws and regulations. The
landlord at certain of the related party lease locations has agreed to assume
responsibility for the removal of underground fuel tanks at such locations and
related remediation costs, if any.
8. EMPLOYEE BENEFIT PLAN
Center has a 401(k) savings and retirement plan covering substantially all
employees who have completed one year of service and attained the age of 18.
The plan is a defined contribution plan and provides for Center to make
contributions of 50% of a participant's elective salary deferral, up to 2% of
each participant's total compensation, plus additional amounts at the option
of the plan sponsor's Board of Directors. Center's matching contributions are
funded on a current basis. Center's matching contributions, including
discretionary contributions, for the years ended October 31, 1995, 1996 and
1997 were $161,000, $183,000 and $122,000, respectively.
9. BUSINESS COMBINATION
On October 6, 1997, Center reached a definitive agreement to sell, effective
November 1, 1997, all of the outstanding capital stock of Rent-It-Center, Inc.
and substantially all of the assets of the Affiliates for approximately $100.9
million in cash, 482,315 shares of common stock (of which 64,544 shares will
be issued over seven years, subject to earlier issuance over three years if
certain performance objectives are achieved) of Rental Service Corporation
("RSC") and the assumption of Center's debt. The transaction is anticipated to
close by December 2, 1997. Pursuant to the acquisition agreements, RSC assumed
effective control of Center's operations on November 1, 1997.
F-80
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors of
JDW Enterprises, Inc. d.b.a. Valley Rentals
Gilbert, Arizona
We have audited the accompanying balance sheets of JDW Enterprises, Inc.
d.b.a. Valley Rentals ("Valley") as of December 31, 1996 and 1997, and the
related statements of income, changes in stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
Valley's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 JDW Enterprises, Inc.
d.b.a. Valley Rentals as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ WEINTRAUB & MORRISON, P.C.
Scottsdale, Arizona
March 3, 1998
F-81
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents............................... $ 31,303 $ 73,784
Accounts receivable net of allowance for doubtful
accounts of $67,964 and $664,451 at December 31, 1996
and 1997 respectively (Notes 1 (c) and 3).............. 8,003,236 8,719,938
Other receivables and prepaid expenses (Note 8)......... 605,988 1,556,070
Inventory (Notes 1 (d) and 4)........................... 2,049,601 2,859,017
Rental equipment, principally machinery, at cost net of
accumulated depreciation of $12,066,731 and $17,019,555
at December 31, 1996 and 1997, respectively (Notes 1
(e) and 5)............................................. 29,236,418 33,539,944
Operating property and equipment at cost, net (Notes 1
(e), 5 and 7).......................................... 8,571,946 7,855,684
Intangible assets, net of accumulated amortization of
$23,333 and $43,333 for December 31, 1996 and 1997
respectively (Note 6).................................. 76,667 56,667
Other assets............................................ -- 178,502
----------- -----------
$48,575,159 $54,839,606
=========== ===========
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Accounts payable........................................ $ 2,212,778 $ 2,553,213
Payroll and other accrued expenses...................... 960,598 917,539
Bank debt and long-term obligations (Notes 5 and 10).... 32,376,913 37,325,388
Obligations under capital lease (Notes 5 and 10)........ 1,583,097 963,445
Related party obligations (Notes 5, 8 and 10)........... 3,529,778 3,396,027
----------- -----------
Total liabilities....................................... 40,663,164 45,155,612
Commitments and contingencies (Notes 9 and 10)
STOCKHOLDERS' EQUITY
--------------------
Capital stock
Authorized 1,000,000 shares of common stock with no
par value. Issued and outstanding, 600,000 shares.... 600,000 600,000
Retained earnings....................................... 7,311,995 9,083,994
----------- -----------
Total stockholders' equity.............................. 7,911,995 9,683,994
----------- -----------
$48,575,159 $54,839,606
=========== ===========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-82
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues (Notes 1 (b) and 8):
Rental revenues................................... $27,720,279 $30,830,358
Sales of parts, supplies and new equipment........ 3,068,140 2,709,488
Sales of used equipment........................... 1,979,675 3,190,708
----------- -----------
Total revenues.................................. 32,768,094 36,730,554
Cost of revenues (Note 1 (b)):
Cost of equipment rentals, excluding rental
equipment depreciation........................... 13,778,296 15,851,843
Depreciation, rental equipment.................... 6,104,424 6,830,630
Cost of parts, supplies and new equipment......... 2,193,619 1,754,926
Cost of used equipment............................ 1,309,521 2,093,056
----------- -----------
Total cost of revenues.......................... 23,385,860 26,530,455
----------- -----------
Gross profit........................................ 9,382,234 10,200,099
Selling, general and administrative expenses........ 3,650,849 4,420,942
Depreciation and amortization, excluding rental
equipment depreciation............................. 673,127 864,324
----------- -----------
Income from operations.............................. 5,058,258 4,914,833
Other income (expense):
Net interest expense (Note 8)..................... (3,248,766) (3,396,142)
Gain on sale of property (Note 8)................. -- 480,308
----------- -----------
Income before income taxes.......................... 1,809,492 1,998,999
Provision for income taxes (Note 1 (f))............. -- --
----------- -----------
Net income.......................................... $ 1,809,492 $ 1,998,999
=========== ===========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-83
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------
NUMBER STATED RETAINED
OF SHARES VALUE EARNINGS TOTAL
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1996......... 600,000 $600,000 $5,652,503 $6,252,503
Net income........................ -- -- 1,809,492 1,809,492
Common stock issued............... -- -- -- --
Dividends paid.................... -- -- (150,000) (150,000)
------- -------- ---------- ----------
Balances at January 1, 1997......... 600,000 600,000 7,311,995 7,911,995
Net income........................ -- -- 1,998,999 1,998,999
Common stock issued............... -- -- -- --
Dividends......................... -- -- (227,000) (227,000)
------- -------- ---------- ----------
Balances at December 31, 1997....... 600,000 $600,000 $9,083,994 $9,683,994
======= ======== ========== ==========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-84
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Cash received from customers...................... $ 30,830,982 $ 36,013,852
Cash paid to suppliers and employees.............. (20,760,732) (23,667,783)
Interest paid..................................... (3,347,614) (3,540,209)
Interest received................................. 98,848 143,514
------------ ------------
Net cash provided by operating activities......... 6,821,484 8,949,374
------------ ------------
INVESTING ACTIVITIES
Capital expenditures.............................. (9,799,349) (14,624,965)
Proceeds from property sale....................... -- 1,750,000
------------ ------------
Net cash used by investing activities............. (9,799,349) (12,874,965)
------------ ------------
FINANCING ACTIVITIES
Proceeds from bank debt and long-term
obligations...................................... 13,247,983 31,816,689
Principal payments on bank debt and long-term
obligations...................................... (10,142,559) (27,621,617)
Dividends paid.................................... (150,000) (227,000)
------------ ------------
Net cash provided by financing activities......... 2,955,424 3,968,072
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... ( 22,441) 42,481
Cash and cash equivalents, beginning of year...... 53,744 31,303
------------ ------------
Cash and cash equivalents, end of year............ $ 31,303 $ 73,784
============ ============
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-85
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
STATEMENTS OF CASH FLOWS--(CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1997
----------- ----------
<S> <C> <C>
Net income........................................... $ 1,809,492 $1,998,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 6,777,558 7,694,954
Gain on sale of property........................... -- (480,308)
Cost of equipment sold (net of accumulated
depreciation)..................................... 1,309,521 2,093,056
Changes in assets and liabilities:
(Increase) in accounts receivable................ (1,937,112) (716,702)
(Increase) in inventory.......................... (358,945) (809,416)
(Increase) in prepaid expenses and other
receivables..................................... (169,343) (950,083)
(Increase) in other assets....................... -- (178,502)
Increase (decrease) increase in accounts
payable......................................... (205,152) 340,435
(Decrease) in payroll and other accrued
liabilities..................................... (404,535) (43,059)
----------- ----------
Net cash provided by operating activities............ $ 6,821,484 $8,949,374
=========== ==========
</TABLE>
The Notes to the Financial Statements are an integral part of these statements.
F-86
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
a. Valley's activities and operating cycle. Valley is engaged in the equipment
rental and retailing industries in the states of Arizona and New Mexico. In
June, 1997, Valley acquired substantially all operations of Lucas Equipment
Rental.
The nature of Valley'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.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles.
Those estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the
estimates that were used.
b. Revenue and cost recognition. The accompanying financial statements are
prepared on the accrual basis of accounting.
Revenues are recognized when earned. Costs of good sold and operating costs
are charged to expense as incurred.
c. Accounts receivable. Valley provides for potentially uncollectible accounts
receivable by use of the allowance method. The allowance is provided based
upon a review of the individual accounts outstanding, and prior history of
uncollectible accounts receivable. As of December 31, 1997 and 1996, an
allowance has been provided for potentially uncollectible accounts
receivable.
d. Inventory. Inventory quantities and valuations are determined by using the
first in first out method. Inventory is stated at the lower of cost or
market, based on a physical count at December 31, 1997 and 1996
respectively.
e. Property and equipment and depreciation. Property and equipment are carried
at cost. When retired or otherwise disposed of, the related carrying value
and accumulated depreciation are cleared from the respective accounts and
the net difference less any amount realized from disposition is reflected
in earnings.
Maintenance and repairs, including the replacement of minor items, are
expensed as incurred, and major additions to property and equipment are
capitalized.
Depreciation is computed primarily by the straight-line method with
estimated salvage values over the following useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Rental equipment.................................................... 3-5
Vehicles, machinery and equipment................................... 3-5
Leasehold improvements.............................................. 31.5
Furniture, fixtures and computer equipment.......................... 5-7
Land and building................................................... 0-31.5
</TABLE>
f. Income taxes. No provision for income taxes is reflected in the
accompanying statements because the corporation, with the consent of its
stockholders, filed an election with the Internal Revenue Service to be
treated as an S Corporation. Accordingly, all attributes of taxable income,
credits and special deductions are passed directly to the stockholders for
inclusion on their individual income tax returns.
F-87
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
g. Pension plan. Valley sponsors an I.R.C. Section 401(k) plan that covers
employees that have completed one year of service and have reached twenty-
one years of age. Contributions to the plan are made monthly. Valley
matches 25% of the employee contribution and the employee vests
immediately. For 1997 and 1996, Valley's matching contributions to the plan
were $78,415 and $71,431 respectively.
h. Cash equivalents. Valley considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
i. Advertising Costs. Advertising costs are charged to expense when incurred.
Included in sales expenses for the years ended December 31, 1996 and 1997
were advertising costs of $331,374 and $403,392, respectively.
j. Reclassification. Certain items in the financial statements for the year
ended December 31, 1996 have been reclassified to be consistent with the
classifications adopted for the year ended December 31, 1997 with no effect
on net income.
2. CONCENTRATION OF CREDIT RISK
Valley, in the ordinary course of business, maintains bank balances in
excess of Federal Deposit Insurance Corporation Insurance Limits.
3. ACCOUNTS RECEIVABLE AND UNBILLED RENTALS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Accounts receivable.................................. $8,071,200 $9,384,389
Less: Allowance for doubtful accounts................ 67,964 664,451
---------- ----------
$8,003,236 $8,719,938
========== ==========
</TABLE>
Valley has recorded unbilled rental income for rental contracts which, by
their terms, have time remaining under the contract at December 31, 1996 and
1997. Unbilled but earned rental revenues at December 31, 1996 and 1997
amounted to $803,762 and $1,160,929, respectively.
4. INVENTORY
At December 31, 1996 and 1997, inventory categories and amounts were as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Shop and yard inventory.............................. $1,158,479 $2,043,335
Merchandise for resale............................... 564,897 770,409
Used equipment for sale.............................. 282,218 --
Fuel and oil......................................... 44,007 45,273
---------- ----------
$2,049,601 $2,859,017
========== ==========
</TABLE>
F-88
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASE
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
----------- -----------
<S> <C> <C>
NOTES PAYABLE
Notes payable to Wells Fargo Bank, collateralized by
rental equipment and personal guarantees of the
shareholders, principal is due in monthly
installments of $43,750 and 2.0% of the outstanding
balance (minimum $184,000) through May, 2001. The
notes bear interest at prime plus .125% (8.375% at
December 31, 1996), interest is payable monthly...... $12,237,645 $ --
Notes payable to Wells Fargo Bank, collateralized by
accounts receivable, inventory and personal
guarantees of the shareholders, due in monthly
installments of interest only. The notes bear
interest at 8.25% at December 31, 1996............... 3,348,081 --
Notes payable to Imperial Bank, collateralized by
accounts receivable, inventory and personal
guarantees of the shareholders, due in monthly
installments of interest only at 8.45% and 9.0%. The
notes were paid off February 3, 1998................. -- 4,433,235
Notes payable to Imperial Bank, collateralized by land
and buildings, interest due in monthly installments
at 8.45% and 9.0%. The notes were paid off
February 3, 1998..................................... -- 2,768,351
Notes payable to Wells Fargo Bank, collateralized by
land and buildings, principal and interest due in
monthly installments of $9,755 and $25,146 through
July, 2016. The notes bear interest from 8.375% to
9.25%................................................ 3,895,667 --
Notes payable to various equipment companies and
individuals, collateralized by the equipment
purchased, principal and interest due in monthly
installments from $192 to $25,824. The notes bear
interest from 4.9% to 11.0%. The notes were paid off
February 3, 1998..................................... 12,895,520 30,123,802
----------- -----------
Subtotal notes payable.............................. 32,376,913 37,325,388
OBLIGATIONS UNDER CAPITAL LEASE
Capital leases payable, secured by the equipment
leased bear interest from 5.91% to 23.85% and are
payable in monthly installments from $454 to $20,790.
The capital leases were paid off February 3, 1998.... 1,583,097 963,445
RELATED PARTY LOANS
Notes payable to Danny L. and Mary J. Evans are
subordinated to bank debt, interest is due quarterly
and the principal is due on demand. The notes and
interest may not be paid without obtaining approval
of the banks. The notes bear interest at 8.75% at
December 31, 1996 and 1997. The notes were paid off
February 6, 1998..................................... 2,090,000 2,090,000
Notes payable to shareholders are subordinated to bank
debt, interest is due quarterly and the principal is
due on demand. The notes and interest may not be paid
without obtaining approval of the banks. The notes
bear interest at 8.75% at December 31, 1997 and 1996.
The notes were paid off February 6, 1998............. 850,000 850,000
Notes payable to shareholders, collateralized by
rental equipment purchased, principal and interest
due in monthly installments of $7,315. The notes bear
interest at 7.9%. The notes were paid off February 3,
1998................................................. 589,778 456,027
----------- -----------
Subtotal, related party loans....................... 3,529,778 3,396,027
----------- -----------
$37,489,788 $41,684,860
=========== ===========
</TABLE>
F-89
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Maturities on long-term debt as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1998................................. $41,684,806
===========
</TABLE>
Interest expense charged to operations for years ended December 31, 1996 and
1997 was $3,347,614 and $3,539,656, respectively.
Minimum future lease payments under capital leases as of December 31, 1997
are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1998................................... $1,148,868
Less: amount representing interest.............................. 174,529
----------
974,339
Less: amount representing sales tax............................. 10,894
----------
Present value of net minimum lease payments................... $ 963,445
==========
</TABLE>
Amortization on the assets collateralizing the capital leases is included in
depreciation and amortization expense.
6. INTANGIBLE ASSETS
Goodwill represents the aggregate excess of the cost of companies acquired
over the fair value of their net assets at dates of acquisition and is being
amortized on the straight line method over a five year period. Amortization
expense charged to operations for 1996 and 1997 was $20,000 in each year.
7. OPERATING PROPERTY AND EQUIPMENT
Operating property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
----------- ----------
<S> <C> <C>
Vehicles, machinery and equipment.................. $ 3,285,967 $3,407,527
Leasehold improvements............................. 36,321 99,760
Furniture, fixtures and computer equipment......... 1,039,712 1,110,074
Land and building.................................. 6,003,937 5,270,844
----------- ----------
Total............................................ 10,365,937 9,888,205
Less: accumulated depreciation and amortization.... 1,793,991 2,032,521
----------- ----------
$ 8,571,946 $7,855,684
=========== ==========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Accounts receivable
Included in accounts receivable is $86,388 and $0 for 1996 and 1997,
respectively, that is due from J.H. Kelly, Inc., a corporation controlled by a
50% shareholder of Valley.
Other receivables
In addition, other receivables include $35,874 and $52,533 for 1996 and
1997, respectively, due from a 25% shareholder of Valley.
F-90
<PAGE>
JDW ENTERPRISES, INC.
D.B.A. VALLEY RENTALS
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Rental equipment
For the year ended December 31, 1997, Valley rented equipment from a related
party (Bald Eagle Equipment Co.) totaling $369,753.
Operating property and equipment
For the year ended December 31, 1997, Valley sold to JDW Real Estate L.L.C.,
I and II the land and buildings located in Phoenix and Tucson. The properties
were sold (based on appraisal) for $1,750,000 and resulted in a gain of
$480,308. The properties had a cost basis of $1,499,242 and accumulated
depreciation of $229,550 at the time of sale.
Notes payable, related party
At December 31, 1996 and 1997, Valley has notes payable to Danny L. and Mary
J. Evans in the amount of $2,090,000. The notes are subordinated to applicable
bank debt and bear interest at 8.75%. During 1996, J.H. Kelly, Inc.
distributed its notes receivable from Valley to its shareholders Danny L. and
Mary J. Evans.
At December 31, 1996 and 1997, Valley has notes payable to its stockholders
in the amount of $850,000. The notes are subordinated to applicable bank debt
and bear interest at 8.75%.
Valley purchased rental equipment in the amount of $600,456 from two Company
shareholders during 1996. The shareholder notes resulting from this
transaction bear interest at 7.9% and total $589,778 and $456,027 at December
31, 1996 and 1997, respectively.
Rental revenue and retail sales
Valley rents and sells equipment to J.H. Kelly, Inc. For the years ended
December 31, 1996 and 1997, Valley recognized revenues of $48,864 and
$147,417, respectively, from J.H. Kelly, Inc.
Interest expense
Interest expense paid on the shareholder notes amounted to $340,563 and
$299,941, respectively, for the years ended December 31, 1996 and 1997.
9. COMMITMENTS AND CONTINGENCIES
Valley is currently leasing various facilities and equipment under operating
leases expiring through the year 2001. All operating leases were paid off
February 3, 1998.
Future minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
Year ended December 31, 1998.................................... $4,779,265
==========
</TABLE>
10. SUBSEQUENT EVENT
On February 3, 1998, the shareholders of Valley agreed to sell to Rental
Service Corporation substantially all assets of the corporation. The assets
sold included accounts receivable, inventory, rental equipment and other
operating assets and excluded land and buildings. The agreement also required
simultaneous pay-off of all liabilities of Valley including payables, notes,
capital leases and operating leases.
F-91
<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 specific piece of
equipment anywhere in a region and schedule delivery to a customer's job
site.
[photo]
The Company's information systems track each individual rental asset and
automatically schedule preventive maintenance. As a result, the
Company is able to enhance the reliability and extend the useful life of
its rental equipment fleet.
[photo]
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 services, including on- site maintenance and repair.
[photo]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, 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 AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 17
Price Range of Common Stock and Dividend Policy.......................... 18
Capitalization........................................................... 19
Unaudited Pro Forma Consolidated Financial Data.......................... 20
Selected Consolidated Financial and Operating Data....................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 44
Management............................................................... 52
Principal and Selling Stockholders....................................... 63
Certain Relationships and Related Transactions........................... 65
Description of the Bank Facility......................................... 68
Description of Senior Subordinated Notes................................. 69
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 71
Certain United States Tax Considerations for Non-United States Holders... 73
Underwriting............................................................. 76
Legal Matters............................................................ 79
Experts.................................................................. 79
Available Information.................................................... 79
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,750,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION (SM)]
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
WILLIAM BLAIR & COMPANY
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN
LEGG MASON WOOD WALKER
INCORPORATED
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 +
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 13, 1998
PROSPECTUS
2,750,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION (SM)]
COMMON STOCK
-----------
Of the 2,750,000 Shares of Common Stock of Rental Service Corporation ("RSC"
or the "Company") offered hereby, 2,669,920 are being offered by the Company
and 80,080 are being offered by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of the shares of Common
Stock by the Selling Stockholders.
Of the shares of Common Stock offered hereby, 550,000 shares are being
offered for sale initially outside the United States and Canada by the
International Managers and 2,200,000 shares are being offered for sale
initially in a concurrent offering in the United States and Canada by the U.S.
Underwriters. The public offering price and the underwriting discount per share
will be identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "RSV." On August 12, 1998, the last sale price of the Common Stock
as reported on the NYSE was $28 9/16 per share. See "Price Range of Common
Stock and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE 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 DISCOUNTS(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
several 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) The Company has granted the International Managers and the U.S.
Underwriters options to purchase up to an aggregate of 412,500 additional
shares of Common Stock exercisable within 30 days after the date hereof,
solely to cover over-allotments, if any. If such options are exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on
or about , 1998.
-----------
MERRILL LYNCH INTERNATIONAL
WILLIAM BLAIR & COMPANY
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN INTERNATIONAL
LEGG MASON WOOD WALKER INCORPORATED
-----------
The date of this Prospectus is , 1998.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International, William Blair & Company, L.L.C., Morgan Stanley
& Co. International Limited, BT Alex. Brown International, a division of
Bankers Trust International PLC and Legg Mason Wood Walker, Incorporated are
acting as lead managers (the "Lead Managers") for each of the International
Managers named below (the "International Managers"). Subject to the terms and
conditions set forth in an international purchase agreement (the
"International Purchase Agreement") among the Company, the Selling
Stockholders and the International Managers, and concurrently with the sale of
2,200,000 shares of Common Stock to the U.S. Underwriters (as defined below),
the Company and the Selling Stockholders have agreed to sell to the
International Managers, and each of the International Managers severally and
not jointly has agreed to purchase from the Company and the Selling
Stockholders, the aggregate number of shares of Common Stock set forth
opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International......................................
William Blair & Company, L.L.C...................................
Morgan Stanley & Co. International Limited.......................
BT Alex. Brown International, a division of Bankers Trust
International PLC...............................................
Legg Mason Wood Walker, Incorporated.............................
---------
Total....................................................... 550,000
=========
</TABLE>
The Company and the Selling Stockholders also have entered into a U.S.
purchase agreement (the "U.S. Purchase Agreement") with certain underwriters
in the United States and Canada (the "U.S. Underwriters" and, together with
the International Managers, the "Underwriters") for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), William Blair &
Company, L.L.C., Morgan Stanley & Co. Incorporated, BT Alex. Brown
Incorporated and Legg Mason Wood Walker, Incorporated are acting as
representatives (the "U.S. Representatives"). Subject to the terms and
conditions set forth in the U.S. Purchase Agreement, and concurrently with the
sale of 550,000 shares of Common Stock to the International Managers pursuant
to the International Purchase Agreement, the Company and the Selling
Stockholders have agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase from the Company and the
Selling Stockholders, an aggregate of 2,200,000 shares of Common Stock. The
public offering price per share and the total underwriting discount per share
of Common Stock are identical under the International Purchase Agreement and
the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant
to such agreement are purchased. Under certain circumstances, under the
International Purchase Agreement and the U.S. Purchase Agreement, the
commitments of non-defaulting Underwriters may be increased. The closings with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The Lead Managers have advised the Company and the Selling Stockholders that
the International Managers propose initially to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page
of this Prospectus, and to certain dealers at such price less a concession not
in excess of $ per share of Common Stock. The International Managers may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the Offering, the
public offering price, concession and discount may be changed.
The Company has granted options to the International Managers, exercisable
for 30 days after the date of this Prospectus, to purchase up to 82,500
additional shares of Common Stock at the public offering price set
76
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
forth on the cover page of this Prospectus, less the underwriting discount.
The International Managers may exercise these options solely to cover over-
allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the International Managers exercise these options, each
International Manager will be obligated, subject to certain conditions, to
purchase a number of additional shares of Common Stock proportionate to such
International Manager's initial amount reflected in the foregoing table. The
Company has granted options to the U.S. Underwriters, exercisable for 30 days
after the date of this Prospectus, to purchase up to an aggregate of 330,000
additional shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the International Managers.
The Company and the Company's executive officers and directors have agreed
not to directly or indirectly (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of or otherwise dispose of or
transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock, or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement that transfers, in whole or in part, the economic
consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities,
in cash or otherwise, without the prior written consent of Merrill Lynch on
behalf of the Underwriters for a period of 90 days after the date of this
Prospectus other than (x) in connection with the sale to the Underwriters of
the shares of Common Stock offered hereby or under the accompanying U.S.
Prospectus or (y) 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 1996
Plan and the issuance of shares in connection with acquisitions. See "Shares
Eligible for Future Sale."
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the International Managers and the U.S. Underwriters are permitted
to sell shares of Common Stock to each other for purposes of resale at the
public offering price, less an amount not greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to persons who are non-U.S. or non-Canadian persons or
to persons they believe intend to resell to persons who are non-U.S. or non-
Canadian persons, and the International Managers and any dealer to whom they
sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to U.S. or to Canadian persons or to persons they believe intend to
resell to U.S. or Canadian persons, except, in the case of transactions
pursuant to the Intersyndicate Agreement.
The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain liabilities,
including certain liabilities under the Securities Act, or to contribute to
payments the U.S. Underwriters and the International Managers may be required
to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the U.S. Representatives are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to
77
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
reduce the Underwriters' short position or to stabilize the price of the
Common Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the Common Stock to the extent
that it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the U.S. Representatives will engage in such transactions
or that such transactions, once commenced, will not be discontinued without
notice.
Each International Manager has agreed that (i) it has not offered or sold
and will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995; (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issuance of Common
Stock to a person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996, as
amended, or is a person to whom such document may otherwise lawfully be issued
or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common
Stock, or the possession, circulation or distribution of this Prospectus or
any other material relating to the Company, the Selling Stockholders or shares
of Common Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of Common Stock may not be offered or sold, directly
or indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the shares of Common Stock may be
distributed or published, in or from any country or jurisdiction except in
compliance with any applicable rules and regulations of any such country or
jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Certain of the Underwriters or their affiliates, including the International
Representatives, have performed from time to time, and may perform in the
future, various general financing and banking services and transactions for
the Company and its affiliates, for which such Underwriters or their
affiliates have received or will receive customary compensation. This offering
is being made pursuant to the provisions of Conduct Rule 2710(c)(8) of the
National Association of Securities Dealers, Inc.
78
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, 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
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 17
Price Range of Common Stock and Dividend Policy.......................... 18
Capitalization........................................................... 19
Unaudited Pro Forma Consolidated Financial Data.......................... 20
Selected Consolidated Financial and Operating Data....................... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 31
Business................................................................. 44
Management............................................................... 52
Principal and Selling Stockholders....................................... 63
Certain Relationships and Related Transactions........................... 65
Description of the Bank Facility......................................... 68
Description of Senior Subordinated Notes................................. 69
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 71
Certain United States Tax Considerations for Non-United States Holders... 73
Underwriting............................................................. 76
Legal Matters............................................................ 79
Experts.................................................................. 79
Available Information.................................................... 79
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,750,000 SHARES
[LOGO OF RENTAL SERVICE CORPORATION (SM)]
COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH INTERNATIONAL
WILLIAM BLAIR & COMPANY
MORGAN STANLEY DEAN WITTER
BT ALEX. BROWN INTERNATIONAL
LEGG MASON WOOD WALKER
INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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...................................... $ 51,028
NASD Filing Fee.................................................. 17,798
Accounting Fees and Expenses..................................... 250,000
Legal Fees and Expenses (other than Blue Sky).................... 250,000
Printing and Engraving Expenses.................................. 300,000
Miscellaneous Expenses........................................... 131,174
----------
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.
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>
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.
Since October 9, 1995, the Registrant has sold and issued the following
securities which were not registered under the Securities Act (items (a)
through (e) 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.
e. 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.
f. 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
II-2
<PAGE>
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
stock of Comtect, Inc. On March 1, 1998, the Registrant issued 36,036
shares of Common Stock as additional consideration for this acquisition.
g. Pursuant to the Asset Purchase Agreement dated April 25, 1997 by and
among Brute Equipment Company, Rental Service Corporation, Walker Jones
Equipment Company and Thomas H. Foster, the Registrant issued 233,034
shares of Common Stock on June 5, 1997 as partial consideration for the
acquisition by the Registrant of substantially all of the assets of Brute
Equipment Company. On March 1, 1998 and June 6, 1998, the Registrant issued
29,887 and 51,216 shares of Common Stock, respectively, as additional
consideration for this acquisition.
h. Pursuant to the Asset Purchase Agreement dated April 26, 1997 by and
among Central States Equipment Lessors, Inc. ("Central States"), Walker
Jones Equipment Company and certain stockholders, the Registrant issued
102,432 shares of Common Stock on June 17, 1997 as partial consideration
for the acquisition of substantially all of the assets of Central States.
On March 1, 1998, the Registrant issued 34,145 shares of Common Stock as
additional consideration for this acquisition.
i. As partial consideration for the acquisition of substantially all of
the assets of Roesch Equipment Company, the Registrant issued 8,506 shares
of Common Stock to Tharco, Inc. on October 24, 1997.
j. As partial consideration for the acquisition of substantially all of
the assets of Allen Equipment, Inc., the Registrant issued 4,267 shares of
Common Stock to Allen Equipment, Inc. on November 12, 1997.
k. As partial consideration for the acquisition of all of the outstanding
stock of Rent-It-Center, Inc. d/b/a Center Rentals & Sales and
substantially all of the assets of certain affiliated entities, the
Registrant issued 155,215 shares of Common Stock to The Lanoha Charitable
Remainder Trust; 74,952 shares of Common Stock to David P. Lanoha; 62,040
shares of Common Stock to the National Christian Charitable Foundation,
Inc.; 51,636 shares of Common Stock to Zuni Rental Enterprises, L.L.C.;
32,271 shares of Common Stock to Lanoha Leasing Limited Liability Company;
23,666 shares of Common Stock to Center Rental & Sales/Omaha, L.L.C.; and
17,991 shares of Common Stock to the Richard F. Lanoha Family Trust on
December 2, 1997.
l. As partial consideration for the acquisition of all of the outstanding
stock of Siems Rental & Sales Co., Inc., the Registrant issued 109,529
shares of Common Stock to Leonard A. Siems and 16,786 shares of Common
Stock to Marvin W. Abbott on December 12, 1997.
m. In connection with a Restricted Stock Agreement dated January 14,
1998, the Registrant issued 10,000 shares of Common Stock (subject to
vesting requirements) to Martin R. Reid, its Chairman of the Board and
Chief Executive Officer.
n. As partial consideration for the acquisition of all of the outstanding
stock of Frank Wilson's Rentals & Sales Co., the Registrant issued 14,507
shares of Common Stock to Frank O. Wilson on January 15, 1998.
o. As partial consideration for the acquisition of substantially all of
the assets of JDW Enterprises, Inc. d/b/a Valley Rentals, the Registrant
issued 435,602 shares of Common Stock to JDW Enterprises, Inc. on February
3, 1998.
p. As partial consideration for the acquisition of all of the outstanding
stock of James S. Peterson Enterprises, Inc. d/b/a Metroquip Rental
Centers, the Registrant issued 117,344 shares of Common Stock to James S.
Peterson; 64,993 shares of Common Stock to Henry B. Hayden, Jr.; and 10,753
shares of Common Stock to Mark Nicolay on April 1, 1998.
q. As partial consideration for the acquisition of all of the outstanding
stock of Equipment & Supply Company of Virginia, Inc., the Registrant
issued 6,487 shares of Common Stock to Kenneth A. Mooty and 1,622 shares of
Common Stock to Mary Ellen Mooty on April 10, 1998.
r. In connection with a Restricted Stock Agreement dated April 29, 1998,
the Registrant issued 16,589 shares of Common Stock (subject to vesting
requirements) to Martin R. Reid.
II-3
<PAGE>
s. As partial consideration for the acquisition of all of the outstanding
stock of Midwest Aerial Platforms, Inc., the Registrant issued 29,539
shares of Common Stock to Joseph D. Simms; 8,660 shares of Common Stock to
The Jerome Group, Ltd.; 3,693 shares of Common Stock to R. George Kannard;
1,846 shares of Common Stock to Mark S. Lancourt; and 1,846 shares of
Common Stock to George L. Sagowsky on May 5, 1998.
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.(1)
3.2 Certificate of Amendment of Certificate of Incorporation.(2)
3.3 Form of Amended and Restated Bylaws of the Company.(3)
4.1 Indenture dated as of May 13, 1998 by and between Rental Service
Corporation, the Subsidiary Guarantors and Norwest Bank Minnesota,
National Association, as trustee for the 9% Senior Subordinated
Notes.(15)
*5.1 Opinion of Latham & Watkins as to the validity of the securities
being registered hereby (including consent).
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.(1)
10.2 First Amendment to Credit Agreement dated as of September 26,
1995.(1)
10.3 Second Amendment and Consent to Credit Agreement dated as of December
21, 1995.(1)
10.4 Amended and Restated Credit Agreement, dated as of September 24,
1996.(4)
10.5 First Amendment to Amended and Restated Credit Agreement, dated as of
January 31, 1997.(5)
10.6 Third Agreement, Consent and Limited Waiver to the Amended and
Restated Credit Agreement, dated as of May 22, 1997.(6)
10.7 Fourth Amendment to the Amended and Restated Credit Agreement, dated
as of August 1, 1997.(7)
10.8 Second Amended and Restated Credit Agreement, dated as of December 2,
1997.(2)
10.9 First Amendment to Second Amended and Restated Credit Agreement,
dated as of May 13, 1998.(15)
**10.10 Second Amendment to Second Amended and Restated Credit Agreement,
dated as of July 20, 1998.
10.11 Stock Purchase Agreement dated as of July 25, 1995, between Acme
Acquisition Holdings Corp. and Martin R. Reid.(1)
10.12 Stock Purchase and Severance Agreement dated as of July 25, 1995,
between Acme Acquisition Holdings Corp. and Douglas A. Waugaman.(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.13 Stock Purchase and Severance Agreement dated as of October 4, 1995
between Rental Service Corporation and Douglas A. Waugaman.(1)
10.14 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.(1)
10.15 Amendment to Corporate Development and Administrative Services
Agreement effective October 31, 1993.(1)
10.16 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.(1)
10.17 Letter Agreement dated June 7, 1996 between Nassau Capital Partners
L.P. and NAS Partners I L.L.C., and Rental Service Corporation.(1)
10.18 Stockholders' Agreement dated as of January 4, 1996 by and among the
parties listed on the signature page thereto and Rental Service
Corporation.(1)
10.19 Stock Option Plan for Key Employees.(1)
10.20 Form of Incentive Stock Option Agreement for Directors.(1)
10.21 Form of Incentive Stock Option Agreement for Region Managers.(1)
10.22 Form of Amended Incentive Stock Option Agreement for Region
Managers.(1)
10.23 Form of Amended Incentive Stock Option Agreement for Corporate Office
Personnel.(1)
10.24 Form of Incentive Stock Option Agreement for Other Corporate and
District Personnel.(1)
10.25 Form of Indemnification Agreement.(1)
10.26 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.(1)
10.27 Letter Agreement dated June 1, 1996 between Rental Service
Corporation and David G. Ledlow.(1)
10.28 Form of Amendment to Amended Incentive Stock Option Agreement for
Region Managers.(1)
10.29 Form of Amendment to Amended Incentive Stock Option Agreement for
Region Managers.(1)
10.30 Form of Amendment to Amended Incentive Stock Option Agreement for
Region Managers.(1)
10.31 Form of Amendment to Amended Incentive Stock Option Agreement for
Corporate Office Personnel.(1)
10.32 1996 Equity Participation Plan of Rental Service Corporation.(9)
10.33 Form of Incentive Stock Option Agreement for Employees.(6)
10.34 Form of Non-Qualified Stock Option Agreement for Directors.(6)
10.35 Employee Qualified Stock Purchase Plan of Rental Service
Corporation.(10)
10.36 Management Incentive Compensation Plan.(11)
10.37 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.(12)
10.38 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.(12)
10.39 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.(12)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
10.40 Stock Purchase Agreement by and among David P. Lanoha and The Lanoha
Charitable Remainder Trust and National Christian Charitable
Foundation and Richard F. Lanoha Family Trust as "Sellers," RSC
Acquisition Corp. as "Buyer," Rental Service Corporation as "Parent"
and Rent-It-Center, Inc. d/b/a Center Rental and Sales, Inc. as the
"Company," dated October 6, 1997.(8)
10.41 Asset Purchase Agreement by and among David P. Lanoha as "Seller,"
RSC Acquisition Corp. as "Buyer," Rental Service Corporation as
"Parent" and Lanoha Leasing Limited Liability Company as the
"Company," dated October 6, 1997.(8)
10.42 Asset Purchase Agreement by and among David P. Lanoha as "Seller,"
RSC Acquisition Corp. as "Buyer," Rental Service Corporation as
"Parent" and Zuni Rental Enterprises L.L.C. as the "Company," dated
October 6, 1997.(8)
10.43 Asset Purchase Agreement by and among David P. Lanoha as "Seller,"
RSC Acquisition Corp. as "Buyer," Rental Service Corporation as
"Parent" and Center Rental & Sales/Omaha LLC as the "Company," dated
October 6, 1997.(8)
10.44 Stock Purchase Agreement by and among Leonard A. Siems, Marvin W.
Abbott and the Trustees (as defined) as "Sellers," RSC Alabama, Inc.
as "Buyer," Rental Service Corporation as "Parent" and Siems Rental
& Sales Co., Inc. as the "Company," dated October 31, 1997.(8)
10.45 Asset Purchase Agreement by and among JDW Enterprises, Inc. d/b/a
"Valley Rentals" as "Seller," Rental Service Corporation, RSC
Center, Inc. as "Buyer" and the stockholders of Seller, dated
December 30, 1997.(13)
10.46 Employment Agreement dated January 14, 1998 between Rental Service
Corporation and Martin R. Reid.(14)
10.47 Restricted Stock Agreement dated January 14, 1998 between Rental
Service Corporation and Martin R. Reid.(15)
**10.48 Restricted Stock Agreement dated April 29, 1998 between Rental
Service Corporation and Martin R. Reid.
10.49 Stock Purchase Agreement by and among James S. Peterson as "Seller,"
Walker Jones Equipment, Inc. as "Buyer," Rental Service Corporation
as "Parent" and James S. Peterson Enterprises, Inc. as the
"Company," dated April 1, 1998.(14)
10.50 Stock Purchase Agreement by and among Mark S. Mosak and Thomas A.
Mosak as "Sellers," Walker Jones Equipment, Inc. as "Buyer," Rental
Service Corporation as "Parent" and T&M Rental, Inc. as the
"Company," dated April 2, 1998.(14)
10.51 Registration Rights Agreement dated as of May 13, 1998 by and among
Rental Service Corporation and the persons named therein relating to
the 9% Senior Subordinated Notes.(15)
**10.52 Form of Executive Severance Agreement between Rental Service
Corporation and certain executive officers.
10.53 Stock Purchase Agreement by and among Jerry O. Grayson, Michael A.
Mathon and Becker Partners as "Sellers," Becker St. Paul Corporation
and Kathleen Becker as "Partners," Walker Jones Equipment, Inc. as
"Buyer," and M. J. Struckel & Company, Inc. as the "Company," dated
July 29, 1998.(16)
21.1 Subsidiaries of Rental Service Corporation.(15)
*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.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
*23.5 Consent of Ernst & Young LLP.
*23.6 Consent of Weintraub & Morrison, P.C.
*23.7 Consent of Latham & Watkins (included in Exhibit 5.1).
**24.1 Powers of Attorney.
**27.1 Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
**Previously filed.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-05949, effective September 18, 1996), and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-40707, effective December 16, 1997), and
incorporated herein by reference.
(3) 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.
(4) 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.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
January 31, 1997, and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-26753, effective May 29, 1997), and incorporated
herein by reference.
(7) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1997, and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended September 30, 1997, and incorporated herein by
reference.
(9) 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.
(10) Filed with the Company's Proxy Statement on Schedule 14A filed March 26,
1997, and incorporated herein by reference.
(11) Filed with the Company's Proxy Statement on Schedule 14A filed March 30,
1998, and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
April 14, 1997, and incorporated herein by reference.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
February 18, 1998, and incorporated herein by reference.
(14) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended March 31, 1998, and incorporated herein by
reference.
(15) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(Registration No. 333-56653) dated June 12, 1998, and incorporated herein
by reference.
(16) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1998, and incorporated herein by
reference.
II-7
<PAGE>
(b) Financial Statement Schedules
Report of Independent Auditors
Schedule I--Condensed Financial Information of Registrant
Condensed Balance Sheets--December 31, 1996 and 1997
Condensed Statements of Operations--for the years ended December 31,
1995, 1996 and 1997
Condensed Statements of Cash Flows--for the years ended December 31,
1995, 1996 and 1997
Notes to Condensed Financial Statements--December 31, 1997
Schedule II--Valuation and Qualifying Accounts--as of and for the years
ended December 31, 1995, 1996 and 1997
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Scottsdale, State of Arizona, on August 12, 1998.
RENTAL SERVICE CORPORATION
/s/ Martin R. Reid
By: _________________________________
Martin R. Reid
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed below by the following persons
in their capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Martin R. Reid Chairman of the Board, Chief August 12, 1998
____________________________________ Executive Officer and
Martin R. Reid Director (Principal
Executive Officer)
* Chief Financial Officer, August 12, 1998
____________________________________ Secretary and Treasurer
Robert M. Wilson (Principal Financial and
Accounting Officer)
* Director August 12, 1998
____________________________________
William M. Barnum, Jr.
Director
____________________________________
James R. Buch
* Director August 12, 1998
____________________________________
David P. Lanoha
* Director August 12, 1998
____________________________________
Christopher A. Laurence
* Director August 12, 1998
____________________________________
Eric L. Mattson
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director August 12, 1998
____________________________________
Britton H. Murdoch
* Director August 12, 1998
____________________________________
John M. Sullivan
/s/ Martin R. Reid
*By ________________________________
Martin R. Reid
Attorney-in-Fact
</TABLE>
II-10
<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, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, and have issued our
report thereon dated February 12, 1998, included elsewhere in this
Registration Statement. Our audits also included the financial statement
schedules listed in Item 21(b). 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 12, 1998
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
RENTAL SERVICE CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
------
Cash................................................. $ 5,000 $ 5,000
Other assets......................................... -- 2,000
Investment in and net amounts due from wholly owned
subsidiaries........................................ 95,075,000 290,782,000
----------- ------------
$95,080,000 $290,789,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Accounts payable and accrued expenses................ $ 8,000 $ 8,000
Stockholders' equity:
Common stock....................................... 114,000 198,000
Additional paid-in capital......................... 93,917,000 270,927,000
Common stock issuable.............................. -- 6,000,000
Retained earnings.................................. 1,041,000 13,656,000
----------- ------------
Total stockholders' equity........................... 95,072,000 290,781,000
----------- ------------
$95,080,000 $290,789,000
=========== ============
</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,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Costs and expenses:
Interest expense (income)................ $ (7,000) $ 3,000 $ --
---------- ---------- -----------
Income (loss) before equity in income of
subsidiaries and extraordinary item....... 7,000 (3,000) --
Equity in income of subsidiaries........... 3,230,000 2,503,000 12,615,000
---------- ---------- -----------
Income before extraordinary item........... 3,237,000 2,500,000 12,615,000
Extraordinary item, gain on extinguishment
of debt less applicable income taxes of
$142,000 in 1996.......................... -- 220,000 --
---------- ---------- -----------
Net income................................. $3,237,000 $2,720,000 $12,615,000
========== ========== ===========
</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,
----------------------------------------
1995 1996 1997
----------- ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.......................... $ 3,237,000 $ 2,720,000 $ 12,615,000
Equity in income of subsidiaries.... (3,230,000) (2,503,000) (12,615,000)
Extraordinary item.................. -- (220,000) --
Change in other assets.............. -- -- (2,000)
Change in accounts payable and
accrued expenses................... (109,000) 8,000 --
----------- ------------ -------------
Net cash provided by (used in)
operating activities............... (102,000) 5,000 (2,000)
FINANCING ACTIVITIES
Proceeds from issuance of redeemable
preferred stock.................... -- 7,500,000 --
Redemption of redeemable 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.. -- 95,223,000 153,974,000
Proceeds from exercise of stock
options............................ -- 1,000 85,000
Repurchase of common stock
warrants........................... -- (945,000) --
Loans to subsidiaries............... (9,893,000) (51,855,000) (154,057,000)
----------- ------------ -------------
Net cash provided by (used in)
financing activities............... 107,000 (5,000) 2,000
----------- ------------ -------------
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, 1997
1. BASIS OF PRESENTATION
Rental Service Corporation's (the "Company") 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.
2. LONG-TERM DEBT
The Company has guaranteed its subsidiaries' $500.0 million revolving line
of credit with banks, of which $67.9 million and $206.5 million is outstanding
at December 31, 1996 and 1997, respectively. Additionally, the Company has
guaranteed its subsidiaries' $100.0 million term loan with banks.
On September 24, 1996, the Company repaid the note payable to Bank and
repurchased the related warrants for $13.0 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.
S-5
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
RENTAL SERVICE CORPORATION
YEAR ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONS
----------------------- TRANSFERS
BALANCE AT CHARGED TO (TO) FROM
BEGINNING COSTS AND OTHER BALANCE AT
DESCRIPTION OF YEAR EXPENSES ACQUISITIONS ACCOUNTS DEDUCTIONS END OF YEAR
----------- ----------- ---------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 inventory
obsolescence......... 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 inventory
obsolescence......... 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
=========== ========== ========== ========== ========== ===========
YEAR ENDED DECEMBER 31, 1997
Deducted from assets
accounts:
Allowance for doubtful
accounts............. $ 2,165,000 $2,596,000 $ 582,000 $ -- $2,418,000(a) $ 2,925,000
Reserve for rental
equipment............ 923,000 511,000 218,000 1,416,000 412,000(b) 2,656,000
Reserve for inventory
obsolescence......... 782,000 534,000 247,000 787,000 169,000(b) 2,181,000
Income tax valuation
allowance............ 4,740,000 -- -- -- 253,000(c) 4,487,000
----------- ---------- ---------- ---------- ---------- -----------
Total................... $ 8,610,000 $3,641,000 $1,047,000 $1,529,000 $2,578,000 $12,249,000
=========== ========== ========== ========== ========== ===========
</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 1.1
_______________________________________________________________________________
_______________________________________________________________________________
RENTAL SERVICE CORPORATION
(a Delaware corporation)
2,200,000 Shares of Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: August __, 1998
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1. Representations and Warranties................................................. 3
------------------------------
(a) Representations and Warranties by the Company.................................. 3
(b) Representations and Warranties by the Selling Stockholders..................... 10
(c) Officers' Certificates......................................................... 12
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing................................ 13
-----------------------------------------------
(a) Initial Securities............................................................. 13
(b) Option Securities.............................................................. 13
(c) Payment........................................................................ 13
(d) Denominations; Registration.................................................... 15
SECTION 3. Covenants of the Company....................................................... 15
------------------------
(a) Compliance with Securities Regulations and Commission Requests................. 15
(b) Filing of Amendments........................................................... 15
(c) Delivery of Registration Statements............................................ 16
(d) Delivery of Prospectuses....................................................... 16
(e) Continued Compliance with Securities Laws...................................... 16
(f) Blue Sky Qualifications........................................................ 16
(g) Rule 158....................................................................... 17
(h) Use of Proceeds................................................................ 17
(i) Listing........................................................................ 17
(j) Restriction on Sale of Securities.............................................. 17
SECTION 4. Payment of Expenses............................................................ 18
-------------------
(a) Expenses....................................................................... 18
(b) Expenses of the Selling Stockholders........................................... 18
(c) Termination of Agreement....................................................... 18
(d) Allocation of Expenses......................................................... 19
SECTION 5. Conditions of U.S. Underwriters' Obligations................................... 19
--------------------------------------------
(a) Effectiveness of Registration Statement........................................ 19
(b) Opinion of Counsel for Company................................................. 19
(c) Opinion of Counsel for the Selling Stockholders................................ 19
(d) Opinion of Counsel for U.S. Underwriters....................................... 19
(e) Officers' Certificate.......................................................... 20
(f) Certificate of Selling Stockholders............................................ 20
(g) Accountant's Comfort Letter.................................................... 20
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
(h) Bring-down Comfort Letter.................................................... 20
(i) Approval of Listing.......................................................... 21
(j) No Objection................................................................. 21
(k) Lock-up Agreements........................................................... 21
(l) Purchase of Initial International Securities................................. 21
(m) Conditions to Purchase of U.S. Option Securities............................. 21
(i) Officers' Certificate................................................ 21
(ii) Opinion of Counsel for Company....................................... 21
(iii) Opinion of Counsel for U.S. Underwriters............................. 21
(iv) Bring-down Comfort Letter............................................ 22
(n) Additional Documents......................................................... 22
(o) Termination of Agreement..................................................... 22
SECTION 6. Indemnification.............................................................. 22
---------------
(a) Indemnification by the Company and Selling Stockholders...................... 22
(b) Indemnification of Company, Directors and Officers and Selling
Stockholders by the U.S. Underwriters........................................ 23
(c) Actions against Parties; Notification........................................ 24
(d) Settlement without Consent if Failure to Reimburse........................... 24
(e) Other Agreements with Respect to Indemnification............................. 25
SECTION 7. Contribution................................................................. 25
------------
SECTION 8. Representations, Warranties and Agreements to Survive Delivery............... 26
--------------------------------------------------------------
SECTION 9. Termination of Agreement..................................................... 26
------------------------
(a) Termination; General......................................................... 26
(b) Liabilities.................................................................. 27
SECTION 10. Default by One or More of the U.S. Underwriters.............................. 27
-----------------------------------------------
SECTION 11. Default by One or More of the Selling Stockholders or the Company............ 28
-----------------------------------------------------------------
SECTION 12. Notices...................................................................... 28
-------
SECTION 13. Parties...................................................................... 29
-------
SECTION 14. GOVERNING LAW AND TIME....................................................... 29
----------------------
SECTION 15. Effect of Headings........................................................... 29
------------------
</TABLE>
-ii-
<PAGE>
SCHEDULES
Schedule A - List of Underwriters............................... Sch A-1
Schedule B - List of Selling Stockholders....................... Sch B-1
Schedule C - Pricing Information................................ Sch C-1
Schedule D - List of Persons Subject to Lock-up................. Sch D-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.................... A-1
Exhibit B - Form of Opinion of Selling Stockholders' Counsel........ B-1
Exhibit C - Form of Lock-up Letter.................................. C-1
-iii-
<PAGE>
RENTAL SERVICE CORPORATION
(a Delaware corporation)
2,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
August __, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
WILLIAM BLAIR & COMPANY, L.L.C.
MORGAN STANLEY & CO. INCORPORATED
BT ALEX. BROWN INCORPORATED
LEGG MASON WOOD WALKER, INCORPORATED
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Rental Service Corporation, a Delaware corporation (the "Company") and the
persons listed in Schedule B hereto the "Selling Stockholders" confirm their
respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters
named in Schedule A hereto (collectively, the "U.S. Underwriters," which term
shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, William Blair & Company, L.L.C.,
Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Legg Mason
Wood Walker, Incorporated are acting as representatives (in such capacity, the
"U.S. Representatives"), with respect to the sale by the Company and the Selling
Stockholders acting severally and not jointly, and the purchase by the U.S.
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $.01 per share, of the Company ("Common
Stock") set forth in said Schedule A, and with respect to the grant by the
Company to the U.S. Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of 330,000
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 2,200,000 shares of Common Stock (the "Initial U.S. Securities") to be
purchased by the U.S. Underwriters and all or any part of the 330,000 shares of
Common Stock subject to the option described in
-1-
<PAGE>
Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities." The Initial U.S. Securities consist of
2,135,936 shares to be sold by the Company and an aggregate of 64,064 shares to
be sold by the Selling Stockholders.
It is understood that the Company and the Selling Stockholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Company
and the Selling Stockholders of an aggregate of 550,000 shares of Common Stock
(the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, William Blair & Company, L.L.C., Morgan
Stanley & Co. International Limited, BT Alex. Brown International, a division of
Bankers Trust International PLC and Legg Mason Wood Walker, Incorporated are
acting as lead managers (the "Lead Managers") and the grant by the Company to
the International Managers, acting severally and not jointly, of an option to
purchase all or any part of the International Managers' pro rata portion of up
to 82,500 additional shares of Common Stock solely to cover overallotments, if
any (the "International Option Securities" and, together with the U.S. Option
Securities, the "Option Securities"). The Initial International Securities and
the International Option Securities are hereinafter called the "International
Securities." It is understood that the Company and the Selling Stockholders are
not obligated to sell and the U.S. Underwriters are not obligated to purchase,
any Initial U.S. Securities unless all of the Initial International Securities
are contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch (in such capacity, the "Global Coordinator").
The Company and the Selling Stockholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-59519) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule
-2-
<PAGE>
424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has
elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare
and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule
434 and Rule 424(b). Two forms of prospectus are to be used in connection with
the offering and sale of the Securities: one relating to the U.S. Securities
(the "Form of U.S. Prospectus") and one relating to the International Securities
(the "Form of International Prospectus"). The Form of International Prospectus
is identical to the Form of U.S. Prospectus, except for the front cover and back
cover pages and the information under the caption "Underwriting." The
information included in any such prospectus or in any such Term Sheet, as the
case may be, that was omitted from such registration statement at the time it
became effective but that is deemed to be part of such registration statement at
the time it became effective (a) pursuant to paragraph (b) of Rule 430A is
referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule
434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and
Form of International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final Form
of U.S. Prospectus and the final Form of International Prospectus in the forms
first furnished to the Underwriters for use to confirm the sale of the
Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary U.S. Prospectus dated July 24, 1998 and preliminary
International Prospectus dated July 24, 1998, respectively, each together with
the applicable Term Sheet and all references in this Agreement to the date of
such Prospectuses shall mean the date of the applicable Term Sheet. For purposes
of this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S.
Underwriter as follows:
-3-
<PAGE>
(i) Each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the 1933 Act and no stop
order suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933 Act and
no proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, have been threatened by the Commission, and
any request on the part of the Commission for additional information has
been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any U.S. Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements thereto were issued and at the Closing Time (and,
if any U.S. Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a material fact or omitted
or will omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. If Rule 434 is used, the Company will comply with
the requirements of Rule 434 and the Prospectuses shall not be "materially
different", as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter through the
U.S. Representatives expressly for use in the Registration Statement or the
U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) The consolidated financial statements of the Company
together with the related notes and schedules thereto included in the
Registration Statement and the Prospectuses present fairly in all material
respects the consolidated financial position, results of operations and
cash flows of the Company at the dates and for the periods to which they
relate and have been prepared in accordance with generally
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accepted accounting principles applied on a consistent basis, except as
otherwise disclosed in the Registration Statement and the Prospectuses. The
summary and selected financial and statistical data included in the
Registration Statement and the Prospectuses present fairly in all material
respects the information shown therein and the summary and selected
financial data have been prepared and compiled on a basis consistent with
the audited financial statements included therein, except as otherwise
stated therein. Ernst & Young LLP is an independent public accounting firm
as required by the 1933 Act and the rules and regulations thereunder.
(iii) (A) The pro forma financial statements (including the
notes thereto) included in the Registration Statement and the Prospectuses
(1) have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements and (2) have been
properly computed on the bases described therein, and (B) the assumptions
used in the preparation of the pro forma financial statements included in
the Registration Statement and the Prospectuses are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectuses, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company
and its subsidiaries considered as one enterprise, and (C) there has been
no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) The Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of Delaware,
has the corporate power and authority to own its property and to conduct
its business as described in the Registration Statement and the
Prospectuses and is duly qualified to transact business as a foreign
corporation under the laws of, and is in good standing in, each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
Material Adverse Effect; and the Company has not received any written
notice of any proceeding instituted in any such jurisdiction revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, such power
and authority or qualification.
(vi) Each Subsidiary has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to
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conduct its business as described in the Registration Statement and the
Prospectuses and is duly qualified to transact business as a foreign
corporation under the laws of, and is in good standing in, each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not reasonably
be expected to have a Material Adverse Effect; and neither the Company nor
any such Subsidiary has received any written notice of any proceeding
instituted in any such jurisdiction revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or
qualification.
(vii) As of June 30, 1998, the Company had the authorized,
issued and outstanding consolidated capitalization set forth under the
heading "Capitalization" in the Registration Statement and the
Prospectuses; all of the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and were not issued in violation of any preemptive or
similar rights; the Company owns, directly or indirectly, all of the
outstanding shares of capital stock of each of the Subsidiaries and all
such shares are owned free and clear of all liens, encumbrances, equities
and claims or restrictions on transferability (other than those imposed by
the 1933 Act and the securities or "Blue Sky" laws of certain
jurisdictions) or voting, except as disclosed in the Registration Statement
and the Prospectuses; the Subsidiaries constitute all of the subsidiaries
of the Company as of the date hereof; except as set forth in the
Registration Statement and the Prospectuses, there are no (A) options,
warrants or other rights to purchase from the Company or any Subsidiary,
(B) agreements or other obligations of the Company or any of the
Subsidiaries to issue or (C) other rights obligating the Company or any
Subsidiary to convert any obligation into, or exchange any securities for,
shares of capital stock of or ownership interests in the Company or any of
the Subsidiaries outstanding. Except for the Company's direct and indirect
interests in the Subsidiaries and Cash Equivalents (as such term is defined
in the Prospectuses), the Company does not own, directly or indirectly, any
shares of capital stock or any other equity or long-term debt securities or
have any equity interest in any firm, partnership, joint venture or other
entity, other than as described in the Registration Statement and the
Prospectuses. The shares of issued and outstanding capital stock of the
Company, including the Securities to be purchased by the Underwriters from
the Selling Stockholders, have been duly authorized and validly issued and
are fully paid and non-assessable; none of the outstanding shares of
capital stock of the Company, including the Securities to be purchased by
the Underwriters from the Selling Stockholders, was issued in violation of
the preemptive or other similar rights of any securityholder of the Company
pursuant to the Delaware General Corporation Law (the "DGCL") or the
Amended Certificate of Incorporation.
(viii) The Company has requisite corporate power and authority
to execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement and the
consummation by the Company of the transactions contemplated hereby have
been duly and validly
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<PAGE>
authorized by the Company. This Agreement has been duly authorized,
executed and delivered by the Company.
(ix) The Securities to be purchased by the U.S. Underwriters and
the International Managers from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters pursuant to this Agreement and
the International Managers pursuant to the International Purchase
Agreement, respectively, and, when issued and delivered by the Company
pursuant to this Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth herein and the
International Purchase Agreement, respectively, will be validly issued,
fully paid and non-assessable; the Common Stock conforms to the description
thereof contained in the Registration Statement and the Prospectuses; no
holder of the Securities will be subject to personal liability by reason of
being such a holder; and the issuance of the Securities is not subject to
the preemptive or other similar rights of any securityholder of the
Company pursuant to the DGCL or the Amended Certificate of Incorporation.
(x) Neither the Company nor any of the Subsidiaries is (1) in
violation of its certificate of incorporation or bylaws, (2) in violation
of any law, ordinance, governmental rule, regulation or court decree to
which it or its property or assets may be subject, except for such
violations as singly or in the aggregate do not and will not reasonably be
expected to have a Material Adverse Effect or (3) in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties or assets may be bound, except for
such defaults as singly or in the aggregate do not and will not reasonably
be expected to have a Material Adverse Effect. The execution and delivery
by the Company, and the performance by the Company of its obligations under
this Agreement, the consummation of the transactions contemplated hereby,
and the fulfillment of the terms hereof, will not result in the breach or
violation of or constitute a default or Repayment Event (as defined below)
under (a) any statute, rule or regulation applicable to the Company, (b)
the certificate of incorporation or bylaws of the Company, (c) any other
agreement or instrument binding upon the Company or any of the Subsidiaries
that is material to the Company and the Subsidiaries, taken as a whole, or
(d) any judgment, order or decree binding on the Company or any subsidiary
of any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, except for any breach, violation, default or
Repayment Event which, singly or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary.
(xi) No labor dispute with the employees of the Company or any of
the Subsidiaries exists or, to the Company's knowledge, is threatened or
imminent that could reasonably be expected to result in a Material Adverse
Effect, except as described in or contemplated by the Registration
Statement and the Prospectuses.
(xii) There are no (A) legal or governmental proceedings pending
or to the Company's knowledge threatened to which the Company or any of the
Subsidiaries is a party or to which any of the properties of the Company or
any of the Subsidiaries is subject which would be required to be described
in the Registration
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<PAGE>
Statement and the Prospectuses pursuant to the 1933 Act that are not
described in the Registration Statement and the Prospectuses, other than
proceedings that, if decided adversely to the Company or such Subsidiaries,
would not reasonably be expected to have a Material Adverse Effect, or a
material adverse effect on the power or ability of the Company to perform
its obligations under this Agreement or (B) material documents relating to
the Company or any of the Subsidiaries which would be required to be
described in the Registration Statement and the Prospectuses or filed as
exhibits thereto pursuant to the 1933 Act that are not so described in the
Registration Statement and the Prospectuses and filed as required.
(xiii) The Company and the Subsidiaries own or possess all
right, title and interest in and to, or have duly licensed from third
parties, all patents, patent rights, trade secrets, inventions, know-how,
trademarks, trade names, copyrights, service marks and other proprietary
rights (collectively, "Trade Rights"), if any, that are material to the
business of the Company and the Subsidiaries, taken as a whole; neither the
Company nor any of the Subsidiaries have received any notice of
infringement, misappropriation or conflict from any third party as to such
material Trade Rights that has not been resolved or disposed of and, to the
knowledge of the Company, neither the Company nor any of the Subsidiaries
has infringed, misappropriated or otherwise conflicted with the material
Trade Rights of any third parties, except for such infringements,
misappropriations or conflicts as, singly or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect.
(xiv) No consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except
(A) such as have been obtained or made, (B) such as may be required by the
1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"),
or the securities or Blue Sky laws in connection with the offer and sale of
the Shares and (C) clearance with the National Association of Securities
Dealers, Inc. ("NASD").
(xv) Each of the Company and the Subsidiaries has all necessary
consents, authorizations, approvals, orders, certificates and permits of
and from, and has made all declarations and filings with, all federal,
state, local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, to own, lease, license
and use its properties and assets and to conduct its business in the manner
described in the Registration Statement and the Prospectuses, except to the
extent that the failure to obtain or file would not reasonably be expected
to have a Material Adverse Effect.
(xvi) The Company and the Subsidiaries have good and valid title
to all real and personal property owned by them which is material to the
business of the Company and the Subsidiaries, in each case free and clear
of all liens (except liens for taxes not yet due and payable), encumbrances
and defects, except such as are
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<PAGE>
described or reflected in the Registration Statement and the Prospectuses,
and such as do not materially interfere with the use made and proposed to
be made for such property by the Company and the Subsidiaries, and except
to the extent the failure to have such title or the existence of such
liens, encumbrances and defects would not reasonably be expected to have a
Material Adverse Effect; and any material real property held under lease by
the Company and the Subsidiaries are held by them under valid and binding
leases with such exceptions as are not material and do not materially
interfere with the use made and proposed to be made of such property and
buildings by the Company and the Subsidiaries, in each case except as
described or reflected in the Registration Statement and the Prospectuses.
(xvii) The Company confirms that as of the date hereof it is in
compliance with all provisions of Section 517.075, Florida Statutes
(Chapter 92-198, Laws of Florida).
(xviii) The Company is not and, after giving effect to the
offering of the Shares and the application of the proceeds thereof as
described in the Registration Statement and the Prospectuses, will not be
an "investment company" as such term is defined in the Investment Company
Act of 1940, as amended.
(xix) The Company and the Subsidiaries (a) are in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (b) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (c) are in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(xx) Except for the Selling Stockholders, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act other than holders of registration rights
who are not Selling Stockholders who have received (or waived receipt of)
proper notice from the Company with respect to such rights and have not
exercised such rights with respect to the offering made by the
Prospectuses.
(xxi) The Company and each of the Subsidiaries are insured by
insurers against such losses and risks and in such amounts as the Company
believes are appropriate for the business in which they are engaged.
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<PAGE>
(xxii) Neither the Company nor any of the Subsidiaries has
taken, nor will take, directly or indirectly, any action designed to, or
that might be reasonably expected to, cause or result in stabilization or
manipulation of the price of the Securities.
(b) Representations and Warranties by the Selling Stockholders. Each
Selling Stockholder, severally and not jointly, represents and warrants to each
Underwriter as of the date hereof and as of the Closing Time and agrees with
each Underwriter, as follows:
(i) To the extent that any statements or omissions made in the
Registration Statement, when it became effective, and the Prospectuses, or
any amendment or supplement thereto are made in reliance upon and in
conformity with information furnished to the Company by such Selling
Stockholder, neither the Prospectuses nor any amendments or supplements
thereto include any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) Such Selling Stockholder has the full right, power and
authority to enter into this Agreement and a Power of Attorney and Custody
Agreement (the "Power of Attorney and Custody Agreement") and to sell,
transfer and deliver the Securities to be sold by such Selling Stockholder
hereunder. The execution and delivery of this Agreement and the Power of
Attorney and Custody Agreement and the sale and delivery of the Securities
to be sold by such Selling Stockholder and the consummation of the
transactions contemplated herein and compliance by such Selling Stockholder
with its obligations hereunder have been duly authorized by such Selling
Stockholder and do not and will not, whether with or without the giving of
notice or passage of time or both, conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any tax, lien,
charge or encumbrance upon the Securities to be sold by such Selling
Stockholder or any property or assets of such Selling Stockholder pursuant
to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, license, lease or other agreement or instrument to which
such Selling Stockholder is a party or by which such Selling Stockholder
may be bound, or to which any of the property or assets of such Selling
Stockholder is subject, nor will such action result in any violation of the
provisions of the charter or by-laws or other organizational instrument of
such Selling Stockholder, if applicable, or any applicable treaty, law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over such Selling Stockholder or any of its properties.
(iii) Such Selling Stockholder has and will at the Closing Time
have good and marketable title to the Securities to be sold by such Selling
Stockholder hereunder, free and clear of any security interest, mortgage,
pledge, lien, charge, claim, equity or encumbrance of any kind, other than
pursuant to this Agreement; and upon
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<PAGE>
delivery of such Securities and payment of the purchase price therefor as
herein contemplated, assuming each such Underwriter has no notice of any
adverse claim, each of the Underwriters will receive good and marketable
title to the Securities purchased by it from such Selling Stockholder, free
and clear of any security interest, mortgage, pledge, lien, charge, claim,
equity or encumbrance of any kind.
(iv) Such Selling Stockholder has duly executed and delivered,
in the form heretofore furnished to the U.S. Representatives, the Power of
Attorney and Custody Agreement with Martin R. Reid and Robert M. Wilson, or
any of them, as attorneys-in-fact (the "Attorneys-in-Fact") and Robert M.
Wilson, as custodian (the "Custodian"); the Custodian is authorized to
deliver the Securities to be sold by such Selling Stockholder hereunder and
to accept payment therefor; and each Attorney-in-Fact is authorized to
execute and deliver this Agreement and the certificate referred to in
Section 5(f) or that may be required pursuant to Section 5(n) on behalf of
such Selling Stockholder, to sell, assign and transfer to the Underwriters
the Securities to be sold by such Selling Stockholder hereunder, to
determine the purchase price to be paid by the Underwriters to such Selling
Stockholder, as provided in Section 2(a) hereof, to authorize the delivery
of the Securities to be sold by such Selling Stockholder hereunder, to
accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement.
(v) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities.
(vi) No filing with, or consent, approval, authorization, order,
registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, is necessary or required for the
performance by such Selling Stockholder of its obligations hereunder or in
the Power of Attorney and Custody Agreement, or in connection with the sale
and delivery of the Securities hereunder or the consummation of the
transactions contemplated by this Agreement, except such as may have
previously been made or obtained or as may be required under the 1933 Act
or the 1933 Act Regulations or state securities laws.
(vii) During a period of 90 days from the date of the
Prospectuses, such Selling Stockholder will not, without the prior written
consent of Merrill Lynch: (A) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer
or dispose of, directly or indirectly, any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
or file any registration statement under the 1933 Act with respect to any
of the foregoing or (B) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly,
the economic consequence of ownership of the
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<PAGE>
Common Stock, whether any such swap or transaction described in clause (A)
or (B) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (x) the Securities to be sold hereunder or under the International
Purchase Agreement or (y) the exercise of existing options or (z) any sale
by the pledgee of shares of Common Stock which are subject to an existing
pledge or other security arrangement on the date hereof of which the U.S.
Underwriters have been advised in writing, in good faith pursuant to the
terms of such pledge or arrangement.
(viii) Certificates for all of the Securities to be sold by such
Selling Stockholder pursuant to this Agreement, in suitable form for
transfer by delivery or accompanied by duly executed instruments of
transfer or assignment in blank with signatures guaranteed, have been
placed in custody with the Custodian with irrevocable conditional
instructions to deliver such Securities to the Underwriters pursuant to
this Agreement.
(ix) Neither such Selling Stockholder nor any of his/her
affiliates directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, or has any
other association with (within the meaning of Article I, Section 1(m) of
the By-laws of the National Association of Securities Dealers, Inc.), any
member firm of the National Association of Securities Dealers, Inc.
(c) Officers' Certificates. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Global Coordinator, the
U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby; and any certificate signed by or on behalf of the
Selling Stockholders as such and delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the Underwriters pursuant to the terms of this
Agreement shall be deemed a representation and warranty by such Selling
Stockholder to the U.S. Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
-----------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and the Selling Stockholders, severally and not jointly,
agree to sell to each U.S. Underwriter, severally and not jointly, and each U.S.
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Stockholder, at the price per share set forth in Schedule C, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional number of Initial U.S. Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
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<PAGE>
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the U.S.
Underwriters, severally and not jointly, to purchase up to an additional 330,000
shares of Common Stock at the price per share set forth in Schedule C, less an
amount per share equal to any dividends or distributions declared by the Company
and payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part on up to two occasions only for the
purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial U.S. Securities upon notice by the
Global Coordinator to the Company setting forth the number of U.S. Option
Securities as to which the several U.S. Underwriters are then exercising the
option and the time and date of payment and delivery for such U.S. Option
Securities. Any such time and date of delivery for the U.S. Option Securities (a
"Date of Delivery") shall be determined by the Global Coordinator, but shall not
be later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the U.S. Option Securities, each of the
U.S. Underwriters, acting severally and not jointly, will purchase that
proportion of the total number of U.S. Option Securities then being purchased
which the number of Initial U.S. Securities set forth in Schedule A opposite the
name of such U.S. Underwriter bears to the total number of Initial U.S.
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. The Underwriters shall acquire security entitlements
with respect to the Initial Securities being offered by the Company and the
Selling Stockholders hereunder and payment shall be made therefor at a closing
(the "Closing") to take place at the offices of Latham & Watkins, 633 W. 5th
Street, Los Angeles, California, or at such other place as shall be agreed upon
by the Global Coordinator and the Company and the Selling Stockholders, at 7:00
A.M. (California time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Global Coordinator and the Company and the Selling Stockholders (such time and
date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option
Securities are purchased by the U.S. Underwriters, payment of the purchase price
for, and delivery of certificates for, such U.S. Option Securities shall be made
at the above-mentioned offices, or at such other place as shall be agreed upon
by the Global Coordinator and the Company, on each Date of Delivery as specified
in the notice from the Global Coordinator to the Company.
In the case of Initial Securities to be offered by the Company, on the
date of the Closing, the transfer agent shall cause such Initial Securities to
be registered in the name
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of Cede & Co., as nominee of the Depository Trust Company ("DTC") and shall
cause DTC to credit security entitlements with respect to such Initial
Securities by book entry to the securities accounts of the U.S. Underwriters at
DTC for the account of each Underwriter against payment of the purchase price to
the Company by wire transfer of immediately available funds to a bank account
designated by the Company.
In the case of Initial Securities to be sold by the Selling
Stockholders, prior to the date of the Closing, the Selling Stockholders shall
deliver or cause to be delivered to the Company's transfer agent certificates
representing the Initial Securities being offered by the Selling Stockholders
hereunder, with instructions to cancel such certificates and register those
Initial Securities in the name of Cede & Co., as nominee of DTC, on the date of
the Closing. At Closing Time, the Selling Stockholders shall cause DTC to
credit security entitlements with respect to such Initial Securities by book
entry to the securities accounts of the U.S. Underwriters at DTC for the account
of each Underwriter against payment of the purchase price to or upon the order
of the Selling Stockholders by wire transfer of immediately available funds to
accounts designated by the Custodian pursuant to each Selling Stockholder's
Power of Attorney and Custody Agreement.
Time shall be of the essence, and crediting of security entitlements
at the time and place specified pursuant to this Agreement is a further
condition of the obligation of each Underwriter hereunder. Security
entitlements with respect to the Initial Securities shall be credited to
securities accounts of the U.S. Representatives for the account of each U.S.
Underwriter in such amounts as the U.S. Representatives shall request in writing
not less than one full business day prior to the date of the Closing.
It is understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the U.S. Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial U.S.
Securities or the U.S. Option Securities, if any, to be purchased by any U.S.
Underwriter whose funds have not been received by the Closing Time or the
relevant Date of Delivery, as the case may be, but such payment shall not
relieve such U.S. Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in the City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
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SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the Global
Coordinator upon the advice of counsel for the U.S. Underwriters shall
reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the U.S. Representatives and counsel for the U.S. Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the U.S. Representatives,
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the U.S.
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S.
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Underwriter reasonably requested, and the Company hereby consents to the use of
such copies for purposes permitted by the 1933 Act. The Company will furnish to
each U.S. Underwriter, without charge, during the period when the U.S.
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the U.S. Prospectus (as amended or supplemented) as such
U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments
or supplements thereto furnished to the U.S. Underwriters will be identical to
the electronically transmitted copies thereof filed with the Commission pursuant
to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the International Purchase Agreement and in the Prospectuses. If at
any time when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of the Global
Coordinator upon the advice of counsel for the U.S. Underwriters or in the
opinion of the Company upon the advice of its counsel, to amend the Registration
Statement or amend or supplement any Prospectus in order that the Prospectuses
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of the Global Coordinator
upon the advice of such counsel or in the opinion of the Company upon the advice
of its counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the Company
will furnish to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use all reasonable
efforts, in cooperation with the U.S. Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
reasonably request and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject.
(g) Rule 158. The Company will make generally available to its
securityholders as soon as practicable an earnings statement meeting the
requirements of the last paragraph of Section 11(a) of the 1933 Act.
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(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect the
listing of the Securities on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 90 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder or under the
International Purchase Agreement, (B) the grant of stock options and purchase
rights to employees of the Company under the 1995 Plan, the 1996 Plan and the
QSP Plan, (C) the issuance of shares upon the conversion or exercise of
outstanding options and warrants, (D) the registration of the shares of Common
Stock underlying the 1996 Plan or (E) any shares of Common Stock issued in
connection with acquisitions.
SECTION 4. Payment of Expenses.
-------------------
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and the
Prospectuses and any amendments or supplements thereto, (vii) the preparation,
printing
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and delivery to the Underwriters of copies of the Blue Sky Survey and any
supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, any review by the NASD of the terms of the sale of the Securities and (x)
the fees and expenses incurred in connection with the listing of the Securities
on the New York Stock Exchange.
(b) Expenses of the Selling Stockholders. The Selling Stockholders,
severally and not jointly, will pay all expenses incident to the performance of
their respective obligations under, and the consummation of the transactions
contemplated by this Agreement, including (i) any stamp duties, capital duties
and stock transfer taxes, if any, payable upon the sale of the Securities to the
Underwriters, and their transfer between the Underwriters pursuant to an
agreement between such Underwriters, and (ii) the fees and disbursements of
their respective counsel and accountants.
(c) Termination of Agreement. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5 (other than
Section 5(d)), Section 9(a)(i), Section 9(a)(iii) (with respect to the Company's
securities only) or Section 11, the Company shall reimburse the U.S.
Underwriters for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel for the U.S. Underwriters.
(d) Allocation of Expenses. The provisions of this Section shall not
affect any agreement that the Company and the Selling Stockholders may make for
the sharing of such costs and expenses.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
--------------------------------------------
obligations of the several U.S. Underwriters hereunder are subject to the
satisfaction of the following conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of the
Registration Statement shall have been issued under the 1933 Act or proceedings
therefor initiated or threatened by the Commission, and any request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of Closing
Time, of
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Latham & Watkins, counsel for the Company, in form and substance satisfactory to
counsel for the U.S. Underwriters, together with signed or reproduced copies of
such letter for each of the other U.S. Underwriters to the effect set forth in
Exhibit A hereto and to such further effect as counsel to the U.S. Underwriters
may reasonably request.
(c) Opinion of Counsel for the Selling Stockholders. At Closing Time,
the U.S. Representatives shall have received a favorable opinion, dated as of
Closing Time, of counsel for each of the Selling Stockholders, in form and
substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the
U.S. Representatives shall have received the favorable opinion, dated as of
Closing Time, of Simpson Thacher & Bartlett, counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the other
U.S. Underwriters with respect to certain matters relating to the Company and
the Securities. In giving such opinion such counsel may rely, as to all matters
governed by the laws of jurisdictions other than the law of the State of New
York, the federal law of the United States and the General Corporation Law of
the State of Delaware, upon the opinions of counsel satisfactory to the U.S.
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and the Subsidiaries and certificates of
public officials.
(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary couse of business, and the
U.S. Representatives shall have received a certificate of the chief executive
officer or a Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect that
(i) there has been no such material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary couse of business, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied at or prior to Closing Time and (iv) 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, to the
knowledge of the Company, are pending or have been threatened by the Commission.
(f) Certificate of Selling Stockholders. At Closing Time, the U.S.
Representatives shall have received a certificate of an Attorney-in-Fact on
behalf of each Selling Stockholder, dated as of Closing Time, to the effect
that (i) the representations and warranties of each Selling Stockholder
contained in Section 1(b) hereof are true and correct in all respects with the
same force and effect as though expressly made at and as of Closing Time and
(ii) each Selling Stockholder has complied in all material respects with all
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agreements and all conditions on its part to be performed under this Agreement
at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the U.S.
Representatives, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the U.S.
Representatives shall have received from Ernst & Young LLP a letter, dated as of
Closing Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit C hereto signed by the persons listed on Schedule D hereto.
(l) Purchase of Initial International Securities. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities under
this Agreement, the International Managers shall have purchased the Initial
International Securities under the International Purchase Agreement.
(m) Conditions to Purchase of U.S. Option Securities. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b) hereof
to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the U.S. Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the chief executive officer or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company
confirming that the certificate
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delivered at the Closing Time pursuant to Section 5(e) hereof remains true
and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
Latham & Watkins, counsel for the Company, in form and substance
satisfactory to counsel for the U.S. Underwriters, dated such Date of
Delivery, relating to the U.S. Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinion required
by Section 5(b) hereof.
(iii) Opinion of Counsel for U.S. Underwriters. The favorable
----------------------------------------
opinion of Simpson Thacher & Bartlett, counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(d) hereof.
(iv) Bring-down Comfort Letter. A letter from Ernst & Young
-------------------------
LLP, in form and substance satisfactory to the U.S. Representatives and
dated such Date of Delivery, substantially in the same form and substance
as the letter furnished to the U.S. Representatives pursuant to Section
5(h) hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days prior to
such Date of Delivery.
(n) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished with such
documents and opinions as they may reasonably require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company and the Selling Stockholders in
connection with the issuance and sale of the Securities as herein contemplated
shall be satisfactory in form and substance to the U.S. Representatives and
counsel for the U.S. Underwriters.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
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SECTION 6. Indemnification.
---------------
(a) Indemnification by the Company and Selling Stockholders. The
Company agrees to indemnify and hold harmless each U.S. Underwriter, each
Selling Stockholder and each person, if any, who controls any U.S. Underwriter
or Selling Stockholder within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act to the extent and in the manner set forth in clauses
(i), (ii) and (iii) below. In addition, each Selling Stockholder, severally and
not jointly, subject to the second proviso below, agrees to indemnify and hold
harmless each U.S. Underwriter, the Company and each person, if any, who
controls any U.S. Underwriter or the Company within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or the
Prospectuses (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim whatsoever
based upon any such untrue statement or omission, or any such alleged untrue
statement or omission provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill Lynch),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission,
to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any
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preliminary prospectus or the U.S. Prospectus (or any amendment or supplement
thereto); and provided, further, that each Selling Stockholder agrees to
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indemnify and hold harmless each U.S. Underwriter as provided in clauses (i),
(ii) and (iii) above, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with written information furnished to the
Company or the Underwriters by such Selling Stockholder expressly for use in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectuses (or any amendment or supplement thereto), and the liability
of any Selling Stockholder for indemnification under this Section 6 shall be
limited to an amount equal to the net proceeds (after deducting the U.S.
Underwriters' discount) received by such Selling Stockholder from the sale of
U.S. Securities pursuant to this Agreement; and provided, further, that the
-------- -------
Company will not be liable to any U.S. Underwriter with respect to any U.S.
Prospectus to the extent that the Company shall sustain the burden of providing
that any such loss, liability, claim, damage or expense resulted from the fact
that such U.S. Underwriter, in contravention of a requirement of applicable law,
sold Securities to a person to whom such U.S. Underwriter failed to send or
give, at or prior to the Closing date, a copy of the final U.S. Prospectus, as
then amended or supplemented if: (i) the Company has previously furnished
copies thereof (sufficiently in advance of the Closing date and in sufficient
quantity to allow for distribution by the Closing date) to the U.S. Underwriters
and the loss, liability, claim, damage or expense of such U.S. Underwriter
resulted from an untrue statement or omission of a material fact contained in or
omitted from the preliminary U.S. Prospectus which was corrected in the final
U.S. Prospectus as, if applicable, amended or supplemented prior to the Closing
date and such final U.S. Prospectus was required by law to be delivered at or
prior to the written confirmation of sale to such person and (ii) such failure
to give or send such final U.S. Prospectus by the Closing date to the party or
parties asserting such loss,liability, claim, damage or expense would have
constituted the sole defense to the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers and Selling
Stockholders by the U.S. Underwriters. Each U.S. Underwriter severally agrees
to indemnify and hold harmless the Company, its directors, each of its officers
who signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act and each Selling Stockholder against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or
the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto).
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(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall (subject to the following
sentence) be selected by Merrill Lynch, and, in the case of parties indemnified
pursuant to Section 6(b) above, counsel to the indemnified parties shall be
selected by the Company. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof with counsel satisfactory to such
indemnified party; provided, however, that counsel to the indemnifying party
shall not (except with the consent of the indemnified party) also be counsel to
the indemnified party and provided, further, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. In no event shall the indemnifying
parties be liable for fees and expenses of more than one counsel (in addition to
any local counsel) separate from their own counsel for all indemnified parties
in connection with any one action or separate but similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Other Agreements with Respect to Indemnification. The provisions
of this Section shall not affect any agreement among the Company and the Selling
Stockholders with respect to indemnification.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable or insufficient to hold harmless
an indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each
-24-
<PAGE>
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the U.S. Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) 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 and the Selling Stockholders on the one hand and
of the U.S. Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling
Stockholders on the one hand and the U.S. Underwriters on the other hand in
connection with the offering of the U.S. Securities pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the U.S. Securities pursuant to this Agreement
(before deducting expenses) received by the Company and the Selling Stockholders
and the total underwriting discount received by the U.S. Underwriters, in each
case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used,
the corresponding location on the Term Sheet, bear to the aggregate initial
public offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company and the Selling Stockholders on the
one hand and the U.S. Underwriters on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company and the Selling Stockholders
or by the U.S. Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the U.S. Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
7 were determined by pro rata allocation (even if the U.S. Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 7. The aggregate amount of losses, liabilities, claims, damages
and expenses incurred by an indemnified party and referred to above in this
Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public
-25-
<PAGE>
exceeds the amount of any damages which such U.S. Underwriter has otherwise been
required to pay by reason of any 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.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company or any Selling Stockholder within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act shall have the same rights to contribution as
the Company or such Selling Stockholder, as the case may be. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among
the Company and the Selling Stockholders with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Stockholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any U.S. Underwriter or controlling person, or by or on behalf
of the Company or the Selling Stockholders, and shall survive delivery of the
Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company and the Selling Stockholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the U.S. Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the U.S. Representatives, impracticable to market the Securities or
to enforce contracts for
-26-
<PAGE>
the sale of the Securities, or (iii) if trading in any securities of the Company
has been suspended or materially limited by the Commission or the New York Stock
Exchange, or if trading generally on the American Stock Exchange or the New York
Stock Exchange or in the Nasdaq National Market has been suspended or materially
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by any of said exchanges or by such system
or by order of the Commission, the National Association of Securities Dealers,
Inc. or any other governmental authority, or (iv) if a banking moratorium has
been declared by either Federal or New York State authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
-----------------------------------------------
or more of the U.S. Underwriters shall fail or refuse at Closing Time or a Date
of Delivery to purchase the Securities which it or they are obligated but failed
or refused to purchase under this Agreement (the "Defaulted Securities"), the
U.S. Representatives shall have the right, within 36 hours thereafter, to make
arrangements for one or more of the non-defaulting U.S. Underwriters, or any
other underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth if; however, the U.S. Representatives shall not have completed such
arrangements within such 36-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder (as set forth opposite their respective names
in Schedule A) bear to the underwriting obligations of all non-defaulting U.S.
Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
U.S. Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of the
U.S. Underwriters to purchase and of the Company to sell the Option Securities
to be purchased and sold on such Date of Delivery shall terminate without
liability on the part of any non-defaulting U.S. Underwriter, the Company or the
Selling Stockholders.
No action taken pursuant to this Section shall relieve any
defaulting U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the U.S. Underwriters to purchase and the Company to sell the relevant U.S.
Option Securities, as the case may be, either the U.S. Representatives or the
Company shall have the right to postpone Closing Time or the relevant Date of
Delivery, as the case may be, for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectuses or in
any other documents or arrangements. As used herein, the term "U.S.
Underwriter" includes any person substituted for a U.S. Underwriter under this
Section 10.
-27-
<PAGE>
SECTION 11. Default by One or More of the Selling Stockholders or the
---------------------------------------------------------
Company.
- -------
(a) If a Selling Stockholder shall fail at Closing Time or at a Date
of Delivery to sell and deliver the number of Securities which such Selling
Stockholder or Selling Stockholders are obligated to sell hereunder, and the
remaining Selling Stockholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number to be sold by all Selling Stockholders as set
forth in Schedule B hereto, then the Company shall have the right within 36
hours thereafter to make arrangements for the Company to sell such number of
Securities; provided that if the Company has not agreed to do so within such 36
--------
hour period, then the Underwriters may, at option of the U.S. Representatives,
by notice from the U.S. Representatives to the Company and the non-defaulting
Selling Stockholders, either (a) terminate this Agreement without any liability
on the fault of any non-defaulting party except that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase
the Securities which the non-defaulting Selling Stockholders and the Company
have agreed to sell hereunder. No action taken pursuant to this Section 11
shall relieve any Selling Stockholder so defaulting from liability, if any, in
respect of such default.
In the event of a default by any Selling Stockholder as referred to in
this Section 11, each of the U.S. Representatives and the Company and the non-
defaulting Selling Stockholders shall have the right to postpone Closing Time or
Date of Delivery for a period not exceeding seven days in order to effect any
required change in the Registration Statement or Prospectuses or in any other
documents or arrangements.
(b) If the Company shall fail at Closing Time or at the Date of
Delivery to sell the number of Securities that it is obligated to sell
hereunder, then this Agreement shall terminate without any liability on the part
of any non-defaulting party; provided, however, that the provisions of Sections
1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken
pursuant to this Section shall relieve the Company from liability, if any, in
respect of such default.
SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, Attention of Jay Caldwell;
notices to the Company shall be directed to it at 6929 E. Greenway Parkway,
Suite 200, Scottsdale, Arizona 85254, attention of the President; and notices to
the Selling Stockholders shall be directed to the Custodian at 6929 E. Greenway
Parkway, Suite 200, Scottsdale, Arizona 85254.
-28-
<PAGE>
SECTION 13. Parties. This Agreement shall each inure to the benefit
-------
of and be binding upon the U.S. Underwriters, the Company and the Selling
Stockholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company and the Selling
Stockholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the U.S. Underwriters, the Company and the Selling
Stockholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any U.S. Underwriter shall be deemed to be a successor by reason merely of
such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
----------------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT
AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 15. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
-29-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company and the Attorney-in-Fact for
the Selling Stockholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement between the U.S.
Underwriters, the Company and the Selling Stockholders in accordance with its
terms.
Very truly yours,
RENTAL SERVICE CORPORATION
By ___________________________
Name:
Its:
THE SELLING STOCKHOLDERS:
National Christian Charitable Foundation, Inc.,
Dave and Marcia Lanoha Fund
The Jerome Group, Ltd.
Tharco, Inc.
Allen Equipment, Inc.
George L. Scigousky
By ____________________________
As Attorney-in-Fact
-30-
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
WILLIAM BLAIR & COMPANY, L.L.C.
MORGAN STANLEY & CO. INCORPORATED
BT ALEX. BROWN INCORPORATED
LEGG MASON WOOD WALKER, INCORPORATED
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By____________________________________
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
-31-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial U.S.
Name of U.S. Underwriter Securities
- ------------------------ ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................
William Blair & Company, L.L.C..........
Morgan Stanley & Co. Incorporated.......
BT Alex. Brown Incorporated.............
Legg Mason Wood Walker, Incorporated....
---------
Total................................... 2,200,000
=========
</TABLE>
Sch A-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Maximum Number of
Number of Initial Option
Securities to Be Sold Securities to Be Sold
--------------------- ---------------------
<S> <C> <C>
Rental Service Corporation 2,135,936 330,000
National Christian Charitable
Foundation, Inc., Dave
and Marcia Lanoha Fund 49,632 -
The Jerome Group, Ltd. 4,263 -
Tharco, Inc. 6,400 -
Allen Equipment, Inc. 3,413 -
George L. Scigousky 356 -
--------- -------
Total........................... 2,200,000 330,000
========= =======
</TABLE>
Sch B-1
<PAGE>
SCHEDULE C
RENTAL SERVICE CORPORATION
2,200,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The public offering price per share for the Securities,
determined as provided in said Section 2, shall be $____.
2. The purchase price per share for the U.S. Securities to be paid
by the several U.S. Underwriters shall be $____, being an amount equal to the
public offering price set forth above less $____ per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
Sch C-1
<PAGE>
SCHEDULE D
List of persons subject to lock-up
Martin R. Reid
Robert M. Wilson
Ronald Halchishak
David G. Ledlow
John Markle
Douglas A. Waugaman
David B. Harrington
William M. Barnum, Jr.
James R. Buch
David P. Lanoha
Christopher A. Laurence
Eric L. Mattson
Britton H. Murdoch
John M. Sullivan
National Christian Charitable Foundation, Inc., Dave and Marcia Lanoha Fund
The Jerome Group, Ltd.
Tharco, Inc.
Allen Equipment, Inc.
George L. Scigousky
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) 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 to conduct its business as
described in the Prospectuses. Based solely on certificates from public
officials, such counsel confirms that the Company is qualified to do
business in the State of Arizona.
(ii) RSC Holdings Inc., a Delaware corporation, RSC Acquisition Corp.,
a Delaware corporation, RSC Industrial Corporation, a Delaware corporation,
RSC Duval Inc., a Delaware corporation, and RSC Rents, Inc., a California
corporation (collectively, the "Identified Subsidiaries" and each an
"Identified Subsidiary"), have each been duly incorporated and are validly
existing and in good standing under the laws of the States of Delaware or
California, as applicable; and, based solely on certificates from public
officials, such counsel confirms that each of the Identified Subsidiaries
is qualified to do business in the state or states indicated in Schedule A
to such opinion.
(iii) The Company has the authorized capitalization as set forth in
the Prospectuses. The issued and outstanding shares of capital stock of
each Identified Subsidiary are as set forth in Schedule B to such opinion
(the "Identified Subsidiary Shares"). The issued and outstanding shares of
capital stock of each of RSC Alabama, Inc., an Alabama corporation, RSC
Center, Inc., a Texas corporation, and Walker Jones Equipment, Inc., a
Mississippi corporation (the "Foreign Subsidiaries" and collectively with
the Identified Subsidiaries, the "Subsidiaries") are as set forth in
Schedule C to such opinion (collectively with the Identified Subsidiary
Shares, the "Subsidiary Shares"). The Identified 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) and in the Prospectuses,
the Company or a wholly-owned subsidiary of the Company owns of record all
of the Subsidiary Shares, to such counsel's knowledge, free and clear of
any adverse claim (as defined in Section 8-302 of the New York Uniform
Commercial Code (the "UCC").
(iv) The Securities to be purchased by the Underwriters from the
Selling Stockholders have been duly authorized and validly issued and are
fully paid and non-assessable.
(v) The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to the U.S. Purchase Agreement
and the International Purchase Agreement,
Exh A-1
<PAGE>
respectively, against payment of the consideration set forth in the U.S.
Purchase Agreement and the International Purchase Agreement, will be
validly issued and fully paid and non-assessable and no holder of the
Securities is or will be subject to personal liability by reason of being
such a holder.
(vi) The Securities conform as to legal matters in all respects to the
description thereof in the Prospectuses under the caption "Description of
Capital Stock."
(vii) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(viii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); and, to
such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectuses and each amendment or
supplement to the Registration Statement and the Prospectuses as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to which
we need express no opinion) complied as to form in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations.
(x) If Rule 434 has been relied upon, the Prospectuses were not
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective.
(xi) The form of certificate used to evidence the Common Stock is in
due and proper form under the Delaware General Corporation Law (the
"DGCL").
(xii) To such counsel's knowledge, no legal or governmental
proceedings have been filed in any Delaware, New York or federal court to
which the Company or any of the Subsidiaries is a party or to which any of
the properties of the Company or any of the Subsidiaries is subject which
would be required under the Act to be described in a registration statement
or in a prospectus and are not so described.
(xiii) The information in the Prospectuses under the captions
"Capitalization," "Management--401(k) Plan," "Management--Equity
Participation Plans," "Management--Executive Incentive Bonus Plan,"
"Management--Employee Qualified Stock Purchase Plan," "Certain
Relationships and Related Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" and in the Registration Statement under
Item 14 and Item 15, to the extent that it constitutes a summary of the
Company's capital stock or of legal matters or documents referred to
therein is correct in all material respects.
Exh A-2
<PAGE>
(xiv) To such counsel's knowledge, there are no contracts or other
agreements required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto.
(xv) To such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any federal or New York or
Delaware court or governmental agency or body is required for the
consummation of the issuance and sale of the Shares of Common Stock by the
Company pursuant to the Underwriting 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.
(xvi) The execution of the U.S Purchase Agreement and the
International Purchase Agreement and the issuance of the Shares of Common
Stock by the Company pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement do not (i) 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 the Subsidiaries or
by which the property of any of them is bound and which is filed as an
exhibit to the Registration Statement; (ii) violate the Company's Amended
Certificate of Incorporation or Amended and Restated Bylaws, the
Certificate of Incorporation and Bylaws of any Identified Subsidiary or the
DGCL or (iii) violate any federal or New York statute, rule or regulation
known to such counsel to be applicable to the Company or any Subsidiary
(other than state securities laws, as to which counsel expresses no
opinion).
(xvii) The issuance and sale of the Shares of Common Stock by the
Company and the sale of the Shares of Common Stock by the Selling
Stockholders are not subject to preemptive rights of the stockholders of
the Company in the Amended Certificate of Incorporation or the DGCL.
(xviii) To such counsel's knowledge, except for the Selling
Stockholders and holders of registration rights who are not Selling
Stockholders, who have received (or waived receipt of) proper notice from
the Company with respect to such rights and have not exercised such rights
with respect to the offering made by the Prospectuses, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered
by the Company under the 1933 Act.
(xix) The Company is not, and after giving effect to the offering of
the Shares of Common Stock and the application of the proceeds thereof as
described in the Prospectuses, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
Exh A-3
<PAGE>
In addition, we have participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants for the Company, and your representatives, at which the contents of
the Registration Statement and the Prospectuses and related matters were
discussed, and, although we are not passing upon, and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectuses (except to the
extent set forth in paragraph (xiii) hereof) and have not made any independent
check or verification thereof, during the course of such participation, no facts
came to our attention that caused us to believe that either the Registration
Statement, at the time it became effective, contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or that the Prospectuses, as of their date
and as of the date hereof, contained or contains an untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; it being understood that we express no belief with respect to
the financial statements, schedules and other financial data included in the
Registration Statement or the Prospectus.
In rendering such opinion, such counsel may rely, as to matters of
fact (but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating to
legal opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
Exh A-4
<PAGE>
Exhibit B
FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(c)
(i) No filing with, or consent, approval, authorization, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign, (other than the issuance of the order
of the Commission declaring the Registration Statement effective and such
authorizations, approvals or consents as may be necessary under state securities
laws, as to which we need express no opinion) is necessary or required to be
obtained by the Selling Stockholders for the performance by each Selling
Stockholder of its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement (collectively, the "Purchase Agreements") or in
the Power of Attorney and Custody Agreement, or in connection with the offer,
sale or delivery of the Securities.
(ii) Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Stockholders named therein and
constitutes the legal, valid and binding agreement of such Selling Stockholder.
(iii) The Purchase Agreements have been duly [authorized],/1/
executed and delivered by or on behalf of each Selling Stockholder.
[(iv) Each Attorney-in-Fact has been duly authorized by the Selling
Stockholders to deliver the Securities on behalf of the Selling Stockholders in
accordance with the terms of the Purchase Agreements.]/2/
(v) The execution, delivery and performance of the Purchase
Agreements and the Power of Attorney and Custody Agreement and the sale and
delivery of the Securities and the consummation of the transactions contemplated
in the Purchase Agreements and in the Registration Statement and compliance by
the Selling Stockholders with its obligations under the Purchase Agreements
[have been duly authorized by all necessary action on the part of the Selling
Stockholders and]/3/ do/does not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default under or result in the creation or imposition of any tax,
lien, charge or encumbrance upon the Securities or any property or assets of the
Selling Stockholders pursuant to, any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, license, lease or other instrument or
agreement to which any Selling Stockholder is a party or by which he/she may be
bound, or to
- ----------
/1/ This bracketed language should be removed when the Selling Stockholders to
whom the opinion applies are individuals rather than corporations, partnerships
or trusts.
/2/ See footnote 1.
/3/ See footnote 1.
B-1
<PAGE>
which any of the property or assets of the Selling Stockholders may be subject
nor will such action result in any violation of the provisions of the charter or
by-laws of the Selling Stockholders, if applicable, or any law, administrative
regulation, judgment or order of any governmental agency or body or any
administrative or court decree having jurisdiction over such Selling Stockholder
or any of its properties.
(vi) To such counsel's knowledge, each Selling Stockholder has valid
and marketable title to the Securities to be sold by such Selling Stockholder
pursuant to the Purchase Agreements, free and clear of any pledge, lien,
security interest, charge, claim, equity or encumbrance of any kind, and has
full right, power [and authority]/4/ to sell, transfer and deliver such
Securities pursuant to the Purchase Agreements. Each Selling Stockholder which
is a corporation or limited liability company, a partnership, a limited
partnership or a trust has full corporate, partnership or trust power, right and
authority to sell such Securities.]/5/ [Assuming that (1) The Depository Trust
Company ("DTC") is a "securities intermediary," as defined in (S) 8-102 of the
Uniform Commercial Code as in effect in the State of New York (the "New York
UCC") and that the State of New York is the "securities intermediary's
jurisdiction" for purposes of Section 8-110 of the New York UCC, (2) the shares
of Common Stock to be sold by the Selling Stockholders are registered at the
closing in the name of DTC or its nominee, and DTC or another person on behalf
of DTC maintains possession of certificates representing such shares, (3) DTC
indicates by book entries on its books that security entitlements with respect
to such shares have been credited at the closing to the Underwriters' securities
accounts at DTC and (4) the Underwriters are acquiring security entitlements
with respect to the shares of Common Stock to be sold by the Selling
Stockholders without notice of any adverse claim (within the meaning of the New
York UCC), upon the payment and transfer contemplated by the Purchase
Agreements, the Underwriters will acquire a security entitlement with respect to
the Securities and no action based on an adverse claim may be asserted against
the Underwriters.]/6/
- -------------------
/4/ See footnote 1.
/5/ See footnote 1.
/6/ Opinion to be provided by Latham & Watkins on behalf of the Selling
Stockholders.
B-2
<PAGE>
Exhibit C
FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS
PURSUANT TO SECTION 5(K)
August __, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
WILLIAM BLAIR & COMPANY, L.L.C.
MORGAN STANLEY & CO. INCORPORATED
BT ALEX. BROWN INCORPORATED
LEGG MASON WOOD WALKER, INCORPORATED
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
North Tower
World Financial Center
New York, New York 10281-1209
MERRILL LYNCH INTERNATIONAL
WILLIAM BLAIR & COMPANY, L.L.C.
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
BT ALEX. BROWN INTERNATIONAL, A DIVISION OF BANKERS TRUST INTERNATIONAL PLC
LEGG MASON WOOD WALKER, INCORPORATED
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 9L4
England
Re: Proposed Public Offering by Rental Service Corporation
------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder or an officer and/or director of Rental
Service Corporation, a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), William Blair & Company, L.L.C., Morgan Stanley & Co.
Incorporated, BT Alex. Brown Incorporated and Legg Mason Wood
C-1
<PAGE>
Walker, Incorporated propose to enter into a U.S. Purchase Agreement (the "U.S.
Purchase Agreement") with the Company and Merrill Lynch International, William
Blair & Company, L.L.C., Morgan Stanley & Co. International Limited, BT Alex.
Brown International, a division of Bankers Trust International PLC and Legg
Mason Wood Walker, Incorporated propose to enter into an International Purchase
Agreement (the "International Purchase Agreement") with the Company providing
for the public offering of shares (the "Securities") of the Company's common
stock, par value $.01 per share (the "Common Stock"). In recognition of the
benefit that such an offering will confer upon the undersigned as a stockholder
or an officer and/or director of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the U.S. Purchase
Agreement and the International Purchase Agreement that, during a period of 90
days from the date of the U.S. Purchase Agreement and the International Purchase
Agreement, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature: ____________________________
Print Name: _________________________
C-2
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF LATHAM & WATKINS]
August 13, 1998
Rental Service Corporation
6929 East Greenway Parkway
Scottsdale, Arizona 85254
Re: Registration Statement on Form S-1 (File No. 333-59519)
-------------------------------------------------------
3,162,500 Shares of Common Stock, par value $.01 per share
----------------------------------------------------------
Ladies and Gentlemen:
In connection with the registration of 3,162,500 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 filed with the
Securities and Exchange Commission (the "Commission") on July 21, 1998, as
amended by Amendment No. 1 filed with the Commission on July 24, 1998, Amendment
No. 2 filed with the Commission on August 12, 1998 and Post-Effective Amendment
No. 1 filed with the Commission on August 13, 1998 (collectively, the
"Registration Statement"), you have requested our opinion with respect to the
matters set forth below.
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.
<PAGE>
August 13, 1998
Page 2
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>
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 12, 1998, with respect to the
consolidated financial statements and schedules of Rental Service Corporation
as of December 31, 1996 and 1997 and for each of the three years in the period
ended December 31, 1997, in the Registration Statement (Form S-1 No. 333-59519)
and related Prospectus of Rental Service Corporation for the registration of
2,750,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
August 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and 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. 333-59519) and related Prospectus of
Rental Service Corporation for the registration of 2,750,000 shares of its
common stock.
/s/ ERNST & YOUNG LLP
Orange County, California
August 12, 1998
<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. 333-59519) and
related Prospectus of Rental Service Corporation for the registration of
2,750,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
August 12, 1998
<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, except for the last paragraph in
Note 11 as to which the date is May 1, 1998, with respect to the financial
statements of Brute Equipment Co. d/b/a Foxx Hy-Reach, Inc. as of December 31,
1995 and 1996 and for each of the years then ended, in the Registration
Statement (Form S-1 No. 333-59519) and related Prospectus of Rental Service
Corporation for the registration of 2,750,000 shares of its common stock.
/s/ McGLADREY & PULLEN, LLP
Moline, Illinois
August 12, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated November 7, 1997 with respect to the combined
financial statements of Rent-It-Center, Inc. and Affiliates d/b/a Center
Rental & Sales as of October 31, 1996 and 1997 and for each of the three years
in the period ended October 31, 1997, in the Registration Statement (Form S-1
No. 333-59519) and related Prospectus of Rental Service Corporation for the
registration of 2,750,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
August 12, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 3, 1998 with respect to the financial
statements of JDW Enterprises, Inc. d.b.a. Valley Rentals as of December 31,
1996 and 1997 and for the years then ended, in the Registration Statement
(Form S-1 No. 333-59519) and related Prospectus of Rental Service Corporation
for the registration of 2,750,000 shares of its common stock.
/s/ WEINTRAUB & MORRISON, P.C.
Tempe, Arizona
August 12, 1998
