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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-56653
PROSPECTUS
OFFER TO EXCHANGE
9% SENIOR SUBORDINATED NOTES DUE 2008 (THE "EXCHANGE NOTES")
FOR ALL OUTSTANDING 9% SENIOR SUBORDINATED NOTES DUE 2008 (THE "PRIVATE
NOTES")
OF
RENTAL SERVICE CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON SEPTEMBER
24, 1998 UNLESS EXTENDED.
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Rental Service Corporation, a Delaware corporation (the "Company" or "RSC"),
hereby offers (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 9% Senior Subordinated Notes due 2008 (the "Exchange Notes"), which
exchange has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this
Prospectus is a part, for each $1,000 principal amount of its outstanding 9%
Senior Subordinated Notes due 2008 (the "Private Notes"), of which
$200,000,000 in aggregate principal amount was issued on May 13, 1998 (the
"Offering") are outstanding as of the date hereof. The form and terms of the
Exchange Notes are the same as the form and terms of the Private Notes except
that (i) the Exchange Notes will have been registered under the Securities
Act, and, therefore, will not bear legends restricting the transfer thereof
and (ii) holders of the Exchange Notes will not be entitled to certain rights
of holders of the Private Notes under the Registration Rights Agreement (as
defined), which rights will terminate upon the consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as the Private Notes
(which they replace) and will be entitled to the benefits of an indenture
dated as of May 13, 1998 governing the Private Notes and the Exchange Notes
(the "Indenture"). The Private Notes and the Exchange Notes are sometimes
referred to herein collectively as the "Notes." See "The Exchange Offer" and
"Description of Exchange Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, interest on the Exchange Notes will be
payable semi-annually in arrears on May 15 and November 15 of each year,
commencing on November 15, 1998, at the rate of 9% per annum. The Exchange
Notes will be redeemable, in whole or in part, at the option of the Company on
or after May 15, 2001, at the prices set forth herein, together with accrued
and unpaid interest to the date of redemption. In addition, at any time prior
to May 15, 2001, the Company may, subject to certain requirements, redeem up
to 35% of the aggregate principal amount of the Exchange Notes originally
issued with the net proceeds of one or more Equity Offerings (as defined), at
a redemption price equal to 109% of the aggregate principal amount of the
Exchange Notes to be redeemed, together with accrued and unpaid interest to
the date of redemption; provided, however, that after giving effect to any
such redemption, at least 65% of the aggregate principal amount of the
Exchange Notes originally issued under the Indenture remains outstanding.
Holders whose Private Notes are accepted for exchange will be deemed to have
waived the right to receive any interest accrued on the Private Notes.
Upon a Change of Control (as defined), each holder of the Exchange Notes
will have the right to require the Company to repurchase such holder's
Exchange Notes at a price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase. In
addition, the Company will be obligated to offer to repurchase the Exchange
Notes at 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase in the event of certain Asset Sales
(as defined). See "Description of Exchange Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
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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.
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The date of this Prospectus is August 25, 1998
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The Exchange Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior
Indebtedness (as defined) and will rank pari passu in right of payment with
all future senior subordinated indebtedness of the Company. The Exchange Notes
will be fully and unconditionally guaranteed, jointly and severally (the
"Guarantees"), on a senior subordinated unsecured basis, by all of the
Company's domestic subsidiaries (the "Subsidiary Guarantors"). The Guarantees
will be general unsecured obligations of the Subsidiary Guarantors,
subordinated in right of payment to all existing and future Guarantor Senior
Indebtedness (as defined) and will rank pari passu in right of payment with
all future senior subordinated indebtedness of the Subsidiary Guarantors. As
of June 30, 1998, on a pro forma basis after giving effect to the 1998 Common
Stock Offering and the Other Acquisitions (as defined), (i) the Company would
have had approximately $608.9 million of indebtedness outstanding, of which
$408.9 million would have been Senior Indebtedness ($406.1 million of which
would have represented guarantees of borrowings by its subsidiaries under the
Bank Facility) and (ii) the Subsidiary Guarantors would have had approximately
$408.9 million of indebtedness outstanding, all of which would have been
Guarantor Senior Indebtedness and $406.1 million of which would have
represented borrowings under the Bank Facility. The Indenture permits the
Company and the Subsidiary Guarantors to incur additional Senior Indebtedness
and Guarantor Senior Indebtedness under the Bank Facility, as well as (subject
to certain limitations) additional indebtedness.
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on September 24,
1998, unless the Exchange Offer is extended by the Company in its sole
discretion (the "Expiration Date"). Tenders of Private Notes may be withdrawn
at any time prior to the Expiration Date. Private Notes may be tendered only
in integral multiples of $1,000. The Exchange Offer is subject to certain
customary conditions. See "The Exchange Offer--Conditions."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the holder
of Private Notes is acquiring the Exchange Notes in the ordinary course of its
business and is not participating, and had no arrangement or understanding
with any person to participate, in the distribution of the Exchange Notes.
Holders of Private Notes wishing to accept the Exchange Offer must represent
to the Company, as required by the Registration Rights Agreement, that such
conditions have been met. Each broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Company believes
that none of the registered holders of the Private Notes is an affiliate (as
such term is defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Private
Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. To the extent that a market for the Exchange
Notes does develop, the market value of the Notes will depend on market
conditions (such as yields on alternative investments), general economic
conditions, the Company's financial condition and certain other factors. Such
conditions might cause the Exchange Notes, to the extent that they are traded,
to trade at a significant discount from face value. See "Risk Factors--Absence
of Prior Public Market."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may
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be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Private
Notes where such Private Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has
indicated its intention to make this Prospectus (as it may be amended or
supplemented) available to any broker-dealer for use in connection with any
such resale for a period of 180 days after the Expiration Date. See "The
Exchange Offer--Resale of the Exchange Notes" and "Plan of Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with this Exchange Offer. See "The Exchange Offer--Resale of the Exchange
Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, the Depository Trust Company ("DTC"
or the "Depositary") and registered in its name or in the name of Cede & Co.,
as its nominee. Beneficial interests in the global note representing the
Exchange Notes will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. After the
initial issuance of such global note, Exchange Notes in certificated form will
be issued in exchange for the global note only in accordance with the terms
and conditions set forth in the Indenture. See "The Exchange Offer--Book-Entry
Transfer."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (together will all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the
Exchange Notes offered hereby. This Prospectus omits certain information,
exhibits and undertakings contained in the Registration Statement. For further
information with respect to the Company and the Exchange Notes offered hereby,
reference is hereby made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus, or in any document
incorporated by reference herein, as to the contents of any contract or other
document 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, each such statement being qualified by such reference.
The Company is also subject to the informational requirements of the
Exchange Act, and, in accordance therewith, is required to file reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Public
Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of the
reports, proxy statements and other information can be obtained from the
Public Reference Section of the Commission, Washington, D.C. 20549, at
prescribed rates. In addition, all reports filed by the Company via the
Commission's Electronic Data Gathering and Retrieval System (EDGAR) can be
obtained from the Commission's Internet web site located at
http://www.sec.gov. The Common Stock of the Company is currently traded on the
New York Stock Exchange (the "NYSE"), and such reports, proxy statements and
other information concerning the Company also can be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York 10005.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which the Company has filed with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference in, and
shall be deemed to be a part of, this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998;
(d) The Company's Proxy Statement dated March 30, 1998 related to the
Annual Meeting of Stockholders held on April 29, 1998;
(e) The Company's Current Report on Form 8-K filed with the Commission
on January 22, 1998;
(f) The Company's Current Report on Form 8-K/A filed with the
Commission on February 9, 1998;
(g) The Company's Current Report on Form 8-K filed with the Commission
on February 18, 1998;
(h) The Company's Current Report on Form 8-K/A filed with the
Commission on April 17, 1998; and
(i) The Company's Current Report on Form 8-K filed with the Commission
on May 14, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part thereof from
the respective dates of filing of such documents. Any statement contained in
this Prospectus or in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference in this Prospectus modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus except as so modified or superseded.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company will provide without charge to any
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the foregoing documents incorporated
herein by reference (other than exhibits to such documents unless such
exhibits are specifically incorporated by reference therein). Requests should
be directed to the attention of Robert M. Wilson, Secretary, Rental Service
Corporation, 6929 E. Greenway Parkway, Suite 200, Scottsdale, AZ 85254
(Telephone: (602) 905-3300).
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The factors discussed under
"Risk Factors," among others, could cause actual results to differ materially
from those contained in forward-looking statements made in this Prospectus,
including, without limitation, in "Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the Company's
press releases and in oral statements made by authorized officers of the
Company. When used in this Prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe" and similar expressions are
intended to identify forward-looking statements. All of these forward-looking
statements are based on estimates and assumptions made by management of the
Company, which, although believed to be reasonable, are inherently uncertain.
Therefore, undue reliance should not be placed upon such estimates and
statements. No assurance can be given that any of such statements or estimates
will be realized. Actual results may differ materially from those contemplated
by such forward-looking statements.
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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. Holders of the Private Notes 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.
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 61 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 226 rental locations in 26 states and Canada (as of August
21, 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 21, 1998, the Company has acquired 61 businesses consisting of 189
locations and has opened 62 start-up locations. As of August 21, 1998, the
Company was party to non-binding letters of intent to acquire seven equipment
rental businesses with a combined 16 locations in eight states and Canada. 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.
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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
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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 61 businesses consisting of 189 locations (through August 21, 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
21, 1998). See "Business--Business Strategy--Cluster Strategy" and "Business--
Locations."
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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 three additional
acquisitions for a total combined purchase price of approximately $19.5 million
in cash. These acquisitions had a combined seven locations in Canada, Illinois
and New Mexico.
As of August 21, 1998, the Company was party to non-binding letters of intent
to acquire seven equipment rental businesses with a combined 16 locations in
Arizona, Idaho, Illinois, Maryland, Nevada, Oklahoma, Utah, Wisconsin and
Canada for a total combined purchase price of approximately $51.2 million in
cash (including the assumption of approximately $2.5 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 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.
PUBLIC OFFERING OF COMMON STOCK
On August 19, 1998, the Company received net proceeds of approximately $77.6
million from the sale of 3,018,872 shares of Common Stock in a public offering.
These proceeds were used to reduce the outstanding indebtedness under its
Revolver to provide borrowing availability for general corporate purposes,
including acquisitions.
5
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.............. The Company is offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that
are properly tendered and accepted. The
Company will issue Exchange Notes on or
promptly after the Expiration Date. There is
$200.0 million aggregate principal amount of
Private Notes outstanding. See "The Exchange
Offer--Purpose of the Exchange Offer."
Based on an interpretation by the staff of
the Commission set forth in no-action letters
issued to third parties, the Company believes
that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Private
Notes may be offered for resale, resold and
otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchases
such Exchange Notes directly from the Company
to resell pursuant to Rule 144A or any other
available exemption under the Securities Act
or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under
the Securities Act), without compliance with
the registration and prospectus delivery
provisions of the Securities Act; provided
that the holder of Private Notes is acquiring
Exchange Notes in the ordinary course of its
business and is not participating, and had no
arrangement or understanding with any person
to participate, in the distribution of the
Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account
in exchange for Private Notes, where such
Private Notes were acquired by such broker-
dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus
in connection with any resale of such
Exchange Notes. See "The Exchange Offer--
Resale of the Exchange Notes."
Registration Rights Agreement... The Private Notes were sold by the Company on
May 13, 1998 to BT Alex. Brown Incorporated,
Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated
and William Blair & Company, L.L.C.
(collectively, the "Initial Purchasers")
pursuant to a Purchase Agreement, dated May
8, 1998, by and among the Company and the
Initial Purchasers (the "Purchase
Agreement"). Pursuant to the Purchase
Agreement, the Company and the Initial
Purchasers entered into a Registration Rights
Agreement, dated as of May 13, 1998 (the
"Registration Rights Agreement"), which
grants the holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy such
rights, which will terminate upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain
Rights."
6
<PAGE>
Expiration Date................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on September 24, 1998,
unless the Exchange Offer is extended by the
Company in its sole discretion, in which case
the term "Expiration Date" shall mean the
latest date and time to which the Exchange
Offer is extended. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the Private
Notes........................... The Exchange Notes will bear interest from
and including the date of issuance of the
Private Notes (May 13, 1998). Holders whose
Private Notes are accepted for exchange will
be deemed to have waived the right to receive
any interest accrued on the Private Notes.
See "The Exchange Offer--Interest on the
Exchange Notes."
Conditions to the Exchange The Exchange Offer is subject to certain
Offer........................... customary conditions that may be waived by
the Company. The Exchange Offer is not
conditioned upon any minimum aggregate
principal amount of Private Notes being
tendered for exchange. See "The Exchange
Offer--Conditions."
Procedures for Tendering Each holder of Private Notes wishing to
Private Notes................... accept the Exchange Offer must complete, sign
and date the Letter of Transmittal, or a
facsimile thereof, in accordance with the
instructions contained herein and therein,
and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with
such Private Notes and any other required
documentation to Norwest Bank Minnesota,
N.A., as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the
holder of Private Notes will represent to and
agree with the Company that, among other
things, (i) the Exchange Notes to be acquired
by such holder of Private Notes in connection
with the Exchange Offer are being acquired by
such holder in the ordinary course of its
business, (ii) if such holder is not a
broker-dealer, such holder is not currently
participating in, does not intend to
participate in, and has no arrangement or
understanding with any person to participate
in a distribution of the Exchange Notes,
(iii) if such holder is a broker-dealer
registered under the Exchange Act or is
participating in the Exchange Offer for the
purposes of distributing the Exchange Notes,
such holder will comply with the registration
and prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the Exchange Notes
acquired by such person and cannot rely on
the position of the staff of the Commission
set forth in no-action letters (see "The
Exchange Offer--Resale of Exchange Notes"),
(iv) such holder understands that a secondary
resale transaction described in clause
(iii) above and any resales of Exchange Notes
obtained by such holder in exchange for
Private Notes
7
<PAGE>
acquired by such holder directly from the
Company should be covered by an effective
registration statement containing the selling
securityholder information required by Item
507 or Item 508, as applicable, of Regulation
S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If
the holder is a broker-dealer that will
receive Exchange Notes for its own account in
exchange for Private Notes that were acquired
as a result of market-making activities or
other trading activities, such holder will be
required to acknowledge in the Letter of
Transmittal that such holder will deliver a
prospectus in connection with any resale of
such Exchange Notes; however, by so
acknowledging and by delivering a prospectus,
such holder will not be deemed to admit that
it is an "underwriter" within the meaning of
the Securities Act. See "The Exchange Offer--
Procedures for Tendering."
Special Procedures for Any beneficial owner whose Private Notes
Beneficial Owners............... are registered in the name of a broker,
dealer, commercial bank, trust company or
other nominee and who wishes to tender
such Private Notes in the Exchange Offer
should contact such registered holder
promptly and instruct such registered
holder to tender on such beneficial
owner's behalf. If such beneficial owner
wishes to tender on such owner's own
behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering such owner's
Private Notes, either make appropriate
arrangements to register ownership of the
Private Notes in such owner's name or
obtain a properly completed bond power
from the registered holder. The transfer
of registered ownership may take
considerable time and may not be able to
be completed prior to the Expiration
Date. See "The Exchange Offer--Procedures
for Tendering."
Guaranteed Delivery Holders of Private Notes who wish to
Procedures...................... tender their Private Notes and whose
Private Notes are not immediately
available or who cannot deliver their
Private Notes, the Letter of Transmittal
or any other documentation required by
the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date must
tender their Private Notes according to
the guaranteed delivery procedures set
forth under "The Exchange Offer--
Guaranteed Delivery Procedures."
Acceptance of the Private Notes
and Delivery of the Exchange
Notes...........................
Subject to the satisfaction or waiver of
the conditions to the Exchange Offer, the
Company will accept for exchange any and
all Private Notes that are properly
tendered in the Exchange Offer prior to
the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer
will be delivered on the earliest
practicable date following the Expiration
Date. See "The Exchange Offer--Terms of
the Exchange Offer."
8
<PAGE>
Withdrawal Rights............... Tenders of Private Notes may be withdrawn
at any time prior to the Expiration Date.
See "The Exchange Offer--Withdrawal of
Tenders."
Material Federal Income Tax For a discussion of certain material
Considerations.................. federal income tax considerations
relating to the exchange of the Exchange
Notes for the Private Notes, see
"Material Federal Income Tax
Considerations."
Exchange Agent.................. Norwest Bank Minnesota, N.A. is serving
as the Exchange Agent in connection with
the Exchange Offer.
THE EXCHANGE NOTES
The Exchange Offer applies to $200.0 million aggregate principal amount
of the Private Notes. The form and terms of the Exchange Notes are the same
as the form and terms of the Private Notes except that (i) the Exchange
Notes will have been registered under the Securities Act and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof
and (ii) holders of the Exchange Notes will not be entitled to certain
rights of holders of the Private Notes under the Registration Rights
Agreement, which rights will terminate upon consummation of the Exchange
Offer. The Exchange Notes will evidence the same debt as the Private Notes
(which they replace) and will be issued under, and be entitled to the
benefits of, the Indenture. For further information and for definitions of
certain capitalized terms used below, see "Description of Exchange Notes."
Securities Offered.............. $200.0 million aggregate principal amount
of the Company's 9% Senior Subordinated
Notes due 2008.
Company......................... Rental Service Corporation
Maturity Date................... May 15, 2008.
Interest Payment Dates.......... Interest on the Exchange Notes will
accrue from the date of original issuance
(the "Issue Date") and will be payable
semi-annually in arrears on each May 15
and November 15, commencing November 15,
1998.
Optional Redemption............. The Exchange Notes will be redeemable, in
whole or in part, at the option of the
Company on or after May 15, 2001, at the
redemption prices set forth herein,
together with accrued and unpaid interest
to the date of redemption. In addition,
at any time on or prior to May 15, 2001,
the Company may, at its option, redeem up
to 35% of the aggregate principal amount
of the Exchange Notes originally issued
with the net cash proceeds of one or more
Equity Offerings (as defined), at a
redemption price equal to 109% of the
aggregate principal amount of the
Exchange Notes to be redeemed together
with accrued and unpaid interest to the
date of redemption; provided, however,
that, after giving effect to any such
redemption, at least 65% of the aggregate
principal amount of the Exchange Notes
originally issued under the Indenture
remains outstanding. See "Description of
Exchange Notes-- Redemption."
9
<PAGE>
Change of Control............... Upon the occurrence of a Change of
Control (as defined), each holder will
have the right, subject to certain
conditions, to require the Company to
repurchase all or any part of such
holder's Exchange Notes at a price equal
to 101% of the aggregate principal amount
thereof, together with accrued and unpaid
interest and Additional Interest, if any,
thereon to the date of repurchase. See
"Description of Exchange Notes--Change of
Control." There can be no assurance that,
in the event of a Change of Control, the
Company would have sufficient funds to
repurchase all Exchange Notes tendered.
See "Risk Factors--Purchase of Exchange
Notes upon a Change of Control."
Ranking......................... The Exchange Notes will be general
unsecured obligations of the Company,
subordinated in right of payment to all
existing and future Senior Indebtedness
(as defined) and will rank pari passu in
right of payment with all future senior
subordinated indebtedness of the Company.
As of June 30, 1998, on a pro forma basis
after giving effect to the 1998 Common
Stock Offering and the Other
Acquisitions, the Company would have had
approximately $608.9 million of
indebtedness outstanding, of which
$408.9 million would have been Senior
Indebtedness ($406.1 million of which
would have represented guarantees of
borrowings by its subsidiaries under the
Bank Facility). The Indenture permits the
Company to incur additional Senior
Indebtedness under the Bank Facility, as
well as (subject to certain limitations)
additional indebtedness. See "Risk
Factors--Subordination."
Guarantees...................... The Exchange Notes will be fully and
unconditionally guaranteed, jointly and
severally, on a senior subordinated
unsecured basis by the Subsidiary
Guarantors. The Guarantees will be
general unsecured obligations of the
Subsidiary Guarantors, subordinated in
right of payment to all existing and
future Guarantor Senior Indebtedness and
will rank pari passu in right of payment
with all future senior subordinated
indebtedness of the Subsidiary
Guarantors. As of June 30, 1998, on a pro
forma basis after giving effect to the
1998 Common Stock Offering and the Other
Acquisitions, the Subsidiary Guarantors
would have had approximately
$408.9 million of indebtedness
outstanding, all of which would have been
Guarantor Senior Indebtedness and $406.1
million of which would have represented
borrowings under the Bank Facility. The
Indenture permits the Subsidiary
Guarantors to incur additional Guarantor
Senior Indebtedness under the Bank
Facility, as well as (subject to certain
limitations) additional indebtedness. See
"Description of Exchange Notes--
Subsidiary Guarantees."
10
<PAGE>
Certain Covenants............... The Indenture contains certain covenants
that limit the ability of the Company and
its subsidiaries to, among other things,
incur additional indebtedness, pay
dividends or make investments and certain
other restricted payments, consummate
certain asset sales, enter into certain
transactions with affiliates, incur
liens, permit payment or dividend
restrictions to apply to subsidiaries of
the Company, merge or consolidate with
any other person or sell, assign,
transfer, lease, convey or otherwise
dispose of all or substantially all of
the assets of the Company. In addition,
under certain circumstances, the Company
will be required to offer to purchase the
Exchange Notes, in whole or in part, at a
purchase price equal to 100% of the
principal amount thereof, together with
accrued and unpaid interest, if any, to
the date of repurchase, with the proceeds
of certain Asset Sales (as defined). All
of such covenants are subject to
significant qualifications and
exceptions. See "Description of Exchange
Notes--Certain Covenants."
RISK FACTORS
For a discussion of certain factors that should be considered in evaluating
an investment in the Exchange Notes, see "Risk Factors" beginning on page 15.
11
<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.
12
<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 97,112 192,631 330,303 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 35,903 4,627 20,008 21,806
------- ------- -------- --------- ------- -------- ---------
Income before income
taxes and extraordinary
items.................. 6,116 6,711 23,479 31,897 9,096 22,056 23,506
Provision for income
taxes.................. 2,401 2,722 10,330 14,035 4,058 9,437 10,061
------- ------- -------- --------- ------- -------- ---------
Income before
extraordinary items.... 3,715 3,989 13,149 $ 17,862 5,038 12,619 $ 13,445
========= =========
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 $ .56
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 68,594 306,975 654,658 608,914
Redeemable preferred
stock (net of treasury
stock).................. 28,401 -- -- -- --
Common stockholders'
equity.................. 46 95,072 290,781 320,381 397,940
</TABLE>
13
<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 1998 Common Stock Offering, 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.
14
<PAGE>
RISK FACTORS
Certain information contained in this Prospectus, including information with
respect to the Company's plans and strategy for its business, are forward-
looking statements. Holders of Private Notes considering participating in this
Exchange Offer 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.
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 holders of the Exchange Notes, 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 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" and
"Description of the Bank Facility" and "Description of Exchange 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 value of the Exchange Notes.
SUBORDINATION
The Exchange Notes and the Guarantees will be unsecured obligations of the
Company and the Subsidiary Guarantors and will be subordinated in right of
payment to all existing and future Senior Indebtedness and Guarantor Senior
Indebtedness, which will include borrowings under the Bank Facility and
guarantees thereof. The Exchange Notes and the Guarantees will rank pari passu
in right of payment with all future senior subordinated indebtedness of the
Company and the Guarantors, respectively, and will rank senior to other
indebtedness that expressly provides that it is subordinated in right of
payment to the Exchange Notes or the Guarantees. In the event of bankruptcy,
liquidation or reorganization of the Company, the assets of the Company and
the Guarantors will be available to pay obligations on the Exchange Notes and
the Guarantees only after all Senior Indebtedness and Guarantor Senior
Indebtedness has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on any or all of the Exchange Notes and
Guarantees outstanding. The Company may not pay principal of, premium (if any)
on, or interest on the Exchange Notes, make any deposit pursuant to defeasance
provisions or repurchase or redeem or otherwise retire any Exchange Notes
(i) if any Senior Indebtedness is not paid when due or (ii) if any other
default on Designated Senior Indebtedness (as defined) occurs that permits the
holders of such Designated Senior Indebtedness to accelerate maturity of such
Designated Senior Indebtedness, in accordance with its terms, and the Trustee
(as defined) receives a notice of such default unless, in either case, the
default has been cured or waived, any such acceleration has been rescinded
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or such Designated Senior Indebtedness has been paid in full or, in the case
of any default other than a payment default, 179 days have passed since the
default notice is given. As of June 30, 1998, on a pro forma basis after
giving effect to the 1998 Common Stock Offering and the Other Acquisitions,
(i) the Company would have had approximately $608.9 million of indebtedness
outstanding, of which $408.9 million would have been Senior Indebtedness
($406.1 million of which would have represented guarantees of borrowings by
its subsidiaries under the Bank Facility) and (ii) the Subsidiary Guarantors
would have had approximately $408.9 million of indebtedness outstanding, all
of which would have been Guarantor Senior Indebtedness and $406.1 million of
which would have represented borrowings under the Bank Facility. Additional
Senior Indebtedness and Guarantor Senior Indebtedness may be incurred by the
Company and its subsidiaries from time to time, subject to certain
restrictions imposed by the Indenture and the Bank Facility. Additional
Indebtedness also may be incurred by foreign subsidiaries of the Company,
which are not required to guarantee the Exchange Notes. See "--Need for
Additional Capital for Future Growth; Restrictions Imposed by Debt Covenants,"
"Description of the Bank Facility" and "Description of Exchange Notes--
Subordination."
RISKS RELATING TO GROWTH STRATEGY
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. 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 21, 1998, the Company, through its aggressive
expansion strategy, has acquired 61 businesses comprised of 189 locations and
has opened 62 start-up locations. At August 21, 1998, the Company was party to
non-binding letters of intent to acquire seven equipment rental businesses
with a combined 16 locations in Arizona, Idaho, Illinois, Maryland, Nevada,
Oklahoma, Utah, Wisconsin and Canada for a total combined purchase price of
approximately $51.2 million in cash (including the assumption of approximately
$2.5 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, possibly causing adverse effects on the value of the Exchange
Notes. 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."
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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 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. The Company offered the Private Notes to
implement its growth strategy and meet its capital needs 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
could have a material adverse effect on its ability to make payments on the
Exchange Notes.
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. 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 (including the Exchange Notes). Furthermore, the Indenture
relating to the Exchange Notes 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 limits or prohibits, 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. In the event of
any such default, the lenders under the Bank Facility could elect to declare
all amounts borrowed under the Bank Facility, together with accrued interest
and other fees, to be due and payable. If the indebtedness under the Bank
Facility were to be accelerated, all indebtedness outstanding under such Bank
Facility would be required to be paid in full before the subsidiaries of the
Company that are parties to the Bank Facility 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 Exchange 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 otherwise beneficial
to the Company. See "Description of the Bank Facility," "Business--Growth
Strategy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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HOLDING COMPANY STRUCTURE; EFFECTS OF ASSET ENCUMBRANCES
Substantially all of the Company's operating income is generated by its
subsidiaries. As a result, the Company will rely on cash received from its
subsidiaries to provide substantially all of the funds necessary to meet its
debt service obligations, including the payment of principal and interest on
the Exchange Notes. The Subsidiary Guarantors will guarantee the Company's
obligations under the Bank Facility on a senior secured basis, and the capital
stock of, and substantially all of the assets of, the Subsidiary Guarantors
will be pledged to secure the obligations of the Company and such subsidiaries
under the Bank Facility and other secured obligations. In addition, the Bank
Facility will prohibit the payment of dividends or other similar distributions
to the Company from its subsidiaries in the event of a default thereunder. The
Exchange Notes are guaranteed on a senior subordinated unsecured basis by the
Subsidiary Guarantors, and therefore, should the Company fail to satisfy any
payment obligation under the Exchange Notes, the holders would have a direct
claim therefor against the Subsidiary Guarantors pursuant to such Guarantees.
The Indenture will limit, but not prohibit, the ability of the Company and its
subsidiaries to incur additional indebtedness, including Senior Indebtedness.
In the event of a default under the Bank Facility (or any other Senior
Indebtedness), the lenders thereunder would be entitled to a claim on the
assets securing such indebtedness which is prior to any claim of the holders
of the Exchange Notes. Accordingly, there may be insufficient assets remaining
after payment of prior secured claims (including claims of lenders under the
Bank Facility) to pay amounts due on the Exchange Notes. The Indenture also
limits the ability of the Company and its subsidiaries to incur additional
indebtedness. However, these limitations are subject to certain exceptions.
See "--Fraudulent Conveyance Risks" and "Description of Exchange Notes."
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 value
of the Exchange Notes. See "Business--Competition."
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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 21, 1998, the Company
operated 226 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 21, 1998, the Company was
party to non-binding letters of intent to acquire seven equipment rental
businesses with a combined 16 locations in eight states (Arizona, Idaho,
Illinois, Maryland, Nevada, Oklahoma, Utah and Wisconsin) and Canada. 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 value of the
Exchange Notes. 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
Exchange Notes. 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 value of the Exchange Notes. 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
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future uses or conditions will not result in the imposition of environmental
liability upon the Company or expose the Company to third-party actions such
as tort suits. The Company uses hazardous materials such as solvents to clean
and maintain its rental equipment fleet. In addition, the Company generates
and disposes waste such as used motor oil, radiator fluid and solvents, and
may be liable under various federal, state and local laws for environmental
contamination at facilities where its waste is or has been disposed. In
addition, the Company dispenses petroleum products from underground and above-
ground storage tanks located at certain rental locations that it owns or
leases. The Company maintains an environmental compliance program that
includes the implementation of required technical and operational activities
designed to minimize the potential for leaks and spills, maintenance of
records and the regular testing and monitoring of tank systems for tightness.
There can be no assurance, however, that these tank systems have been or will
at all times remain free from leaks or that the use of these tanks has not or
will not result in spills or other releases. The Company incurs ongoing
expenses associated with the removal of older underground storage tanks and
other activities to come into compliance with environmental laws, and the
performance of appropriate remediation at certain of its locations. The
foregoing risks could have a material adverse effect on the value of the
Exchange Notes. 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 value of the Exchange Notes.
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 value of the Exchange
Notes. See "Capitalization," "Unaudited Pro Forma Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Management."
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FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own accounts in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or "float," of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of
a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
ABSENCE OF PRIOR PUBLIC MARKET
The Private Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Exchange Notes are new
securities and have no established trading market. The Company does not intend
to apply for listing of the Exchange Notes on any exchange or to seek the
admission thereof to trading in the National Association of Securities Dealers
Automated Quotation System. The Initial Purchasers have advised the Company
that they currently intend to make a market in the Exchange Notes. However,
the Initial Purchasers are not obligated to do so and any market making may be
discontinued at any time without notice. In addition, such market making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act, and may be limited during the Exchange Offer. No assurance can
be given as to the liquidity of any trading market for the Exchange Notes or
that any such trading market will develop. If an active public market for the
Exchange Notes does not develop, their value and liquidity may be adversely
affected. If a market for the Exchange Notes develops, any such market may be
discontinued at any time. If a public trading market develops for the Exchange
Notes, future trading prices of the Exchange Notes will depend on many
factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities.
PURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company is required to make
an offer to purchase all outstanding Exchange Notes at a purchase price equal
to 101% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. There can be no assurance that the
Company will have available funds sufficient to purchase the Exchange Notes
upon a Change of Control. In addition, any Change of Control, and any
repurchase of the Exchange Notes required under the Indenture upon a Change of
Control, would constitute an event of default under the Bank Facility, with
the result that the obligations of the borrowers thereunder could be declared
due and payable by the lenders. Any acceleration of the obligations under the
Indenture or the Bank Facility would make it unlikely that the Company could
service the Exchange Notes and, accordingly, that the Company could effect a
purchase of the Exchange Notes upon a Change of Control. See "Description of
the Bank Facility" and "Description of Exchange Notes--Change of Control."
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FRAUDULENT CONVEYANCE RISKS
Management of the Company believes that the indebtedness represented by the
Exchange Notes is being incurred for proper purposes and in good faith, and
that after the consummation of the Exchange Offer, based on present forecasts,
asset valuations and other financial information, the Company will be solvent,
will have sufficient capital for carrying on its business and will be able to
pay its debts as they mature. See "--Ability to Service Debt; Significant
Leverage." Notwithstanding management's belief, however, if a court of
competent jurisdiction in a suit by an unpaid creditor or a representative of
creditors (such as a trustee in a bankruptcy or a debtor-in-possession) were
to find that, at the time of incurrence of such indebtedness, the Company was
rendered insolvent, was rendered insolvent by reason of such incurrence, was
engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital, intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, or
intended to hinder, delay or defraud its creditors, and that the indebtedness
was incurred for less than reasonably equivalent value, then such court could,
among other things, (i) void all or a portion of the Company's obligations to
the holders of Exchange Notes, the result of which would be that such holders
might not be repaid in full and/or (ii) subordinate the Company's obligations
to the holders of Exchange Notes to other existing or future indebtedness of
the Company to a greater extent than would otherwise be the case, the effect
of which would be to entitle other creditors to be paid in full before any
payment could be made on the Exchange Notes.
In addition, the Guarantees may be subject to review under relevant federal
and state fraudulent conveyance and similar statues in a bankruptcy case or a
lawsuit by or on behalf of creditors of any of the Subsidiary Guarantors. In
such a case, the analysis set forth above would generally apply, except that
the Guarantees could also be subject to the claim that, since the Guarantees
were incurred for the benefit of the Company (and only indirectly for the
benefit of the Subsidiary Guarantors), the obligations of the Subsidiary
Guarantors thereunder were incurred for less than reasonably equivalent value
or fair consideration. A court could avoid a Subsidiary Guarantor's obligation
under its Guarantee, subordinate the Guarantee to other indebtedness of a
Subsidiary Guarantor or take other action detrimental to the holders of the
Exchange Notes.
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. In addition, if the Company conducts such operations
through foreign subsidiaries, such subsidiaries will not be required to become
guarantors of the Exchange Notes.
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
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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.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on May 13, 1998 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The
Initial Purchasers subsequently sold the Private Notes (i) to "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities
Act ("Rule 144A"), in reliance on Rule 144A and (ii) in offshore transactions
in reliance on Regulation S under the Securities Act. As a condition to the
sale of the Private Notes, the Company and the Initial Purchasers entered into
the Registration Rights Agreement on May 13, 1998. Pursuant to the
Registration Rights Agreement, the Company agreed that, unless the Exchange
Offer is not permitted by applicable law or Commission policy, it would (i)
file with the Commission a Registration Statement under the Securities Act
with respect to the Exchange Notes within 90 days after the Closing Date, (ii)
cause such Registration Statement to become effective under the Securities Act
within 150 days after the Closing Date (iii) keep the Exchange Offer open for
at least 20 business days (or longer if required by applicable law) after the
date that notice thereof is mailed to holders of the Private Notes and
(iv) commence the Exchange Offer and use its best efforts to issue, on or
prior to 45 days after the date on which the Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all
Private Notes tendered prior thereto in the Exchange Offer. A copy of the
Registration Rights Agreement has been filed as an exhibit to the Registration
Statement. The Registration Statement is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement and the Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate, in a distribution of the Exchange Notes, will be allowed to
resell Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder of Private Notes acquires Exchange Notes in the
Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes or is a broker-dealer, such holder cannot
rely on the position of the staff of the Commission enumerated in certain no-
action letters issued to third parties and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any
resale for a period of 180 days after the Expiration Date. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration
24
<PAGE>
Date. The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Private Notes
surrendered pursuant to the Exchange Offer. Private Notes may be tendered only
in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
not be entitled to any of the rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued
under, and be entitled to the benefits of, the Indenture, which also
authorized the issuance of the Private Notes, such that both series of Notes
will be treated as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $200.0 million in aggregate principal
amount of the Private Notes are outstanding. Only a registered holder of the
Private Notes (or such holder's legal representative or attorney-in-fact) as
reflected on the records of the Trustee under the Indenture may participate in
the Exchange Offer. There will be no fixed record date for determining
registered holders of the Private Notes entitled to participate in the
Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 24, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, and (ii) mail to
the registered holders of Private Notes an announcement thereof which shall
include disclosure of the approximate number of Private Notes deposited to
date, each prior to 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The Company reserves the right, in its reasonable discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders of
Private Notes. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, the Company will promptly disclose
such amendment by means of a prospectus supplement that will be distributed to
the registered holders of Private Notes, and the Company will extend the
Exchange Offer for a period of five
25
<PAGE>
to ten business days, depending upon the significance of the amendment and the
manner of disclosure to the registered holders of Private Notes, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 9% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
each May 15 and November 15, commencing November 15, 1998. Holders of Exchange
Notes will receive interest on November 15, 1998 from the date of initial
issuance of the Private Notes. Holders of Private Notes that are accepted for
exchange will be deemed to have waived the right to receive any interest
accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth below under "--
Exchange Agent" for receipt prior to the Expiration Date. In addition, either
(i) certificates for such Private Notes must be received by the Exchange Agent
along with the Letter of Transmittal, (ii) a timely confirmation of a book-
entry transfer (a "Book-Entry Confirmation") of such Private Notes, if such
procedure is available, into the Exchange Agent's account at the Depositary
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below.
The tender by a holder of Private Notes that is not withdrawn prior to the
Expiration Date will constitute an agreement between such holder and the
Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having
26
<PAGE>
an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act which
is a member of one of the recognized signature guarantee programs identified
in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depositary have confirmed that any financial
institution that is a participant in the Depositary's system may utilize the
Depositary's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to
permit resales of any Private Notes that are not tendered pursuant to the
Exchange Offer, the Company reserves the right in its sole discretion to
purchase or make offers for any Private Notes that remain outstanding
subsequent to the Expiration Date or, as set forth below under "--Conditions,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Private Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
Holder in the ordinary course of the respective business of such holder, (ii)
such holder has no arrangement or understanding with any person to participate
in the distribution of the Exchange Notes, (iii) if such holder is a resident
of the State of California, it falls under the self-executing institutional
investor exemption set forth under Section 25102(i) of the Corporate
Securities Law of 1968 and Rules 260.102.10 and 260.105.14 of the California
Blue Sky Regulations, (iv) if such holder is a resident of the Commonwealth of
Pennsylvania, it falls under the self-executing institutional investor
exemption set forth under Sections 203(c), 102(d) and (k) of the Pennsylvania
Securities Act of 1972, Section 102.111 of the Pennsylvania Blue Sky
Regulations and an interpretive opinion dated November 16, 1985, (v) such
holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer
for the purposes of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in certain no-action letters, (vi) such holder understands that a
secondary resale transaction described in clause (v) above and any resales of
Exchange Notes obtained by such holder in exchange for Private Notes acquired
by such holder
27
<PAGE>
directly from the Company should be covered by an effective registration
statement containing the selling securityholder information required by Item
507 or Item 508, as applicable, of Regulation S-K of the Commission and (vii)
such holder is not an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company. If the holder is a broker-dealer that will receive
Exchange Notes for such holder's own account in exchange for Private Notes
that were acquired as a result of market-making activities or other trading
activities, such holder will be required to acknowledge in the Letter of
Transmittal that such holder will deliver a prospectus in connection with any
resale of such Exchange Notes; however, by so acknowledging and by delivering
a prospectus, such holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depositary pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depositary) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depositary for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depositary's systems may make book-
entry delivery of Private Notes by causing the Depositary to transfer such
Private Notes into the Exchange Agent's account at the Depositary in
accordance with the Depositary's procedures for transfer. However, although
delivery of Private Notes may be effected through book-entry transfer at the
Depositary, the Letter of Transmittal or facsimile thereof, with any required
signature guarantees and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth
below under "--Exchange Agent" on or prior to the Expiration Date or pursuant
to the guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
28
<PAGE>
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to 5:00 p.m. on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as provided herein before
the acceptance of such Private Notes, if the Exchange Offer violates
applicable law, rules or regulations or an applicable interpretation of the
staff of the Commission.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Private Notes (see " --Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to the registered holders of the Private Notes, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders, if the Exchange Offer would otherwise expire during
such five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Private Notes eligible to participate in the
Exchange Offer will terminate upon consummation of the Exchange Offer except
with respect to the Company's continuing obligations (i) to indemnify such
holders (including any broker-dealers) and certain parties related to such
holders against certain liabilities (including liabilities under the
Securities Act), (ii) to use its best efforts to keep the Registration
Statement effective to the extent necessary to ensure that it is available for
resales of Exchange Notes by broker-dealers for a period of up to 90 days from
the date the Commission declares the Registration Statement effective (the
"Exchange Offer Registration Period") and (iii) to provide copies of the
latest version of the Prospectus to broker-dealers upon their request during
the Exchange Offer Registration Period.
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<PAGE>
ADDITIONAL INTEREST
If (i) the Company fails to file the Registration Statement within 90 days
after the Issue Date or a shelf registration statement covering resale of the
Private Notes (a "Shelf Registration Statement") within 30 days after such
obligation arises; (ii) within 150 days after the Issue Date, the Registration
Statement has not been declared effective; (iii) within 45 days after the date
on which the Registration Statement is declared effective by the Commission,
the Exchange Offer has not been consummated, or within the time period
specified in the Registration Rights Agreement, the Shelf Registration
Statement has not been declared effective; or (iv) after either the
Registration Statement or the Shelf Registration Statement has been declared
effective, such registration statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Private
Notes or Exchange Notes in accordance with and during the periods specified in
the Registration Rights Agreement (each event referred to in clauses (i)
through (iv), a "Registration Default"), interest ("Additional Interest") will
accrue on the Private Notes and the Exchange Notes (in addition to the stated
interest on the Private Notes and the Exchange Notes) from and including the
date on which any such Registration Default shall occur to but excluding the
date on which all Registration Defaults have been cured. Additional Interest
will accrue at a rate of 0.25% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall increase by
0.25% per annum at the end of each subsequent 90-day period, but in no event
shall such rate exceed 1.50% per annum.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the registration statement of
which this Prospectus is a part.
EXCHANGE AGENT
Norwest Bank Minnesota, N.A. has been appointed as Exchange Agent of the
Exchange Offer. Questions and requests for assistance, requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
<TABLE>
<CAPTION>
By Registered or Certified
By Hand: Mail: By Overnight Courier:
<S> <C> <C>
Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A. Norwest Bank Minnesota, N.A.
Northstar East Building Corporate Trust Operations Corporate Trust Services
608 Second Avenue South P.O. Box 1517 Sixth and Marquette Avenue
12th Floor Minneapolis, MN 55480-1517 Minneapolis, MN 55479-0113
Corporate Trust Services
Minneapolis, MN
</TABLE>
By Facsimile:
(612) 667-4927
Confirm by Telephone:
(612) 667-9764
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company,
30
<PAGE>
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$100,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller reasonably
believes is a QIB in a transaction meeting the requirements of Rule 144A, (ii)
in a transaction meeting the requirements of Rule 144 under the Securities
Act, (iii) outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities Act, (iv) in
accordance with another exemption from the registration requirements of the
Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange
Private Notes in like principal amount, the terms of which will be cancelled.
The issuance of the Exchange Notes in exchange for the surrender of the
Private Notes will not result in any increase in the indebtedness of the
Company.
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<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 1998
Common Stock Offering and the application of the net proceeds therefrom to
repay indebtedness under the Revolver. This table should be read in
conjunction with "Use of Proceeds," "Unaudited Pro Forma Consolidated
Financial Data," "Selected Consolidated Financial and Operating Data" and the
Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
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)................................ 351,834 383,649 306,090
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............................... 654,658 686,473 608,914
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
23,803,538 outstanding, pro forma as
adjusted(2)............................... 208 208 238
Additional paid-in capital................. 291,749 291,749 369,278
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............... 320,381 320,381 397,940
-------- ---------- ----------
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 1998
Common Stock Offering, the repayment of indebtedness under the Revolver
with the net proceeds of the 1998 Common Stock Offering and the completion
of the Other Acquisitions, the Company would have had borrowing
availability of approximately $193.9 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.
32
<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 issuance of the Private Notes pursuant to the
Offering and the issuance of the Exchange Notes in exchange for the Private
Notes; (ii) the sale by the Company of 3,018,872 shares of Common Stock in
August 1998 at a
33
<PAGE>
price of $27.3125 per share (the "1998 Common Stock 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 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 Offering, the 1998 Common Stock 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 issuance of
the Private Notes pursuant to the Offering and the issuance of the Exchange
Notes in exchange for the Private Notes; (ii) the 1998 Common Stock 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 Offering and the 1998 Common Stock 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 1998 Common Stock Offering and (ii) the reduction in the amounts
outstanding under the Revolver upon the application of the net proceeds from
the 1998 Common Stock Offering (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.
34
<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 -- 330,303
---------------- ------------- ------------------
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 (9,842)(8) 35,903
---------------- ------------- ------------------
Income before
income taxes and
extraordinary
items............ 22,055 9,842 31,897
Provision
(benefit) for
income taxes..... 9,704 4,331 (9) 14,035
---------------- ------------- ------------------
Income before
extraordinary
items............ $ 12,351 $ 5,511 $ 17,862
================ ============= ==================
Income before
extraordinary
items per common
share............ $ .81 $ .75
Weighted average
common shares.... 15,265(10)(11) 23,743(10)(11)
Income before
extraordinary
items per common
share, assuming
dilution......... $ .79 $ .74
Weighted average
common shares,
assuming
dilution......... 15,540(10)(11) 24,017(10)(11)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
35
<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 Offering, the 1998 Common Stock Offering and
the Completed Common Stock Offerings, the additional interest expense
associated with the issuance of the Private Notes pursuant to the
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 above acquisitions.
36
<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 (1,606)(7)
-------- ------ ------- ------ ------- -------- -------
Income (loss)
before income
taxes and
extraordinary
items............ 22,056 (95) 1,086 803 (1,950) 21,900 1,606
Provision
(benefit) for
income taxes..... 9,437 -- 286 183 (532)(8) 9,374 687 (8)
-------- ------ ------- ------ ------- -------- -------
Income (loss)
before
extraordinary
items............ $ 12,619 $ (95) $ 800 $ 620 $(1,418) $ 12,526 $ 919
======== ====== ======= ====== ======= ======== =======
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> <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.............. 21,806
-----------------
Income (loss)
before income
taxes and
extraordinary
items............ 23,506
Provision
(benefit) for
income taxes..... 10,061
-----------------
Income (loss)
before
extraordinary
items............ $ 13,445
=================
Income before
extraordinary
items per common
share............ $ 0.56
Weighted average
common shares.... 23,868(9)(10)
Income before
extraordinary
items per common
share, assuming
dilution......... $ 0.56
Weighted average
common shares,
assuming
dilution......... 24,112(9)(10)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Statement of
Operations.
37
<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 Offering and
the 1998 Common Stock Offering, the additional interest expense
associated with the issuance of the Private Notes pursuant to the
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 above acquisitions.
38
<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 (77,559)(8) 308,914
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 (77,559) 734,582
Stockholders' equity:
Common stock(2)......... 208 8 (8)(9) 208 30 (10) 238
Additional paid-in
capital................ 291,749 -- -- 291,749 77,529 (10) 369,278
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 77,559 397,940
---------- ------- ------- ---------- -------- ----------
$1,098,751 $18,013 $15,758 $1,132,522 $ -- $1,132,522
========== ======= ======= ========== ======== ==========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Consolidated Balance Sheet.
39
<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 1998 Common
Stock Offering 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 1998
Common Stock Offering.
40
<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.
41
<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
======== ======= ======= ======= ======== ======= ========
OTHER DATA:
Ratio of Earnings to
Fixed Charges(5)....... 1.3x 4.1x 2.5x 1.8x 2.4x 2.7x 2.0x
</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>
42
<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.
(5) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before income taxes and extraordinary items plus fixed
charges. Fixed charges consist of interest expense and 30% of rental
expense (the portion deemed representative of the interest factor).
43
<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 21, 1998, the Company has
acquired 61 businesses consisting of 189 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 increased the
Company's goodwill and other intangibles (including covenants not to compete).
During the initial phase of an acquisition or start-up location, the Company
typically incurs expenses related to completing acquisitions and opening
start-up locations, training employees, installing or converting information
systems, facility set-up and marketing expenses. As a result, the
profitability of a new location is generally expected to be lower in the
initial period of its operation than in subsequent periods. Integration of
acquisitions is generally completed within the first six months, while the
Company generally expects start-up locations to achieve normalized
profitability after one year. The Company anticipates that as it continues to
implement its growth strategy, new locations will continue to impact the
Company's margins until such locations achieve normalized profitability.
The Company is continually involved in the investigation and evaluation of
potential acquisitions and start-up locations. Acquisition transactions are
typically subject to numerous conditions, including due diligence
investigation, environmental review and negotiation of a definitive purchase
agreement. In evaluating acquisition targets, the Company considers, among
other things, the target's competitive market position, management team,
growth position and the demographic characteristics of the target market. At
any time, the Company may have one or more offers outstanding and may have
executed one or more non-binding letters of intent or binding acquisition
agreements. As of August 21, 1998, the Company was party to non-binding
letters of intent to acquire seven equipment rental businesses with a combined
16 locations in eight states and Canada for a total combined purchase price of
approximately $51.2 million in cash (including the assumption of approximately
$2.5 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
44
<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, 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>
45
<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 Private 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.
46
<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 December 31, 1996.
This increase is due to the additional goodwill and covenants not-to-compete
associated with acquisitions completed since December 31, 1996.
47
<PAGE>
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.
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
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<PAGE>
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.
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
49
<PAGE>
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 Private 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 of
debt of $920,000, net of income taxes of $386,000, associated with the write-
off of unamortized debt issuance costs.
50
<PAGE>
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 Private 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 Private Notes.
In connection with the formation of Rental Service Corporation of Canada
Ltd. ("RSC Canada"), a wholly owned subsidiary of RSC, the Company has
executed an amendment and consent to the Bank Facility to permit the Canadian
credit facility described below, 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.
51
<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 has entered into a secured revolving credit facility with lenders
(or affiliates) who are parties to the Bank Facility. The new Canadian facility
provides RSC Canada with borrowing availability of up to Cdn. $28.0 million,
subject to certain borrowing base limitations. The Canadian credit facility is
secured by substantially all of the assets of RSC Canada and any subsidiary of
RSC Canada and is guaranteed by RSC, with the guarantee being secured by the
stock of RSC Canada. The Canadian credit facility expires on December 2, 2002,
and contains other terms substantially similar to those contained in the Bank
Facility.
On May 13, 1998, the Company issued the Private Notes 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 Private 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 Private 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 Exchange
Notes."
On August 19, 1998, the Company received net proceeds of approximately $77.6
million from the sale of 3,018,872 shares of Common Stock in a public offering.
These proceeds were used to reduce the outstanding indebtedness under its
Revolver to provide borrowing availability for general corporate purposes,
including acquisitions.
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 17
acquisitions of equipment rental businesses (including Valley, Metroquip, T&M
and Struckel) with an aggregate of 51 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
226 in the United States and Canada as of August 21, 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,
52
<PAGE>
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 (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 three additional
acquisitions for a total combined purchase price of approximately $19.5
million in cash. These acquisitions had a combined seven locations in Canada,
Illinois and New Mexico.
As of August 21, 1998, the Company was party to non-binding letters of
intent to acquire seven equipment rental businesses with a combined 16
locations in Arizona, Idaho, Illinois, Maryland, Nevada, Oklahoma, Utah,
Wisconsin and Canada for a total combined purchase price of approximately
$51.2 million in cash (including the assumption of approximately $2.5 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.
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<PAGE>
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 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."
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<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>
55
<PAGE>
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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BUSINESS
GENERAL
The Company is a leading consolidator in the rapidly-growing equipment
rental industry, with a demonstrated track record of 61 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 226 rental locations in 26 states and Canada (as of
August 21, 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 61 businesses comprised of 189 locations and has
opened 62 start-up locations through August 21, 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 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
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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
58
<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 61 businesses consisting of 189 locations (through
August 21, 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 21, 1998). See "--Business Strategy--Cluster Strategy" and "--
Locations."
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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
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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."
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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 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 21, 1998, the Company operated 226 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 (6), North Carolina
(3), Oklahoma (8), Pennsylvania (1), South Carolina (9), Tennessee (11),
Texas (29), Virginia (4) and Wisconsin (1). As of August 21, 1998, the Company
was party to non-binding letters of intent to acquire seven equipment rental
businesses with a combined 16 locations in Canada (3) and the following eight
states: Arizona (1), Idaho (2), Illinois (3), Maryland (1), Nevada (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.
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Existing or future competitors also may seek to compete with the Company for
acquisition candidates which could have the effect of increasing the price for
acquisitions or reducing the number of suitable acquisition candidates.
Management believes such competition has already increased the prices obtained
by businesses acquired by the Company and its competitors. In addition, such
competitors may also compete with the Company for start-up locations, thereby
limiting the number of attractive locations for expansion. Competition in the
rental or MRO business and competition in making acquisitions could have a
material adverse effect on the Company. See "Risk Factors--Competition."
The equipment rental business is highly service-oriented. The success of an
individual rental operator is predicated on its customer handling and problem
solving abilities; quality, condition and servicing of its equipment; and
overall operation of its business. Other components of competition include
location, availability of equipment (both depth and breadth) and price. The
Company believes it competes in the markets it serves primarily on the basis
of responsive customer service, a broad selection of high-quality rental
equipment and supplies, and competitive prices. Relative to smaller companies
with only one or two rental locations, the Company believes RSC benefits from
several competitive advantages, including sophisticated management information
systems, volume purchasing discounts, professional management, a diverse
customer base 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 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.
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<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.
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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.
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<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"). 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.
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.
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<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."
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<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation provides that a director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except in
certain cases where liability is mandated by the General Corporation Law of
the State of Delaware. The provision has no effect on any non-monetary
remedies that may be available to the Company or its stockholders, nor does it
relieve the Company or its directors from compliance with federal or state
securities laws. The Bylaws of the Company generally provide that the Company
shall indemnify, to the fullest extent permitted by law, any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses (including attorneys' fees) and losses, claims, liabilities,
judgments, fines and amounts paid in settlement actually incurred by such
person in connection with such Proceeding. In addition, the Company has
obtained director and officer liability insurance that insures the Company's
directors and officers against certain liabilities.
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<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
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<PAGE>
disability, if earlier). Participants are entitled to receive the vested
amounts in their accounts in a single lump-sum payment on death, disability,
retirement or termination of employment. In certain circumstances,
participants may receive loans and hardship withdrawals from their accounts in
the 401(k) Plan.
EQUITY PARTICIPATION PLANS
The Company currently maintains two plans, the Stock Option Plan for Key
Employees (the "1995 Plan") and the 1996 Equity Participation Plan (the "1996
Plan"), pursuant to which certain employees or directors may obtain options or
other awards that enable them to participate in the Company's equity. The
Board adopted the 1996 Plan on December 5, 1996, and the 1996 Plan was
approved by the Company's stockholders on February 5, 1997. The principal
purposes of the 1996 Plan are to provide incentives for officers, directors,
key employees and consultants of the Company and its subsidiaries through
granting options, restricted stock and other awards, 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.
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<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
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<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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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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PRINCIPAL 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; and (iii) all directors and executive officers of the Company
as a group. Except as otherwise indicated, each stockholder listed below has
informed the Company that such stockholder has (i) sole voting and investment
power with respect to such stockholder's shares of stock, except to the extent
that authority is shared by spouses under applicable law, and (ii) record and
beneficial ownership with respect to such stockholder's shares of stock.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY OWNED(1)
-------------------------
NAME NUMBER PERCENT
---- ------------- -----------
<S> <C> <C>
William M. Barnum, Jr.(2)(3)........................ 644,425 3.1%
Martin R. Reid(3)(4)(5)............................. 271,461 1.3
Robert M. Wilson(3)(4).............................. 18,825 *
Ronald Halchishak(3)(4)............................. 39,340 *
David G. Ledlow(3)(4)............................... 34,761 *
John Markle(3)(6)................................... 43,029 *
Douglas A. Waugaman(3)(4)........................... 84,177 *
David B. Harrington(3)(4)........................... 6,250 *
Milfred E. Howard(3)(4)(7).......................... 6,250 *
James R. Buch(3)(4)................................. 3,850 *
David P. Lanoha(3)(6)............................... 146,730 *
Christopher A. Laurence(2)(3)....................... 3,736 *
Eric L. Mattson(3)(8)............................... 2,500 *
Britton H. Murdoch(3)(9)............................ 4,500 *
John M. Sullivan(3)(4).............................. 2,500 *
All directors and executive officers as a group
(15 persons)(2)(3)(5)(7)........................... 1,312,334 6.2
</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; 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.
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(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.
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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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<PAGE>
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, has entered into a secured
revolving credit facility with lenders (or affiliates) who are parties to the
Bank Facility. The new Canadian facility provides RSC Canada with borrowing
availability of up to Cdn. $28.0 million, subject to certain borrowing base
limitations. The Canadian credit facility is secured by substantially all of
the assets of RSC Canada and any subsidiary of RSC Canada and is guaranteed by
RSC, with the guarantee being secured by the stock of RSC Canada. The Canadian
credit facility expires on December 2, 2002, and contains other terms
substantially similar to those contained in the Bank Facility.
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DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will be issued under an indenture (the "Indenture"), to
be dated as of May 13, 1998 by and between the Company, the Subsidiary
Guarantors and Norwest Bank Minnesota, N.A., as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the
provisions of the Indenture, including the definitions of certain terms
therein and those terms made a part of the Indenture by reference to the TIA
as in effect on the date of the Indenture. A copy of the Indenture may be
obtained from the Company or the Initial Purchasers. The definitions of
certain capitalized terms used in the following summary are set forth below
under "--Certain Definitions." For purposes of this "Description of Exchange
Notes," references to the "Company" mean only Rental Service Corporation and
not its Subsidiaries.
The Exchange Notes will be unsecured obligations of the Company, ranking
subordinate in right of payment to all Senior Indebtedness.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as Paying Agent and Registrar for the Exchange Notes. The
Exchange Notes may be presented for registration or transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to registered holders of the Exchange Notes (the "Holders"). The
Company will pay principal (and premium, if any) on the Exchange Notes at the
Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check
mailed to the registered address of Holders. Any Private Notes that remain
outstanding after the completion of the Exchange Offer, together with the
Exchange Notes issued in connection with the Exchange Offer, will be treated
as a single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes are limited in aggregate principal amount to $300.0
million, of which $200.0 million in aggregate principal amount will be issued
in the Exchange Offer, and will mature on May 15, 2008. Additional amounts may
be issued from time to time, subject to the limitations set forth under "--
Certain Covenants--Limitation on Incurrence of Additional Indebtedness."
Interest on the Exchange Notes will accrue at the rate of 9% per annum and
will be payable semiannually in cash on each May 15 and November 15,
commencing on November 15, 1998, to the Holders at the close of business on
the May 1 and November 1 immediately preceding the applicable interest payment
date. Interest on the Exchange from the most recent date to which interest has
been paid or, if no interest has been paid, from and including the date of
issuance.
The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
REDEMPTION
Optional Redemption. The Exchange Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after May
15, 2003, upon not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of the principal amount
thereof) if redeemed during the twelve-month period commencing on May 15 of
the year set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003............................................................ 104.5%
2004............................................................ 103.0%
2005............................................................ 101.5%
2006 and thereafter............................................. 100.0%
</TABLE>
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Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to May 15, 2001, the Company may, at its option, use the net
cash proceeds of one or more Equity Offerings (as defined below) to redeem up
to 35% of the principal amount of the Exchange Notes originally issued under
the Indenture 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 Notes issued
under the Indenture remains outstanding immediately after any such redemption.
In order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 120 days after
the consummation of any such Equity Offering.
As used in the preceding paragraph, "Equity Offering" means a public or
private issuance of Qualified Capital Stock of the Company for cash.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Exchange Notes are to be redeemed at
any time, selection of such Notes for redemption will be made by the Trustee
in compliance with the requirements of the principal national securities
exchange, if any, on which Notes are listed or, if such Notes are not then
listed on a national securities exchange, on a pro rata basis, by lot or by
such method as the Trustee shall deem fair and appropriate; provided, however,
that no Notes of a principal amount of $1,000 or less shall be redeemed in
part; provided, further, that if a partial redemption is made with the
proceeds of an Equity Offering, selection of the Exchange Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis
or on as nearly a pro rata basis as is practicable (subject to DTC
procedures), unless such method is otherwise prohibited. Notice of redemption
shall be mailed by first-class mail at least 30 but not more than 60 days
before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Exchange Notes is subordinated in
right of payment to the prior payment in full in cash or Cash Equivalents of
all Obligations on Senior Indebtedness. Upon any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any liquidation, dissolution, winding up,
reorganization, assignment for the benefit of creditors or marshaling of
assets of the Company or in a bankruptcy, reorganization, insolvency,
receivership or other similar proceeding relating to the Company or its
property, whether voluntary or involuntary, all Obligations due or to become
due upon all Senior Indebtedness shall first be paid in full in cash or Cash
Equivalents, or such payment duly provided for to the satisfaction of the
holders of Senior Indebtedness, before any payment or distribution of any kind
or character is made on account of any Obligations on the Exchange Notes, or
for the acquisition of any of the Exchange Notes for cash or property or
otherwise. If any default occurs and is continuing in the payment when due,
whether at maturity, upon any redemption, by declaration or otherwise, of any
principal of, interest on, unpaid drawings for letters of credit issued in
respect of, or regularly accruing fees with respect to, any Senior
Indebtedness, no payment of any kind or character shall be made by or on
behalf of the Company or any other Person on its or their behalf with respect
to any Obligations on the Exchange Notes or to acquire any of the Exchange
Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Indebtedness, as such event of default is
defined in the instrument creating or evidencing such Designated Senior
Indebtedness, permitting the holders of such Designated Senior Indebtedness
then outstanding to accelerate the maturity thereof and if the Representative
for the respective issue of Designated Senior Indebtedness gives
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written notice of the event of default to the Trustee (a "Default Notice"),
then, unless and until all events of default with respect to such Designated
Senior Indebtedness have been cured (if capable of being cured) or waived in
writing or have ceased to exist or the Trustee receives notice from the
Representative for the respective issue of Designated Senior Indebtedness
terminating the Blockage Period (as defined below), during the 179 days after
the delivery of such Default Notice (the "Blockage Period"), neither the
Company nor any other Person on its behalf shall (x) make any payment of any
kind or character with respect to any Obligations on the Exchange Notes or (y)
acquire any of the Exchange Notes for cash or property or otherwise.
Notwithstanding anything herein to the contrary, in no event will a Blockage
Period extend beyond 179 days from the date the payment on the Exchange Notes
was due and only one such Blockage Period may be commenced within any 360
consecutive days. No event of default which existed or was continuing on the
date of the commencement of any Blockage Period with respect to the Designated
Senior Indebtedness shall be, or be made, the basis for commencement of a
second Blockage Period by the Representative of such Designated Senior
Indebtedness whether or not within a period of 360 consecutive days, unless
such event of default shall have been cured or waived for a period of not less
than 90 consecutive days (it being acknowledged that any subsequent action, or
any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise
to an event of default pursuant to any provisions under which an event of
default previously existed or was continuing shall constitute a new event of
default for this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Indebtedness,
including the Holders of the Exchange Notes, may recover less, ratably, than
holders of Senior Indebtedness.
As of June 30, 1998, on a pro forma basis after giving effect to the 1998
Common Stock Offering and the Other Acquisitions, the aggregate amount of
Senior Indebtedness outstanding would have been approximately $408.9 million.
SUBSIDIARY GUARANTEES
Each Subsidiary Guarantor will unconditionally guarantee, on a senior
subordinated basis, jointly and severally, to each Holder and the Trustee, the
full and prompt performance of the Company's obligations under the Indenture
and the Exchange Notes, including the payment of principal of and interest on
the Exchange Notes. The Guarantees will be subordinated to Guarantor Senior
Indebtedness on the same basis as the Exchange Notes are subordinated to
Senior Indebtedness.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount which, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, will result in the obligations of such Subsidiary Guarantor under
the Guarantee not constituting a fraudulent conveyance or fraudulent transfer
under federal or state law.
Each Subsidiary Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary of the Company without limitation, or with other Persons
upon the terms and conditions set forth in the Indenture. See "--Certain
Covenants--Merger, Consolidation and Sale of Assets." In the event all of the
Capital Stock of a Subsidiary Guarantor is (or all or substantially all of the
assets of a Subsidiary Guarantor are) sold by the Company and the sale
complies with the provisions set forth under "--Certain Covenants--Limitation
on Asset Sales," the Subsidiary Guarantor's Guarantee will be released.
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Separate financial statements of the Subsidiary Guarantors are not included
herein because such Subsidiary Guarantors are jointly and severally liable
with respect to the Company's obligations pursuant to the Exchange Notes, and
the aggregate net assets, earnings and equity of the Subsidiary Guarantors are
substantially equivalent to the net assets, earnings and equity of the Company
and its Subsidiaries on a consolidated basis.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest thereon, if any, to the date of purchase
(the "Change of Control Offer Price").
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a
copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 60 days from the date
such notice is mailed, other than as may be required by law (the "Change of
Control Payment Date"). Holders electing to have an Exchange Note purchased
pursuant to a Change of Control Offer will be required to surrender the Note,
with the form entitled "Option of Holder to Elect to Purchase" on the reverse
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on the business day prior to the Change
of Control Payment Date.
Notwithstanding the foregoing, the Company shall not be required to make a
Change of Control Offer, as provided above, if, in connection with any Change
of Control, it had made an offer to purchase (an "Alternate Offer") any and
all Notes validly tendered at a cash price equal to or higher than the Change
of Control Offer Price and has purchased all Notes properly tendered in
accordance with the terms of such Alternate Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Exchange Notes that might be delivered by Holders
seeking to accept the Change of Control Offer. In the event the Company is
required to purchase outstanding Notes pursuant to a Change of Control Offer,
the Company expects that it would seek third party financing to the extent it
does not have available funds to meet its purchase obligations. However, there
can be no assurance that the Company would be able to obtain such financing.
The Change of Control feature of the Exchange Notes may make it more
difficult or discourage a takeover of the Company, and, thus, the removal of
incumbent management. Except as described herein with respect to a Change of
Control, the Indenture does not contain provisions that permit the Holders to
require the Company to repurchase or redeem the Exchange Notes in the event of
a takeover, recapitalization or similar restructuring. Restrictions in the
Indenture described herein on the ability of the Company and its Restricted
Subsidiaries to incur additional Indebtedness, to grant liens on their
property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Exchange
Notes, and there can be no assurance that the Company or the acquiring party
will have sufficient financial resources to effect such redemption or
repurchase. Such restrictions and the restrictions on transactions with
Affiliates may, in certain circumstances, make more difficult or discourage
any leveraged buyout of the Company or any of its Subsidiaries by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders protection in all
circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company
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shall comply with the applicable securities laws and regulations and shall not
be deemed to have breached its obligations under the "Change of Control"
provisions of the Indenture by virtue thereof.
The Bank Facility will, and future credit agreements or other agreements
relating to Senior Indebtedness to which the Company becomes a party may,
prohibit the Company from purchasing any Notes as a result of a Change of
Control and/or provide that certain change of control events with respect to
the Company would constitute a default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing the
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited from purchasing
the Exchange Notes. In such case, the Company's failure to purchase tendered
Exchange Notes would constitute an Event of Default under the Indenture. If,
as a result thereof, a default occurs with respect to any Senior Indebtedness,
the subordination provisions in the Indenture would likely restrict payments
to the Holders.
BOOK ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be issued in registered,
global form in minimum denominations of $1,000 and integral multiples of
$1,000 in excess thereof.
The Exchange Notes initially will be represented by one or more Exchange
Notes in registered, global form without interest coupons (collectively, the
"Global Notes"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for its nominee, in each case for credit to an account of
a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Exchange Notes in certificated form except in the limited circumstances
described below. See "--Exchange of Book-Entry Notes for Certificated Notes."
Except in the limited circumstances described below, owners of beneficial
interest in the Global Notes will not be entitled to receive physical delivery
of Certificated Notes (as defined below). Transfers of beneficial interests in
the Global Notes will be subject to the applicable rules and procedures of DTC
and its direct or indirect participants, which may change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar. The Exchange
Notes may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITARY PROCEDURES
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry charges in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in each security held by or on behalf of DTC
are recorded on the records of the Participants and the Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interest in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect
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to the Participants) or by the Participants and the Indirect Participants
(with respect to other owners of beneficial interest in the Global Notes).
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL NOTES WILL NOT
HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF THE EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED
THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY
PURPOSE.
Payments in respect of the principal of, and premium, if any, interest and
additional interest in a Global Note registered in the name of DTC or its
nominee will be payable to DTC in its capacity as the registered Holder under
the Indenture. Under the terms of the Indenture, the Company and the Trustee
will treat the persons in whose names the Exchange Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company, the Trustee nor any agent of the Company or the Trustee has or
will have any responsibility or liability for (i) any aspect of DTC's records
or any Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes or (ii) any other matter
relating to the actions and practices of DTC or any of its Participants or
Indirect Participants. DTC has advised the Company that its current practice
upon receipt of any payment in respect of securities such as the Exchange
Notes (including principal and interest), is to credit the accounts of the
relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings unless DTC has reason to believe it
will not receive payment on such payment date. Payments by the Participants
and the Indirect Participants to the beneficial owners of Exchange Notes will
be governed by standing instructions and customary practices and will be the
responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or the Company. Neither the Company
nor the Trustee will be liable for any delay by DTC or any of its Participants
in identifying the beneficial owners of the Exchange Notes, and the Company
and the Trustee may conclusively rely on and will be protected in relying on
the instructions from DTC or its nominee for all purposes.
Interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System, and secondary market trading activity in
such interests will, therefore, settle in immediately available funds, subject
in all cases to the rules and procedures of DTC and its Participants.
Transfers between Participants in DTC will be effected in accordance with
the DTC's procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Exchange Notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global
Notes and only in respect of such portion of the aggregate principal amount of
the Exchange Notes as to which Participant or Participants has or have given
such direction. However, if there is an Event of Default under the Exchange
Notes, DTC reserves the right to exchange the Global Notes for legended
Exchange Notes in certificated form, and to distribute such Exchange Notes to
its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Notes among Participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the
Trustee nor any of their respective agents will have any obligations under the
rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Exchange Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Notes
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) if the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of the Certificated Notes or (iii) there shall have
occurred and be continuing a
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Default or Event of Default with respect to the Exchange Notes. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible
for payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Subsidiary Guarantor
may incur Indebtedness (including, without limitation, Acquired Indebtedness),
if on the date of the incurrence of such Indebtedness, after giving effect to
the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the
Company is greater than (i) 2.25 to 1.0 if the date of such incurrence is on
or prior to May 15, 2001 or (ii) 2.50 to 1.0 if the date of such incurrence is
after May 15, 2001.
Limitation on Restricted Payments. The Company will not, and will not cause
or permit any of its Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Equity Interests of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock, (c) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire
or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, any Indebtedness of the Company
that is subordinate or junior in right of payment of the Exchange Notes or (d)
make any Investment (other than Permitted Investments) (each of the foregoing
actions set forth in clauses (a), (b), (c) and (d) being referred to as a
"Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
in compliance with the "Limitation on Incurrence of Additional Indebtedness"
covenant or (iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the amount
expended for such purposes, if other than in cash, being the fair market value
of such property as determined in good faith by the Board of Directors of the
Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100%
of such loss) of the Company earned during the period beginning on the first
day of the fiscal quarter including the Issue Date (the "Reference Date")
(treating such period as a single accounting period), provided, however, that
if the Exchange Notes achieve an Investment Grade Rating as of the end of any
fiscal quarter, the percentage for the fiscal quarter after such fiscal
quarter (and for any other fiscal quarter where, on the first day of such
fiscal quarter, the Exchange Notes shall have an Investment Grade Rating) will
be 100% of Consolidated Net Income during each fiscal quarter after such
fiscal quarter; provided further, however, that if such Restricted Payment is
to be made in reliance upon an additional amount permitted pursuant to the
immediately preceding proviso, the Exchange Notes must have an Investment
Grade Rating at the time such Restricted Payment is declared or, if not
declared, made, plus (x) 100% of the aggregate net cash proceeds received by
the Company from any Person (other than a Subsidiary of the Company) from (i)
the issuance and sale subsequent to the Issue Date and on or prior to the
Reference Date of Qualified Equity Interests of the Company (other than
Qualified Equity Interests applied pursuant to clauses 2(ii) and 3(ii) of the
next succeeding paragraph) and (ii) Indebtedness or Disqualified Capital Stock
that has been converted into or exchanged for Qualified Equity Interests
together with the aggregate net cash proceeds received by the Company at the
time of such conversion or exchange, plus (y) without duplication of any
amounts
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included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of
any equity contribution received by the Company from a holder of the Company's
Capital Stock and plus (z) an amount equal to the sum of (1) any net reduction
in Investments made pursuant to this first paragraph of the "Limitation on
Restricted Payments" covenant in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary
(except to the extent any such payment is included in the calculation of
Consolidated Net Income) and (2) the consolidated net Investments, as of the
date of Revocation, made by the Company or any of its Restricted Subsidiaries
in any Subsidiary of the Company that had been designated as an Unrestricted
Subsidiary after the Issue Date, upon its redesignation as a Restricted
Subsidiary in accordance with the covenant described under "--Limitation on
Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of
Default shall have occurred and be continuing, the acquisition of any shares
of Capital Stock of the Company, either (i) solely in exchange for Qualified
Equity Interests of the Company or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of Qualified Equity Interests of the Company; (3)
if no Default or Event of Default shall have occurred and be continuing, the
purchase, redemption, defeasance or other acquisition or retirement for value
of any Indebtedness of the Company that is subordinate or junior in right of
payment to the Exchange Notes either (i) solely in exchange for Qualified
Equity Interests of the Company or (ii) through the application of net
proceeds of (A) a substantially concurrent sale for cash (other than to a
Subsidiary of the Company) of Qualified Equity Interests of the Company or
(B) Refinancing Indebtedness; (4) so long as no Default or Event of Default
shall have occurred and be continuing, repurchases by the Company of Common
Stock of the Company from employees of the Company or any of its Subsidiaries
or their authorized representatives upon the death, disability or termination
of employment of such employees, in an aggregate amount not to exceed $2.0
million in any calendar year; and (5) other Restricted Payments in an
aggregate amount not to exceed $15.0 million. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date in accordance
with clause (iii) of the immediately preceding paragraph, amounts expended
pursuant to clauses (1), (4) and (5) shall be included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations
may be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary (excluding liabilities
that are not subordinated to the Exchange Notes that have been assumed by a
transferee of such assets to the extent that the applicable agreement releases
or indemnifies the Company or such Restricted Subsidiary from such
liabilities), as the case may be, from such Asset Sale shall be in the form of
cash or Cash Equivalents and is received at the time of such disposition or
securities which are converted into cash or Cash Equivalents within 60 days;
and (iii) upon the consummation of an Asset Sale, the Company shall apply, or
cause such Restricted Subsidiary to apply, the Net Cash Proceeds relating to
such Asset Sale within 365 days of receipt thereof either (A) to prepay any
Senior Indebtedness and, in the case of any Senior Indebtedness under any
revolving credit facility, including the Bank Facility, effect a permanent
reduction in the availability under such revolving credit facility, (B) to
make an investment in or acquire properties and assets that replace the
properties and assets that were the subject of such Asset Sale or in
properties and assets that will be used (including acquisitions of other
businesses) in the business of the Company and its Restricted Subsidiaries as
existing on the Issue Date or in businesses reasonably related thereto
("Replacement Assets"), or (C) a combination of prepayment and investment
permitted by the
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foregoing clauses (iii)(A) and (iii)(B). On the 366th day after an Asset Sale
or such earlier date, if any, as the Board of Directors of the Company or of
such Restricted Subsidiary, as the case may be, determines not to apply the
Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net
Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds
which have not been applied on or before such Net Proceeds Offer Trigger Date
as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding
sentence (each a "Net Proceeds Offer Amount"), shall be applied by the Company
or such Restricted Subsidiary, as the case may be, to make an offer to
purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment
Date") not less than 30 nor more than 45 days following the applicable Net
Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that amount
of Notes issued under the Indenture equal to the Net Proceeds Offer Amount at
a price equal to 100% of the principal amount of the Exchange Notes to be
purchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase; provided, however, that if at any time any non-cash consideration
received by the Company or any Restricted Subsidiary of the Company, as the
case may be, in connection with any Asset Sale is converted into or sold or
otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. The Company may defer the
Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer
Amount equal to or in excess of $10.0 million resulting from one or more Asset
Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not
just the amount in excess of $10.0 million, shall be applied as required
pursuant to this paragraph); provided, that in no event will the net cash
proceeds from an Asset Sale be subject to more than one Net Proceeds Offer.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold
the properties and assets of the Company and its Restricted Subsidiaries not
so transferred for purposes of this covenant, and shall comply with the
provisions of this covenant with respect to such deemed sale as if it were an
Asset Sale. In addition, the fair market value of such properties and assets
of the Company or its Restricted Subsidiaries deemed to be sold shall be
deemed to be Net Cash Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 75% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value as determined in good faith by the Board
of Directors of the Company; provided that any consideration not constituting
Replacement Assets received by the Company or any of its Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated
under this paragraph shall constitute Net Cash Proceeds subject to the
provisions of the two preceding paragraphs.
Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set
forth in the Indenture. Upon receiving notice of the Net Proceeds Offer,
Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly
tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of
tendering Holders will be purchased on a pro rata basis (based on amounts
tendered). A Net Proceeds Offer shall remain open for a period of 20 business
days or such longer period as may be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
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The Bank Facility will, and future credit agreements or other agreements
relating to Senior Indebtedness to which the Company becomes a party may,
prohibit the Company from purchasing any Notes pursuant to this "Limitation on
Asset Sales" covenant. In the event the Company is prohibited from purchasing
the Exchange Notes, the Company could seek the consent of its lenders to the
purchase of the Exchange Notes or could attempt to refinance the borrowings
that contain such prohibition. If the Company does not obtain such a consent
or repay such borrowings, the Company will remain prohibited from purchasing
the Exchange Notes. In such case, the Company's failure to purchase tendered
Notes would constitute an Event of Default under the Indenture. If, as a
result thereof, a default occurs with respect to any Senior Indebtedness, the
subordination provisions in the Indenture would likely restrict payments to
the Holders.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or
make any other distributions on or in respect of its Capital Stock; (b) make
loans or advances or to pay any Indebtedness or other obligation owed to the
Company or any other Restricted Subsidiary of the Company; or (c) transfer any
of its property or assets to the Company or any other Restricted Subsidiary of
the Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary of the Company; (4) any instrument governing Acquired
Indebtedness, which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person or
the properties or assets of the Person so acquired; (5) agreements (other than
the Bank Facility) existing on the Issue Date to the extent and in the manner
such agreements are in effect on the Issue Date or as amended in a manner that
is not more disadvantageous to the Holders in any material respect than the
agreement existing on the Issue Date; (6) the Bank Facility; provided,
however, that, except during a period when an event of default under the Bank
Facility shall have occurred and be continuing, no such encumbrances or
restrictions shall limit the ability of such Subsidiary to dividend, loan,
advance or otherwise transfer funds to the Company in an amount required to
pay when due the scheduled interest (including Additional Interest) and
principal at maturity of the Exchange Notes; (7) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (c) above; (8) contracts for
the sale of assets, including, without limitation, customary restrictions with
respect to a Subsidiary pursuant to an agreement that has been entered into
for the sale or disposition of all or substantially all of the Capital Stock
or assets of such Subsidiary; (9) secured Indebtedness otherwise permitted to
be incurred pursuant to the covenants described under "--Limitation on
Incurrence of Additional Indebtedness" and "--Limitation on Liens" that limit
the right of the debtor to dispose of the assets securing such Indebtedness;
(10) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business; (11) any
credit facility or similar agreement entered into in accordance with clause
(xv) of the definition of "Permitted Indebtedness"; provided, however, that,
except during a period when an event of default under such credit facility
shall have occurred and be continuing, no such encumbrances or restrictions
shall limit the ability of any Foreign Subsidiary to dividend, loan, advance
or otherwise transfer funds to the Company in an amount required to pay when
due the scheduled interest (including Additional Interest) and principal at
maturity of the Exchange Notes; (12) customary provisions in joint venture
agreements; or (13) an agreement governing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement referred
to in clause (2), (4), (5), (6), (7), (8), (9), (10), (11) or (12) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less
favorable to the Company in any material respect as determined by the Board of
Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clause (2), (4), (5), (6), (7), (8), (9), (10), (11) or
(12).
Limitation on Liens. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries
whether owned on the Issue Date or
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acquired after the Issue Date, or any proceeds therefrom, or assign or
otherwise convey any right to receive income or profits therefrom unless (i)
in the case of Liens securing Indebtedness that is expressly subordinate or
junior in right of payment to the Exchange Notes or any Guarantee, the
Exchange Notes and the Guarantees are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (ii) in all
other cases, the Exchange Notes and the Guarantees are equally and ratably
secured, except for (A) Liens existing as of the Issue Date to the extent and
in the manner such Liens are in effect on the Issue Date; (B) Liens securing
Senior Indebtedness and Liens securing Guarantor Senior Indebtedness; (C)
Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company on
assets of any Restricted Subsidiary of the Company; (D) Liens securing
Refinancing Indebtedness incurred in accordance with the provisions of the
Indenture which is incurred to Refinance any Indebtedness which has been
secured by a Lien permitted under the Indenture; provided, however, that such
Liens (i) are no less favorable to the Holders and are no more favorable to
the lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (ii) do not extend to or cover any property
or assets of the Company or any of its Restricted Subsidiaries not securing
the Indebtedness so Refinanced; (E) Liens securing Indebtedness incurred in
accordance with clause (xv) of the definition of "Permitted Indebtedness" and
(F) Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company will not
incur or suffer to exist Indebtedness that is senior in right of payment to
the Exchange Notes and subordinate in right of payment to any other
Indebtedness of the Company. No Subsidiary Guarantor will incur or suffer to
exist Indebtedness that is senior in right of payment to such Subsidiary
Guarantor's Guarantee and subordinate in right of payment to any other
Indebtedness of such Subsidiary Guarantor. Notwithstanding anything to the
contrary contained herein, no Indebtedness incurred at any time under the Bank
Facility (as such facility is in existence on the Issue Date) shall be
considered subordinate in right of payment to any other Indebtedness incurred
under the Bank Facility (as such facility is in existence on the Issue Date).
Merger, Consolidation and Sale of Assets. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or
into any Person, or sell, assign, transfer, lease, convey or otherwise dispose
of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the
Company and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and
of the Company's Restricted Subsidiaries substantially as an entirety (the
"Surviving Entity") (x) shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District of
Columbia and (y) shall expressly assume, by supplemental indenture (in form
and substance satisfactory to the Trustee), executed and delivered to the
Trustee, the due and punctual payment of the principal of, and premium, if
any, and interest on all of the Exchange Notes and the performance of every
covenant of the Exchange Notes, the Indenture and the Registration Rights
Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
"Limitation on Incurrence of Additional Indebtedness" covenant;
(iii) immediately before and immediately after giving effect to such
transaction and the assumption contemplated by clause (i)(2)(y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such
transaction have been satisfied.
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For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company (other than to the Company or another Restricted
Subsidiary) the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer
of all or substantially all of the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the
Company in accordance with the foregoing, in which the Company is not the
continuing corporation, the successor Person formed by such consolidation or
into which the Company is merged or to which such conveyance, lease or
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, the Company under the Indenture and the Exchange
Notes with the same effect as if such surviving entity had been named as such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of "--Limitation on Asset Sales") will not, and the Company will not cause or
permit any Subsidiary Guarantor to, consolidate with or merge with or into any
Person other than the Company or any other Subsidiary Guarantor unless: (i)
the entity formed by or surviving any such consolidation or merger is a
corporation organized and existing under the laws of the United States or any
State thereof or the District of Columbia; (ii) such entity, if not already a
Subsidiary Guarantor, assumes by supplemental indenture all of the obligations
of the Subsidiary Guarantor on the Guarantee; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; and (iv) immediately after giving effect to such
transaction and the use of any proceeds therefrom on a pro forma basis, the
Company could satisfy the provisions of clause (ii) of the first paragraph of
this covenant. Any merger or consolidation of a Subsidiary Guarantor with and
into the Company (with the Company being the surviving entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary of the
Company need only comply with clause (iv) of the first paragraph of this
covenant.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related
transactions (including, without limitation, the purchase, sale, lease or
exchange of any property or the rendering of any service) with, or for the
benefit of, any of its Affiliates (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under paragraph (b) below and (y)
Affiliate Transactions on terms that are no less favorable than those that
might reasonably have been obtained in a comparable transaction at such time
on an arm's-length basis from a Person that is not an Affiliate of the Company
or such Restricted Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value in
excess of $5.0 million shall be approved by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If
the Company or any Restricted Subsidiary of the Company enters into an
Affiliate Transaction (or a series of related Affiliate Transactions related
to a common plan) that involves an aggregate fair market value of more than
$10.0 million, the Company or such Restricted Subsidiary, as the case may be,
shall, prior to the consummation thereof, obtain a favorable opinion as to the
fairness of such transaction or series of related transactions to the Company
or the relevant Restricted Subsidiary, as the case may be, from a financial
point of view, from an Independent Financial Advisor and file the same with
the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i) fees and
compensation and benefits paid to and indemnity provided on behalf of
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board
of Directors (including, without limitation, any issuance of securities,
grants of cash, securities, stock options or otherwise, pursuant to, or the
funding of, employment arrangements, stock options and stock ownership plans
approved by the Board of Directors of the Company or the Board of Directors of
the relevant Restricted Subsidiary);
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(ii) transactions exclusively between or among the Company and any of its
Wholly Owned Restricted Subsidiaries or exclusively between or among such
Wholly Owned Restricted Subsidiaries, provided such transactions are not
otherwise prohibited by the Indenture; (iii) any agreement as in effect as of
the Issue Date or any amendment thereto or any transaction contemplated
thereby (including pursuant to any amendment thereto) in any replacement
agreement thereto so long as such amendment or replacement agreement is not
more disadvantageous to the Holders in any material respect than the original
agreement as in effect on the Issue Date; (iv) loans and advances to officers
and employees or consultants of the Company or any of its Restricted
Subsidiaries in the ordinary course of business not to exceed $1,000,000 at
any time outstanding; and (v) Restricted Payments permitted by the Indenture.
Additional Subsidiary Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any Restricted Subsidiary
(other than a Foreign Subsidiary, unless the Company elects to have a Foreign
Subsidiary execute a Guarantee) that is not a Subsidiary Guarantor, or if the
Company or any Restricted Subsidiary shall organize, acquire or otherwise
invest in or hold an Investment in a Restricted Subsidiary (other than a
Foreign Subsidiary, unless the Company elects to have a Foreign Subsidiary
execute a Guarantee) having total consolidated assets with a book value in
excess of $500,000, then such transferee or acquired or other Restricted
Subsidiary shall (a) execute and deliver to the Trustee a supplemental
indenture in form reasonably satisfactory to the Trustee pursuant to which
such Restricted Subsidiary shall unconditionally guarantee jointly and
severally with the other Subsidiary Guarantors, on a senior subordinated
basis, all of the Company's obligations under the Exchange Notes and the
Indenture on the terms set forth in the Indenture and (b) deliver to the
Trustee an opinion of counsel that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Subsidiary Guarantor for all purposes of the Indenture.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably related
to the businesses in which the Company and its Restricted Subsidiaries are
engaged on the Issue Date.
Reports to Holders. The Indenture will provide that the Company will deliver
to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA (S)314(a).
Limitation on Designations of Unrestricted Subsidiaries. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the
Company which owns any Capital Stock of, or owns or holds any Lien on any
property of, the Company or any Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of
(i) fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
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In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that
the Company shall not, and shall not permit any Restricted Subsidiary to, at
any time (x) provide direct or indirect credit support for or a guarantee of
any Indebtedness of any Unrestricted Subsidiary (including a guarantee of any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable with respect to any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable with respect
to any Indebtedness which provides that the holder thereof may (upon notice,
lapse of time or both) declare a default thereon or cause the payment thereof
to be accelerated or payable prior to its final scheduled maturity upon the
occurrence of a default with respect to any Indebtedness of any Unrestricted
Subsidiary (including any right to take enforcement action against such
Unrestricted Subsidiary), except, in the case of clause (x) or (y), to the
extent permitted under the covenant described under "--Limitation on
Restricted Payments."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolution of
the Company certifying compliance with the foregoing provisions which shall be
filed with the Trustee.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Exchange
Notes (except in the case of a default with respect to the "Merger,
Consolidation and Sale of Assets" covenant, which will constitute an Event
of Default with such notice requirement but without such passage of time
requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $10.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $10.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
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(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries; or
(vii) any of the Guarantees of a Subsidiary Guarantor that is a
Significant Subsidiary ceases to be in full force and effect or any of such
Guarantees is declared to be null and void and unenforceable or any of such
Guarantees is found to be invalid, in each case by a court of competent
jurisdiction in a final non-appealable judgment, or any of such Subsidiary
Guarantors denies in writing its liability under its Guarantee (other than
by reason of release of any such Subsidiary Guarantor in accordance with
the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above relating to the Company) shall occur and be continuing, the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Exchange Notes to be
due and payable by notice in writing to the Company and the Trustee specifying
the respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same shall become immediately due and payable;
provided, however, that so long as any Indebtedness permitted to be incurred
under the Indenture pursuant to the Bank Facility shall be outstanding, no
such acceleration shall be effective until the earlier of (i) acceleration of
any such Indebtedness under the Bank Facility or (ii) five business days after
giving notice to the Representative under the Bank Facility of such
acceleration. If an Event of Default specified in clause (vi) above relating
to the Company occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding
Notes shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Exchange Notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the Exchange Notes
may rescind and cancel such declaration and its consequences (i) if the
rescission would not conflict with any judgment or decree, (ii) if all
existing Events of Default have been cured or waived except non-payment of
principal or interest that has become due solely because of the acceleration,
(iii) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become due
otherwise than by such declaration of acceleration, has been paid, (iv) if the
Company has paid the Trustee its reasonable compensation and reimbursed the
Trustee for its expenses, disbursements and advances and (v) in the event of
the cure or waiver of an Event of Default of the type described in clause (vi)
of the description above of Events of Default, the Trustee shall have received
an officers' certificate and an opinion of counsel that such Event of Default
has been cured or waived. No such rescission shall affect any subsequent
Default or impair any right consequent thereto.
The Holders of a majority in principal amount of the Exchange Notes may
waive any existing Default or Event of Default under the Indenture, and its
consequences, except a default in the payment of the principal of or interest
on any Notes.
Holders of the Exchange Notes may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture and under the TIA. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Holders, unless
such Holders have offered to the Trustee reasonable indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge
of any Default or Event of Default (provided that such officers shall provide
such certification at least annually whether or not they know of any Default
or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or its Subsidiaries, as such, shall have any liability for any obligations of
the Company under the Exchange Notes, the Guarantees, the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the Exchange Notes and the Guarantees. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Subsidiary Guarantors discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes, except for (i) the rights
of Holders to receive payments in respect of the principal of, premium, if
any, and interest on the Exchange Notes when such payments are due, (ii) the
Company's obligations with respect to the Exchange Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Exchange Notes. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, reorganization and insolvency events) described
under "--Events of Default" will no longer constitute an Event of Default with
respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants, to
pay the principal of, premium, if any, and interest on the Exchange Notes on
the stated date for payment thereof or on the applicable redemption date, as
the case may be; (ii) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the Holders
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred; (iv) no Default or
Event of Default shall have occurred and be continuing on the date of such
deposit or insofar as Events of Default from bankruptcy or insolvency events
are concerned, at any time in the period ending on the 91st day after the date
of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under the Indenture or
any other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions
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precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance have been complied with; (viii) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied. Notwithstanding the foregoing, the Opinion
of Counsel required by clause (ii) above with respect to a Legal Defeasance
need not be delivered if all Notes not theretofore delivered to the Trustee
for cancellation (x) have become due and payable, (y) will become due and
payable on the maturity date within one year or (z) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Exchange Notes, as expressly provided for in the Indenture) as to all
outstanding Notes when (i) either (a) all the Exchange Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes which have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have been
delivered to the Trustee for cancellation or (b) all Notes not theretofore
delivered to the Trustee for cancellation have become due and payable and the
Company has irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire Indebtedness on
the Exchange Notes not theretofore delivered to the Trustee for cancellation,
for principal of, premium, if any, and interest on the Exchange Notes to the
date of deposit together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity
or redemption, as the case may be; (ii) the Company has paid all other sums
payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel
stating that all conditions precedent under the Indenture relating to the
satisfaction and discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Subsidiary Guarantors and the Trustee,
without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies,
so long as such change does not adversely affect the rights of any of the
Holders in any material respect. Other modifications and amendments of the
Indenture may be made with the consent of the Holders of a majority in
principal amount of the then outstanding Notes issued under the Indenture,
except that, without the consent of each Holder affected thereby, no amendment
may: (i) reduce the amount of Notes whose Holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing
the time for payment of interest, including defaulted interest, on any Notes;
(iii) reduce the principal of or change or have the effect of changing the
fixed maturity of any Notes, or change the date on which any Notes may be
subject to redemption or repurchase, or reduce the redemption or repurchase
price therefor; (iv) make any Notes payable in money other than that stated in
the Exchange Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount
of Notes to waive Defaults or Events of Default; (vi) amend, change or modify
in any material respect the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect
thereto; (vii) modify or change any of the subordination provisions of the
Indenture or the related definitions in a manner that would adversely affect
the Holders, or (viii) release all of the Subsidiary Guarantors at any one
time from all of their obligations under the Guarantees otherwise than in
accordance with the terms of the Indenture.
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GOVERNING LAW
The Indenture will provide that it and the Exchange Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State
of New York but without giving effect to applicable principles of conflicts of
law to the extent that the application of the law of another jurisdiction
would be required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the
Trustee will exercise such rights and powers vested in it by the Indenture,
and use the same degree of care and skill in its exercise as a prudent man
would exercise or use under the circumstances in the conduct of his own
affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to
obtain payments of claims in certain cases or to realize on certain property
received in respect of any such claim as security or otherwise. Subject to the
TIA, the Trustee will be permitted to engage in other transactions; provided
that if the Trustee acquires any conflicting interest as described in the TIA,
it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of is
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary
of the Company or at the time it merges or consolidates with the Company or
any of its Restricted Subsidiaries or assumed in connection with the
acquisition of assets from such Person and in each case not incurred by such
Person in connection with, or in anticipation or contemplation of, such Person
becoming a Restricted Subsidiary of the Company or such acquisition, merger or
consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of the Company or of any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other
than a Restricted Subsidiary of the Company) which constitute all or
substantially all of the assets of such Person or comprises any division or
line of business of such Person or any other properties or assets of such
Person other than in the ordinary course of business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary
course of business), assignment or other transfer for value by the Company or
any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company of (a) any Capital Stock of any Restricted
Subsidiary of the Company; or (b) any other property or assets of the Company
or any Restricted Subsidiary of the Company other than in the ordinary course
of business; provided, however, that Asset Sales shall not include (i) a
transaction or series of related transactions for which the Company or its
Restricted Subsidiaries receive aggregate consideration of less than $500,000
and (ii) the sale, lease, conveyance, disposition or other transfer of
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all or substantially all of the assets of the Company as permitted under "--
Certain Covenants--Merger, Consolidation and Sale of Assets."
"Bank Facility" means the Second Amended and Restated Credit Agreement,
dated as of December 2, 1997, among the Company, the Subsidiaries of the
Company, the lenders party thereto in their capacities as lenders thereunder,
Bankers Trust Company, as issuing bank, and BT Commercial Corporation, as
agent, as amended, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be further amended (including any amendment and
restatement thereof), supplemented or otherwise modified from time to time,
including any agreement or agreements extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness"
covenant above) or adding Restricted Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness
under such agreement or any successor or replacement agreement and whether by
the same or any other agent, lender or group of lenders.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have
been duly adopted by the Board of Directors of such Person and to be in full
force and effect on the date of such certification, and delivered to the
Trustee.
"Borrowing Base" means, with respect to any Foreign Subsidiary as of any
date, an amount equal to the sum of (a) 85% of the net book value of accounts
receivable (other than intercompany receivables) owned by such Foreign
Subsidiary as of such date that are not more than 90 days past due and (b) 85%
of the value (the lower of net book value or orderly liquidation value) of all
rental equipment owned by such Foreign Subsidiary as of such date, all
calculated on a consolidated basis for such Foreign Subsidiary and its
Restricted Subsidiaries in accordance with the method of accounting used for
financial calculations under the applicable credit facility for such Foreign
Subsidiary. To the extent that information is not available as to the amount
of accounts receivable or rental equipment as of a specific date, a Foreign
Subsidiary may utilize the most recent available information provided to the
lenders under the applicable credit facility for the purpose of calculating
the Borrowing Base.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to
any Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (1) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition thereof;
(ii) marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of
acquisition, having a rating of at least A-1 from S&P or at least P-1 from
Moody's; (iv) certificates of deposit or bankers' acceptances maturing within
one year from the
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date of acquisition thereof issued by any bank organized under the laws of the
United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clause (i) above entered into with any bank meeting
the qualifications specified in clause (iv) above; and (vi) investments in
money market funds which invest substantially all their assets in securities
of the types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all or substantially all of the assets of
the Company to any Person or group or related Persons for purposes of Section
13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof
(whether or not otherwise in compliance with the provisions of the Indenture)
other than to the Principals and their Related Parties; (ii) any Person or
Group (other than the Principals and their Related Parties) shall become the
owner, directly or indirectly, beneficially or of record, of shares
representing more than 35% of the aggregate ordinary voting power represented
by the issued and outstanding Capital Stock of the Company and the Principals
and their Related Parties beneficially own, directly or indirectly, shares
representing a lesser percentage of the aggregate ordinary voting power
represented by the issued and outstanding Capital Stock of the Company and do
not have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors; or (iii) the
replacement of a majority of the Board of Directors of the Company over a two-
year period from the directors who constituted the Board of Directors of the
Company at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of
the Company then still in office who either were members of such Board of
Directors at the beginning of such period or whose election as a member of
such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without
limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes
of such Person and its Restricted Subsidiaries paid or accrued in accordance
with GAAP for such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or taxes attributable
to sales or dispositions outside the ordinary course of business), (B)
Consolidated Interest Expense and (C) Consolidated Non-cash Charges less any
non-cash items increasing Consolidated Net Income for such period, all as
determined on a consolidated basis for such Person and its Restricted
Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters for which internal financials are available (the "Four Quarter
Period") ending on or prior to the date of the transaction giving rise to the
need to calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the incurrence or repayment of any
Indebtedness of such Person or any of its Restricted Subsidiaries (and the
application of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness (and the
application of the proceeds thereof), other than the incurrence or repayment
of Indebtedness in the ordinary course of business for working capital
purposes, occurring during the Four Quarter Period or at any time subsequent
to the last day of the Four Quarter Period and on or prior to the Transaction
Date, as if such incurrence or repayment, as the case may be (and the
application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Restricted Subsidiaries
(including any
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Person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including any pro
forma expense and cost reductions as determined in accordance with Regulation
S-X under the Exchange Act) attributable to the assets which are the subject
of the Asset Acquisition or Asset Sale during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such Asset Sale or Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first day of the
Four Quarter Period. If such Person or any of its Restricted Subsidiaries
directly or indirectly guarantees Indebtedness of a third Person, the
preceding sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if such Person or any Restricted Subsidiary of such Person had
directly incurred or otherwise assumed such guaranteed Indebtedness.
Furthermore, in calculating "Consolidated Fixed Charges" for purposes of
determining the denominator (but not the numerator) of this "Consolidated
Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (2) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; and (3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Swap Obligations, shall be deemed to accrue at
the rate per annum resulting after giving effect to the operation of such
agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense,
plus (ii) the product of (x) the amount of all dividend payments on any series
of Preferred Stock of such Person (other than dividends paid in Qualified
Capital Stock) paid, accrued or scheduled to be paid or accrued during such
period times (y) a fraction, the numerator of which is one and the denominator
of which is one minus the then current effective consolidated federal, state
and local tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount and amortization or write-
off of deferred financing costs (but excluding any write-offs of deferred
financing fees in connection with any refinancing or retirement of the Bank
Facility undertaken in conjunction with the offering of the Exchange Notes on
the Issue Date), (b) the net costs under Interest Swap Obligations, (c) all
capitalized interest and (d) the interest portion of any deferred payment
obligation; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
from Asset Sales or abandonments or reserves relating thereto, (b) after-tax
items classified as extraordinary or nonrecurring gains, (c) the net income of
any Person acquired in a "pooling of interests" transaction accrued prior to
the date it becomes a Restricted Subsidiary of the referent Person or is
merged or consolidated with the referent Person or any Restricted Subsidiary
of the referent Person, (d) the net income (but not loss) of any Restricted
Subsidiary of the referent Person to the extent that the declaration of
dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by a contract, operation of law or otherwise, (e) the net
income of any Person, other than a Restricted Subsidiary of the referent
Person, except to the extent of cash dividends or distributions paid to the
referent Person or to a Wholly Owned Restricted Subsidiary of the referent
Person by such Person, (f) any restoration to income of any contingency
reserve, except to the extent that provision for
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such reserve was made out of Consolidated Net Income accrued at any time
following the Issue Date, (g) income or loss attributable to discontinued
operations (including, without limitation, operations disposed of during such
period whether or not such operations were classified as discontinued), and
(h) in the case of a successor to the referent Person by consolidation or
merger or as a transferee of the referent Person's assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of
assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and its Restricted Subsidiaries reducing Consolidated Net
Income of such Person and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP (excluding any such
charges constituting an extraordinary item or loss of any such charge which
requires an accrual of or a reserve for cash charges for any future period).
"Currency Swap Obligations" means any foreign exchange contract, currency
swap agreement or other similar agreement or arrangement designed to protect
the Company or any of its Restricted Subsidiaries against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of
Default.
"Designated Senior Indebtedness" means (i) Indebtedness under or in respect
of the Bank Facility and (ii) any other Indebtedness constituting Senior
Indebtedness or Guarantor Senior Indebtedness which, at the time of
determination, has an aggregate principal amount of at least $25,000,000 and
is specifically designated in the instrument evidencing such Senior
Indebtedness as "Designated Senior Indebtedness" by the Company.
"Designation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or
is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or is redeemable at the sole option of the holder thereof on or prior to the
final maturity date of the Exchange Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for
cash, between a willing seller and a willing and able buyer, neither of whom
is under undue pressure or compulsion to complete the transaction. Fair market
value shall be determined by the Board of Directors of the Company acting in
good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"Foreign Subsidiary" means any Restricted Subsidiary that is not organized
under the laws of the United States of America or any state thereof or the
District of Columbia.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as
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may be approved by a significant segment of the accounting profession of the
United States, which are in effect as of the Issue Date.
"Guarantee" means the guarantee of the Exchange Notes by the Subsidiary
Guarantors.
"Guarantor Senior Indebtedness" means with respect to any Subsidiary
Guarantor, (i) the principal of, premium, if any, and interest (including any
interest accruing subsequent to the filing of a petition of bankruptcy at the
rate provided for in the documentation with respect thereto, whether or not
such interest is an allowed claim under applicable law) on any Indebtedness of
a Subsidiary Guarantor, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Guarantee of such Subsidiary
Guarantor. Without limiting the generality of the foregoing, "Guarantor Senior
Indebtedness" shall also include the principal of, premium, if any, interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on, and
all other amounts owing in respect of, (x) all monetary obligations of every
nature of the Company under the Bank Facility, including, without limitation,
obligations to pay principal and interest, reimbursement obligations under
letters of credit, fees, expenses and indemnities, (y) all Interest Swap
Obligations and (z) all Currency Swap Obligations, in each case whether
outstanding on the Issue Date or thereafter incurred. Notwithstanding the
foregoing, "Guarantor Senior Indebtedness" shall not include (i) any
Indebtedness of such Subsidiary Guarantor to a Restricted Subsidiary of such
Subsidiary Guarantor, (ii) Indebtedness to, or guaranteed on behalf of, any
shareholder, director, officer or employee of such Subsidiary Guarantor or any
Restricted Subsidiary of such Subsidiary Guarantor (including, without
limitation, amounts owed for compensation), (iii) Indebtedness to trade
creditors and other amounts incurred in connection with obtaining goods,
materials or services, (iv) Indebtedness represented by Disqualified Capital
Stock, (v) any liability for federal, state, local or other taxes owed or
owing by such Subsidiary Guarantor, (vi) Indebtedness incurred in violation of
the Indenture provisions set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness," (vii) Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment
to any other Indebtedness of such Subsidiary Guarantor. Notwithstanding
anything to the contrary contained herein, no Indebtedness incurred at any
time under the Bank Facility (as such facility is in existence on the Issue
Date) shall be considered subordinate in right of payment to any other
Indebtedness incurred under the Bank Facility (as such facility is in
existence on the Issue Date).
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all
Obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all Obligations under any title
retention agreement (but excluding trade accounts payable and other accrued
liabilities arising in the ordinary course of business and payable in
accordance with customary terms or that are not overdue by 90 days or more or
are being contested in good faith), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (viii) all Obligations under currency agreements and
interest swap agreements of such Person, and (ix) all Disqualified Capital
Stock issued by such Person with the amount of Indebtedness represented by
such Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed repurchase price, but
excluding accrued dividends, if any. For purposes hereof, the "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a
fixed repurchase price shall be calculated in accordance with the terms of
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such Disqualified Capital Stock as if such Disqualified Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Capital Stock, such fair market
value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company (other than an interest in less
than 1% of the Company's Common Stock or any other publicly traded securities
of the Company) and (ii) which, in the judgment of the Board of Directors of
the Company, is otherwise independent and qualified to perform the task for
which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated
by applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated
by applying a fixed or a floating rate of interest on the same notional amount
and shall include, without limitation, interest rate swaps, caps, floors,
collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness
issued by, any Person. "Investment" shall exclude extensions of trade credit
by the Company and its Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be. For the purposes of the "Limitation
on Restricted Payments" covenant, (i) "Investment" shall include a portion
(proportionate to the Company's equity interest in such Subsidiary) of the
fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude a portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of any
Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (ii) the amount of any Investment shall
be the original cost of such Investment plus the cost of all additional
Investment by the Company or any of its Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups, write-downs, or
write-offs with respect to such Investment, reduced by the payment of
dividends or distributions in connection with such Investment or any other
amounts received in respect of such Investment; provided that no such payment
of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Common Stock of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, at least 51%
of the outstanding Common Stock of such Restricted Subsidiary, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Investment Grade Rating" means a rating of BBB- or higher by Standard &
Poor's Ratings Group (or its successor) and Baa3 or higher by Moody's
Investors Service, Inc. or the equivalent of such rating by such rating
agencies.
"Issue Date" means the date of original issuance of the Exchange Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof and any agreement
to give any security interest).
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"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents
(other than the portion of any such deferred payment constituting interest)
received by the Company or any of its Restricted Subsidiaries from such Asset
Sale net of (a) reasonable out-of-pocket expenses and fees relating to such
Asset Sale (including, without limitation, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable after taking
into account any reduction in consolidated tax liability due to available tax
credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any Indebtedness.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness represented by the Exchange Notes in an aggregate
principal amount not to exceed $200.0 million, and the Guarantees thereof,
issued in the Offering;
(ii) Indebtedness of the Company and the Subsidiary Guarantors (A)
incurred pursuant to the revolving credit provisions of the Bank Facility
or one or more other credit facilities in an aggregate principal amount at
any time outstanding not to exceed $500.0 million; provided that such
amount shall be reduced by any amounts applied to the permanent reduction
of such Indebtedness pursuant to "--Certain Covenants--Limitation on Asset
Sales" and (B) incurred pursuant to the term loan provisions of the Bank
Facility or one or more other credit facilities in an aggregate principal
amount at any time outstanding not to exceed $100.0 million, less any
amounts applied to the permanent reduction of such Indebtedness pursuant to
"--Certain Covenants--Limitation on Asset Sales" and less the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereof (excluding any such payments to the extent
refinanced at the time of payment under any Refinancing of the Bank
Facility);
(iii) other Indebtedness of the Company and its Restricted Subsidiaries
outstanding on the Issue Date;
(iv) Interest Swap Obligations or Currency Swap Obligations of the
Company covering Indebtedness of the Company or any of the Subsidiary
Guarantors and Interest Swap Obligations or Currency Swap Obligations of
any Subsidiary Guarantor covering Indebtedness of such Subsidiary
Guarantor; provided, however, that (a) such Interest Swap Obligations are
entered into to protect the Company and the Subsidiary Guarantors from
fluctuations in interest rates on Indebtedness incurred in accordance with
the Indenture and (b) such Currency Swap Obligations are entered into to
protect the Company and the Subsidiary Guarantors from fluctuations in
currency values;
(v) Indebtedness of a Wholly Owned Restricted Subsidiary of the Company
to the Company or to a Wholly Owned Restricted Subsidiary of the Company
for so long as such Indebtedness is held by the Company or a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien held
by a Person other than the Company or a Wholly Owned Restricted Subsidiary
of the Company, or other than a Lien on the related intercompany note
securing Indebtedness under the Bank Facility; provided that if as of any
date any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company owns or holds any such Indebtedness or holds a
Lien in respect of such Indebtedness, other than a lien on the related
intercompany note securing Indebtedness under the Bank Facility, such date
shall be deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
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(vi) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
of the Company for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary of the Company, in each case subject to no Lien,
other than a Lien on the related intercompany note securing Indebtedness
under the Bank Facility; provided that (a) any Indebtedness of the Company
to any Wholly Owned Restricted Subsidiary of the Company is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Indenture and the Exchange Notes and (b) if as of the date any
Person other than a Wholly Owned Restricted Subsidiary of the Company owns
or holds any such Indebtedness or any Person holds a Lien in respect of
such Indebtedness, other than a lien on the related intercompany note
securing Indebtedness under the Bank Facility, such date shall be deemed
the incurrence of Indebtedness not constituting Permitted Indebtedness by
the Company;
(vii) Indebtedness of the Company and the Subsidiary Guarantors arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business; provided, however, that such Indebtedness is extinguished within
two business days of incurrence;
(viii) Indebtedness of the Company and the Subsidiary Guarantors
represented by letters of credit for the account of the Company or such
Subsidiary Guarantors, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(ix) Indebtedness of the Company or a Subsidiary Guarantor in connection
with one or more standby letters of credit, guarantees, performance bonds
or other reimbursement obligations, in each case, issued in the ordinary
course of business and not in connection with the borrowing of money;
(x) Indebtedness of the Company or a Subsidiary Guarantor arising from
agreements of the Company or a Subsidiary Guarantor providing for
indemnification, adjustment of purchase price or similar obligations, in
each case, incurred or assumed in connection with the acquisition or
disposition of any business, assets or a Subsidiary;
(xi) Indebtedness of the Company and the Subsidiary Guarantors
represented by Capitalized Lease Obligations and Purchase Money
Indebtedness incurred in the ordinary course of business in an amount not
to exceed $20.0 million at any one time outstanding;
(xii) Refinancing Indebtedness;
(xiii) guarantees by the Company of Indebtedness of a Restricted
Subsidiary permitted to be incurred under the Indenture and guarantees by a
Subsidiary Guarantor of Indebtedness of the Company or any Restricted
Subsidiary permitted to be incurred under the Indenture;
(xiv) additional Indebtedness of the Company and any Subsidiary Guarantor
in an aggregate principal amount not to exceed $15.0 million at any one
time outstanding; and
(xv) Indebtedness of a Foreign Subsidiary other than a Foreign Subsidiary
which is a Subsidiary Guarantor which, when aggregated with the principal
amount of all other Indebtedness of such Foreign Subsidiary then
outstanding and incurred pursuant to this clause (xv), does not exceed the
amount of the Borrowing Base of such Foreign Subsidiary.
For purposes of determining whether any Indebtedness is Permitted
Indebtedness, (i) in the event that an item of Indebtedness meets the criteria
of more than one of the types of Indebtedness described above, the Company, in
its sole discretion, will classify such item of Indebtedness and only be
required to include the amount and type of such Indebtedness in one of the
above clauses and (ii) an item of Indebtedness may be divided and classified
in more than one of the types of Indebtedness described above.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary of the Company in any Person that is or will become
immediately after such Investment a Wholly Owned Restricted Subsidiary of the
Company or that will merge or consolidate into the Company or a Wholly Owned
Restricted
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Subsidiary of the Company, (ii) Investments in the Company by any Restricted
Subsidiary of the Company; provided that any Indebtedness evidencing such
Investment is unsecured and subordinated, pursuant to a written agreement, to
the Company's obligations under the Exchange Notes and the Indenture; (iii)
investments in cash and Cash Equivalents; (iv) loans and advances to employees
and officers of the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in excess of $1,000,000
at any one time outstanding; (v) Interest Swap Obligations or Currency Swap
Obligations entered into in the ordinary course of the Company's or its
Restricted Subsidiaries' businesses and otherwise in compliance with the
Indenture; (vi) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers; (vii)
promissory notes or other securities accepted from trade creditors or
customers in the ordinary course of business; (viii) guarantees by the Company
or any Subsidiary Guarantor of Indebtedness otherwise permitted to be incurred
under the Indenture; (ix) Investments made by the Company or its Restricted
Subsidiaries as a result of consideration received in connection with an Asset
Sale made in compliance with the "Limitation on Asset Sales" covenant; and (x)
Investments in joint ventures and Unrestricted Subsidiaries in an aggregate
amount at any one time not to exceed $15.0 million.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims either
(a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provisions, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business in connection therewith, or to
secure the performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, contracts, performance and return-of-money bonds and
other similar obligations (exclusive of obligations for the payment of
borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary of the Company acquired in the ordinary course
of business; provided, however, that (A) the related Purchase Money
Indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Subsidiary of the Company other than the property and assets so acquired
and proceeds thereof and (B) the Lien securing such Indebtedness shall be
created within 90 days of such acquisition;
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(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and set-
off;
(xi) Liens securing Interest Swap Obligations or Currency Swap
Obligations which Interest Swap Obligations or Currency Swap Obligations,
as the case may be, relate to Indebtedness that is otherwise permitted
under the Indenture;
(xii) Liens securing Acquired Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness of the Company or a Restricted Subsidiary of the
Company; and
(xiii) Liens not permitted by clauses (i) through (xii) that are incurred
in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations that do not exceed
$5,000,000 at any one time outstanding.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Principals" means each officer or employee of the Company and any spouse,
sibling, child or grandchild of the foregoing (in each case, whether such
relationship arises from birth, adoption or through marriage).
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Qualified Equity Interest" means any Qualified Capital Stock and all
warrants, options or other rights to acquire Qualified Capital Stock (but
excluding any debt security or Disqualified Capital Stock that is convertible
into or exchangeable for Qualified Capital Stock).
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Subsidiary Guarantor of Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), or (ix) of the
definition of Permitted Indebtedness),
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in each case that does not (1) result in an increase in the aggregate
principal amount of Indebtedness of such Person as of the date of such
proposed Refinancing (plus the amount of any premium required to be paid under
the terms of the instrument governing such Indebtedness and plus the amount of
reasonable expenses incurred by the Company in connection with such
Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided that (x) if such
Indebtedness being Refinanced is Indebtedness of the Company or a Subsidiary
Guarantor, then such Refinancing Indebtedness shall be Indebtedness solely of
the Company or a Subsidiary Guarantor and (y) if such Indebtedness being
Refinanced is subordinate or junior to the Exchange Notes, then such
Refinancing Indebtedness shall be subordinate to the Exchange Notes at least
to the same extent and in the same manner as the Indebtedness being
Refinanced.
"Related Party" with respect to any Principal means (A) any controlling
stockholder or 80% (or more) owned Subsidiary of such Principal or (B) trust,
corporation, partnership or other entity, the beneficiaries, stockholders,
partners, owners or Persons beneficially holding an 80% or more controlling
interest of which consist of such Principal and/or such other Persons referred
to in the immediately preceding clause (A).
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with the covenant described under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries." Any such Designation
may be revoked by a Board Resolution of the Company delivered to the Trustee
subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain Covenants--
Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether
owned by the Company or any Restricted Subsidiary at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom
funds have been or are to be advanced by such Person on the security of such
Property.
"Senior Indebtedness" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Exchange Notes. Without limiting the
generality of the foregoing, "Senior Indebtedness" shall also include the
principal of, premium, if any, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for
in the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on, and all other amounts owing in respect
of, (x) all monetary obligations of every nature of the Company under the Bank
Facility, including, without limitation, obligations to pay principal and
interest, reimbursement obligations under letters of credit, fees, expenses
and indemnities, (y) all Interest Swap Obligations and (z) all Currency Swap
Obligations, in each case whether outstanding on the Issue Date or thereafter
incurred. Notwithstanding the foregoing, "Senior Indebtedness" shall not
include (i) any Indebtedness of the Company to a Restricted Subsidiary of the
Company, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of the Company or any Restricted Subsidiary of
the Company (including, without limitation, amounts owed for compensation),
(iii) Indebtedness to trade creditors and other amounts incurred in connection
with obtaining goods, materials or services, (iv) Indebtedness represented by
Disqualified Capital Stock, (v) any liability for federal, state, local or
other taxes owed or owing by the Company, (vi) Indebtedness incurred in
violation of the Indenture provisions set forth under "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness
which, when incurred and without
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respect to any election under Section 1111(b) of Title 11, United States Code,
is without recourse to the Company and (viii) any Indebtedness which is, by
its express terms, subordinated in right of payment to any other Indebtedness
of the Company. Notwithstanding anything to the contrary contained herein, no
Indebtedness incurred at any time under the Bank Facility (as such facility is
in existence on the Issue Date) shall be considered subordinate in right of
payment to any other Indebtedness incurred under the Bank Facility (as such
facility is in existence on the Issue Date).
"Significant Subsidiary," with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Exchange
Act.
"Subsidiary," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (i) each of the Company's Restricted
Subsidiaries existing on the Issue Date and (ii) each of the Company's
Restricted Subsidiaries (other than any Foreign Subsidiary, unless the Company
elects to have a Foreign Subsidiary execute a Guarantee) created or acquired
after the Issue Date that executes a supplemental indenture pursuant to "--
Certain Covenants--Additional Subsidiary Guarantees."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--
Certain Covenants--Limitation on Designations of Unrestricted Subsidiaries."
Any such designation may be revoked by a Board Resolution of the Company
delivered to the Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total
of the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding voting securities
(other than in the case of a foreign Restricted Subsidiary, directors'
qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by such Person or any
Wholly Owned Restricted Subsidiary of such Person.
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MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion, to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, is the opinion of Latham &
Watkins, counsel to the Company, as to the material federal income tax
consequences expected to result to Holders whose Private Notes are exchanged
for Exchange Notes in the Exchange Offer. Such opinion is based upon current
provisions of the Internal Revenue Code of 1986, as amended, applicable
Treasury regulations, judicial authority and administrative rulings and
practice. There can be no assurance that the Internal Revenue Service (the
"Service") will not take a contrary view, and no ruling from the Service has
been or will be sought with respect to the Exchange Offer. Legislative,
judicial or administrative changes or interpretations may be forthcoming that
could alter or modify the statements and conclusions set forth herein. Any
such changes or interpretations may or may not be retroactive and could affect
the tax consequences to Holders. Certain Holders (including insurance
companies, tax-exempt organizations, financial institutions, broker-dealers,
foreign corporations, and persons who are not citizens or residents of the
United States) may be subject to special rules not discussed below. EACH
HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES FOR EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a "non-
event" for federal income tax purposes (that is, the exchange will not be
treated as an exchange for federal income tax purposes because the Exchange
Notes will not be considered to differ materially in kind or extent from the
Private Notes). As a result, no material federal income tax consequences will
result to Holders exchanging Private Notes for Exchange Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resale of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that for
a period of up to 180 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer that
requests such document in the Letter of Transmittal for use in connection with
any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the Holders of Private Notes (including any broker-
112
<PAGE>
dealers), and certain parties related to such Holders, against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby 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.
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.
113
<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.
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 offering 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 August 21, 1998, RSC Canada, a wholly owned
subsidiary of RSC, entered into a secured revolving credit facility with
lenders (or affiliates) who are parties to the Bank Facility. The new Canadian
facility provides RSC Canada with borrowing availability of up to Cdn. $28.0
million, subject to certain borrowing base limitations. The Canadian credit
facility is secured by substantially all of the assets of RSC Canada and any
subsidiary of RSC Canada and is guaranteed by RSC, with the guarantee being
secured by the stock of RSC Canada. The Canadian credit facility expires on
December 2, 2002, and contains other terms substantially similar to those
contained in the Bank Facility.
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 three additional
acquisitions for a total combined purchase price of approximately $19.5
million in cash. The three acquired equipment rental companies operated in
Canada, Illinois and New Mexico.
As of August 21, 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 $51.2 million in cash (including the
assumption of approximately $2.5 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.
On August 19, 1998, the Company received net proceeds of approximately $77.6
million from the sale of 3,018,872 shares of its common stock in a public
offering.
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.
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.
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.
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.
Fair value of financial instruments: The carrying amount of cash, accounts
receivables, litigation judgment liability and accounts payable approximates
fair value because of the short maturity of these instruments. The
F-62
<PAGE>
BRUTE EQUIPMENT CO.
D/B/A FOXX HY-REACH, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
carrying amount of notes payable which carry current interest rates and have
short maturities approximates fair value.
NOTE 2. UNAUDITED INTERIM INFORMATION
In the opinion of management, the accompanying unaudited condensed financial
information of the Company contains all adjustments, consisting only of those
of a recurring nature, necessary to present fairly the Company's financial
position as of March 31, 1997, and the results of its operations and its cash
flows for the three-months ended March 31, 1996 and 1997. These results are
not necessarily indicative of the results to be expected for the full fiscal
year.
NOTE 3. OPERATING EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Operating equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Vehicles, machinery and equipment........ $1,086,270 $1,003,294 $ 922,770
Leasehold improvements................... 73,494 73,494 73,494
Furniture, fixtures and computer
equipment............................... 56,690 134,362 142,703
---------- ---------- ----------
1,216,454 1,211,150 1,138,967
Less accumulated depreciation and
amortization............................ 625,695 718,709 717,093
---------- ---------- ----------
$ 590,759 $ 492,441 $ 421,874
========== ========== ==========
</TABLE>
NOTE 4. PLEDGED ASSETS AND NOTES PAYABLE
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Revolving credit agreement with a bank, $2,000,000,
($3,000,000 as of December 31, 1995) interest at 3/8%
under the bank's prime rate, (8.5% as of December 31,
1996), due June 30, 1997, collateralized by
substantially all assets of the Company and the
personal guarantees of the officer-stockholders and
the spouse of one of the officer-stockholders. ...... $2,859,141 $1,911,802
Note payable, bank, due in annual installments of
$300,000 plus interest at 7.84%, due April 1999,
collateralized by substantially all assets of the
Company and the personal guarantees of the officer-
stockholders and the spouse of one of the officer-
stockholders. ....................................... -- 1,500,000
Note payable, officer-stockholders, due on demand,
unsecured. The interest rate in effect as of December
31, 1995 and 1996 was 7% and 8%, respectively. ...... 1,567,635 579,355
---------- ----------
$4,426,776 $3,991,157
========== ==========
</TABLE>
F-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.
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.
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>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER CON-
TAINED HEREIN, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANY-
ING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE-
SENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH THIS
PROSPECTUS RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITA-
TION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY EXCHANGE OF EXCHANGE NOTES FOR PRIVATE NOTES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 15
The Exchange Offer....................................................... 24
Use of Proceeds.......................................................... 31
Capitalization........................................................... 32
Unaudited Pro Forma Consolidated Financial Data.......................... 33
Selected Consolidated Financial and Operating Data....................... 41
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 44
Business................................................................. 57
Management............................................................... 65
Principal Stockholders................................................... 76
Certain Relationships and Related Transactions........................... 78
Description of the Bank Facility......................................... 81
Description of Exchange Notes............................................ 82
Material Federal Income Tax Considerations............................... 112
Plan of Distribution..................................................... 112
Legal Matters............................................................ 113
Experts.................................................................. 113
Index to Financial Statements............................................ F-1
</TABLE>
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-----------------------
PROSPECTUS
-----------------------
$200,000,000
[LOGO OF RENTAL SERVICE CORPORATION]
9% SENIOR SUBORDINATED NOTES DUE 2008
AUGUST 25, 1998
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