<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 23, 1998
------------------
UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS)
-------------------------
Delaware 1-14387 06-1522496
Delaware 1-13663 06-1493538
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission File Numbers) (IRS Employer
of Incorporation) Identification Nos.)
Four Greenwich Office Park, Greenwich, Connecticut 06830
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrants' telephone number, including area code (203) 622-3131
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<PAGE>
Item 5. Other
The registrant has completed certain acquisitions that were accounted for as
purchases for financial accounting purposes. Financial statements for certain of
these acquired companies are filed as an Exhibit hereto.
Exhibit
99.1 Index to Financial Statements
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on this 23rd day of December, 1998.
UNITED RENTALS, INC.
By: Michael J. Nolan
------------------------------
Name: Michael J. Nolan
Title: Chief Financial Officer
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized on this 23rd day of December, 1998.
UNITED RENTALS (NORTH AMERICA), INC.
By: Michael J. Nolan
------------------------------
Name: Michael J. Nolan
Title: Chief Financial Officer
4
<PAGE>
EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
I. Combined Financial Statements of Equipment Supply Co., Inc. and
Affiliates Report of Independent Certified Public Accountants.. F-5
Combined Balance Sheets--December 31, 1997 and 1996 and June 30,
1998 (unaudited)............................................... F-6
Combined Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 and for the Six Months Ended June 30, 1998
and 1997 (unaudited)........................................... F-7
Combined Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997 and for the Six Months Ended
June 30, 1998 (unaudited)...................................... F-8
Combined Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995 and for the Six Months Ended June 30,
1998 and 1997 (unaudited)...................................... F-9
Notes to Combined Financial Statements.......................... F-10
II. Financial Statements of Power Rental Co., Inc.
Report of Independent Auditors.................................. F-22
Balance Sheets--July 31, 1997 and May 31, 1998 (unaudited)...... F-23
Statements of Operations for the Year Ended July 31, 1997 and
for the Ten Months Ended May 31, 1997 and 1998 (unaudited)..... F-24
Statements of Stockholders' Equity for the Year Ended July 31,
1997 and for the Ten Months Ended May 31, 1998 (unaudited)..... F-25
Statements of Cash Flows for the Year Ended July 31, 1997 and
for the Ten Months Ended May 31, 1997 and 1998 (unaudited)..... F-26
Notes to Financial Statements................................... F-27
III. Combined Financial Statements of Adco Equipment, Inc.
Report of Independent Auditors.................................. F-33
Combined Balance Sheets--December 31, 1997 and June 30, 1998
(unaudited).................................................... F-34
Combined Statements of Operations For the Year Ended December
31, 1997 and For the Six Months Ended June 30, 1997 and 1998
(unaudited).................................................... F-35
Combined Statements of Stockholders' Equity For the Year Ended
December 31, 1997 and For the Six Months Ended June 30, 1998
(unaudited).................................................... F-36
Combined Statements of Cash Flows For the Year Ended December
31, 1997 and For the Six Months Ended June 30, 1997 and 1998
(unaudited).................................................... F-37
Notes to Combined Financial Statements.......................... F-38
IV. Consolidated Financial Statements of McClinch Inc. and Subsidi-
aries
Reports of Independent Accountants.............................. F-42
Consolidated Balance Sheets--January 31, 1998 and August 31,
1998........................................................... F-44
Consolidated Statements of Income and Retained Earnings for the
Year Ended January 31, 1998 and For the Seven Months Ended
August 31, 1998 and 1997 (unaudited)........................... F-45
Consolidated Statements of Cash Flows For the Year Ended January
31, 1998 and For the Seven Months Ended August 31, 1998 and
1997 (unaudited)............................................... F-46
Notes to Consolidated Financial Statements...................... F-47
V. Financial Statements of Industrial Lift, Inc.
Report of Independent Auditors.................................. F-54
Balance Sheets--December 31, 1996 and 1997 and as of May 12,
1998 (unaudited)............................................... F-55
Statements of Income and Retained Earnings for the Years Ended
December 31, 1996 and 1997 and for the Period Ended May 12,
1997 and 1998 (unaudited)...................................... F-56
Statements of Cash Flows for the Years Ended December 31, 1996
and 1997 and for the Period Ended May 12, 1997 and 1998
(unaudited).................................................... F-57
Notes to Financial Statements................................... F-58
</TABLE>
F-1
<PAGE>
<TABLE>
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<C> <S> <C>
VI. Combined Financial Statements of Able Equipment Rental, Inc.
Report of Independent Auditors.................................. F-63
Combined Balance Sheets--December 31, 1997 and February 28, 1998
(unaudited).................................................... F-64
Combined Statements of Income for the Year Ended December 31,
1997 and for the Two Months Ended February 28, 1997 and 1998
(unaudited).................................................... F-65
Combined Statements of Stockholders' Equity and Partners'
Capital for the Year Ended December 31, 1997 and for the Two
Months Ended February 28, 1998 (unaudited)..................... F-66
Combined Statements of Cash Flows for the Year Ended December
31, 1997 and for the Two Months Ended February 28, 1997 and
1998 (unaudited)............................................... F-67
Notes to Combined Financial Statements.......................... F-68
VII. Combined Financial Statements of Grand Valley Equipment Co.,
Inc. and Kubota of Grand Rapids, Inc.
Independent Auditors' Report on Combined Financial Statements .. F-73
Combined Balance Sheets--December 31, 1997 and May 31, 1998
(unaudited).................................................... F-74
Combined Statements of Income and Retained Earnings for the year
ended December 31, 1997 and for the five months ended May 31,
1997 and 1998 (unaudited)...................................... F-75
Combined Statements of Cash Flows for the year ended December
31, 1997 and for the five months ended May 31, 1997 and 1998
(unaudited).................................................... F-76
Notes to Financial Statements................................... F-77
VIII. Financial Statements of McClinch Equipment Services, Inc.
Reports of Independent Accountants.............................. F-81
Balance Sheets--December 31, 1997 and August 31, 1998........... F-83
Statements of Income and Retained Earnings for the year ended
December 31, 1997 and for the eight months ended August 31,
1998 and 1997 (unaudited)...................................... F-84
Statements of Cash Flows for the year ended December 31, 1997
and for the eight months ended August 31, 1998 and 1997
(unaudited).................................................... F-85
Notes to Financial Statements................................... F-86
IX. Combined Financial Statements of Valley Rentals, Inc.
Report of Independent Auditors.................................. F-91
Combined Balance Sheets--December 31, 1997 and March 31, 1998
(unaudited).................................................... F-92
Combined Statements of Income for the Year Ended December 31,
1997 and for the Three Months Ended March 31, 1997 and 1998
(unaudited).................................................... F-93
Combined Statements of Stockholders' Equity and Partners'
Capital for the Year Ended December 31, 1997 and for the Three
Months Ended March 31, 1998 (unaudited)........................ F-94
Combined Statements of Cash Flows for the Year Ended December
31, 1997 and for the Three Months Ended March 31, 1997 and 1998
(unaudited).................................................... F-95
Notes to Combined Financial Statements.......................... F-96
X. Financial Statements of Lift Systems, Inc.
Independent Accountants' Report................................. F-100
Balance Sheets--December 31, 1997 and July 28, 1998
(unaudited).................................................... F-101
Statement of Income for the year ended December 31, 1997 and
for the 209 day periods ended July 28, 1998 and 1997
(unaudited).................................................... F-102
Statement of Changes in Stockholder's Equity for the year ended
December 31, 1997 and for the 209 day period ended July 28,
1998 (unaudited)............................................... F-103
Statement of Cash Flows for the year ended December 31, 1997
and for the 209 day periods ended July 28, 1998 and 1997
(unaudited).................................................... F-104
Notes to Financial Statements................................... F-106
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
XI. Consolidated Financial Statements of Perco Group Ltd.
Report of Independent Auditors................................. F-111
Consolidated Balance Sheet--December 31, 1997 and May 19, 1998
(unaudited)................................................... F-112
Consolidated Statement of Earnings for the year ended December
31, 1997 and for the 139 days ended May 19, 1997 and 1998
(unaudited)................................................... F-113
Consolidated Statement of Retained Earnings for the year ended
December 31, 1997 and for the 139 days ended May 19, 1998
(unaudited)................................................... F-114
Consolidated Statement of Changes in Financial Position for the
year ended December 31, 1997 and for the 139 days ended May
19, 1997 and 1998 (unaudited)................................. F-115
Notes to Consolidated Financial Statements..................... F-116
XII. Financial Statements of Reitzel Rentals Ltd.
Auditors' Report............................................... F-124
Balance Sheets--February 28, 1998 and May 31, 1998
(unaudited)................................................... F-125
Statements of Operations for the year ended February 28, 1998
and for the three months ended May 31, 1997 and 1998
(unaudited)................................................... F-126
Statements of Shareholders' Equity for the year ended February
28, 1998 and for the three months ended May 31, 1998
(unaudited)................................................... F-127
Statements of Cash Flows for the year ended February 28, 1998
and for the three months ended May 31, 1997 and 1998
(unaudited)................................................... F-128
Notes to Financial Statements.................................. F-129
XIII. Combined Financial Statements of Channel Equipment Holding,
Inc.
Report of Independent Auditors................................. F-135
Combined Balance Sheet--December 31, 1997...................... F-136
Combined Statement of Operations for the Year Ended December
31, 1997...................................................... F-137
Combined Statement of Stockholders' Equity (Deficit) for the
Year Ended December 31, 1997.................................. F-138
Combined Statements of Cash Flows for the Year Ended December
31, 1997...................................................... F-139
Notes to Combined Financial Statements......................... F-140
XIV. Financial Statements of Paul E. Carlson, Inc. dba Carlson
Equipment Company
Independent Auditor's Report................................... F-144
Balance Sheets--February 28, 1998 and June 30, 1998
(unaudited)................................................... F-145
Statements of Operations for the year ended February 28, 1998
and for the four months ended June 30, 1997 and 1998
(unaudited)................................................... F-147
Statements of Stockholders' Equity for the year ended February
28, 1998 and for the four months ended June 30, 1998
(unaudited)................................................... F-148
Statements of Cash Flows for the year ended February 28, 1998
and for the four months ended June 30, 1997 and 1998
(unaudited)................................................... F-149
Notes to Financial Statements.................................. F-150
XV. Financial Statements of West Main Rentals and Sales,
Incorporated
Independent Auditor's Report................................... F-158
Balance Sheet--December 31, 1997 and March 31, 1998
(unaudited)................................................... F-159
Statement of Income for the Year Ended December 31, 1997 and
for the Three Months Ended March 31, 1998 and 1997
(unaudited)................................................... F-160
Statement of Stockholders' Equity for the Year Ended December
31, 1996, 1997 and for the Three Months Ended March 31, 1998
(unaudited).................................................... F-161
Statement of Cash Flows for the Year Ended December 31, 1997 and
for the Three Months Ended March 31, 1998 and 1997
(unaudited).................................................... F-162
Notes to Financial Statements................................... F-163
XVI. Financial Statements of Pro Rentals, Inc.
Report of Independent Auditors.................................. F-169
Balance Sheet--December 31, 1997................................ F-170
Statement of Income for the Year Ended December 31, 1997........ F-171
Statement of Stockholders' Equity for the Year Ended December
31, 1997....................................................... F-172
Statement of Cash Flows for the Year Ended December 31, 1997.... F-173
Notes to Financial Statements................................... F-174
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
XVII. Financial Statements of ASC Equipment Company
Report of Independent Auditors.................................. F-177
Balance Sheet--December 31, 1997................................ F-178
Statement of Income for the Year Ended December 31, 1997........ F-179
Statement of Stockholders' Equity for the Year Ended December
31, 1997....................................................... F-180
Statement of Cash Flows for the Year Ended December 31, 1997.... F-181
Notes to Financial Statements................................... F-182
XVIII. Financial Statements of MERCER Equipment Company
Independent Auditor's Report.................................... F-185
Balance Sheets--December 31, 1996 and October 24, 1997.......... F-186
Statements of Income and Retained Earnings for the Years Ended
December 31, 1995 and 1996 and for the period from January 1,
1997 to October 24, 1997....................................... F-187
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the period from January 1, 1997 to October 24,
1997........................................................... F-188
Notes to Financial Statements................................... F-189
XIX. Consolidated Financial Statements of A&A Tool Rentals & Sales,
Inc. and subsidiary
Report of Independent Auditors.................................. F-194
Consolidated Balance Sheets--October 31, 1996 and October 19,
1997 and July 31, 1997 (unaudited)............................. F-195
Consolidated Statements of Operations for the Years Ended
October 31, 1995 and 1996 and for the period from November 1,
1996 to October 19, 1997 and for the Nine Months Ended July 31,
1996 and 1997 (unaudited)...................................... F-196
Consolidated Statements of Stockholders' Equity for the Years
Ended October 31, 1994, 1995 and 1996 and for the period from
November 1, 1996 to October 19, 1997 .......................... F-197
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1995 and 1996 and for the period from November 1,
1996 to October 19, 1997 and for the Nine Months Ended July 31,
1996 and 1997 (unaudited)...................................... F-198
Notes to Consolidated Financial Statements...................... F-199
XX. Financial Statements of J&J Rental Services, Inc.
Report of Independent Auditors................................ F-206
Balance Sheets--December 31, 1996 and October 22, 1997 ....... F-207
Statements of Income for the Years Ended December 31, 1995 and
1996, for the Six Months Ended June 30, 1997 and for the
period from July 1, 1997 to October 22, 1997................. F-208
Statements of Stockholders' Equity and Partners' Capital for
the Years Ended December 31, 1995 and 1996 and for the Six
Months Ended June 30, 1997 and for the period from July 1,
1997 to October 22, 1997..................................... F-209
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996, for the Six Months Ended June 30, 1997 and for the
period from July 1, 1997 to October 22, 1997................. F-210
Notes to Financial Statements................................. F-211
XXI. Combined Financial Statements of Coran Enterprises, Inc. dba
A-1 Rents and Monterey Bay Equipment Rental, Inc.
Report of Independent Certified Public Accountants............ F-218
Combined Statements of Earnings for the Years Ended December
31, 1995 and 1996 and for the period from January 1, 1997 to
October 24, 1997 ............................................ F-219
Combined Statements of Stockholders' Equity for the Years
Ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997 ......................... F-220
Combined Statements of Cash Flows for the Years Ended December
31, 1995 and 1996 and for the period from January 1, 1997 to
October 24, 1997 ............................................ F-221
Notes to Combined Financial Statements........................ F-222
XXII. Financial Statements of Bronco Hi-Lift, Inc.
Report of Independent Auditors................................ F-224
Balance Sheets--December 31, 1996 and October 24, 1997 ....... F-225
Statements of Income for the Years Ended December 31, 1995 and
1996 and for the period from January 1, 1997 to October 24,
1997......................................................... F-226
Statements of Stockholders' Equity for the Years Ended
December 31, 1995 and 1996 and for the period from January 1,
1997 to October 24, 1997..................................... F-227
Statements of Cash Flows for the Years Ended December 31, 1995
and 1996 and for the period from January 1, 1997 to October
24, 1997..................................................... F-228
Notes to Financial Statements................................. F-229
</TABLE>
F-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Equipment Supply Co., Inc. and Affiliates
Burlington, New Jersey
We have audited the accompanying combined balance sheets of Equipment Supply
Co., Inc. and Affiliates (see Note 1) as of December 31, 1997 and 1996, and
the related combined statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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 financial position of Equipment Supply
Co., Inc. and Affiliates as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
June 19, 1998,
except for Notes 9 and 15 which
are as of July 10, 1998
F-5
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1996 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 1,038,086 $ 4,015,527 $ 1,784,124
Marketable securities................... -- 1,103,354 --
Accounts receivable, net of allowance
for
possible losses of $2,241,339,
$1,202,790
and $2,241,339......................... 16,087,730 14,592,845 16,528,382
Inventories............................. 3,234,402 3,249,010 4,507,505
Prepaid expenses and other assets....... 2,365,177 389,234 1,837,531
Due from stockholder.................... 4,310,190 1,637,628 5,184,698
Rental equipment, net................... 122,154,888 127,343,198 111,617,692
Property and equipment, net............. 6,548,778 5,401,275 5,267,210
Goodwill and other intangible assets,
net.................................... 3,887,945 4,436,997 3,639,033
------------ ------------ ------------
Total assets........................ $159,627,196 $162,169,068 $150,366,175
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Debt.................................. $ 94,870,512 $107,460,779 $ 87,577,703
Capital lease obligations............. 8,841,236 11,923,889 7,241,127
Accounts payable...................... 4,909,578 4,116,967 3,648,493
Income taxes payable.................. 1,209,251 1,393,548 1,442,884
Deferred income taxes................. 3,884,669 3,996,763 939,847
Deferred leasing costs................ 4,379,594 -- 5,626,989
Deferred rental income................ 2,404,500 2,016,607 2,653,308
Other liabilities..................... 1,599,427 2,335,963 3,215,431
------------ ------------ ------------
Total liabilities................... 122,098,767 133,244,516 112,345,782
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, no par value
Authorized 2,500 shares;
Issued and outstanding 581 shares.... 1,500 1,500 1,500
Additional paid-in capital............ 363,808 326,294 363,808
Retained earnings..................... 37,163,121 28,596,758 37,655,085
------------ ------------ ------------
Total stockholders' equity.......... 37,528,429 28,924,552 38,020,393
------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $159,627,196 $162,169,068 $150,366,175
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1997 1996 1995 1998 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Equipment rentals..... $78,141,502 $65,226,201 $40,905,725 $34,381,555 $38,110,803
Sales of rental
equipment............ 8,102,210 11,935,375 7,968,205 3,280,299 3,150,044
Sales of new
equipment,
merchandise and other
revenues............. 8,314,451 10,129,016 5,246,285 5,678,060 4,111,176
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...... 94,558,163 87,290,592 54,120,215 43,339,914 45,372,023
----------- ----------- ----------- ----------- -----------
COST OF REVENUES
Cost of equipment
rentals, excluding
depreciation......... 23,509,529 19,225,581 14,222,651 12,528,730 7,675,660
Depreciation of rental
equipment............ 20,397,030 15,383,114 7,844,434 10,368,052 10,774,115
Cost of rental
equipment sold....... 5,049,876 9,834,128 3,291,409 2,131,867 1,975,139
Cost of new equipment
and merchandise...... 6,312,172 6,263,969 2,250,037 5,135,293 3,721,652
----------- ----------- ----------- ----------- -----------
TOTAL COST OF
REVENUES........... 55,268,607 50,706,792 27,608,531 30,163,942 24,146,566
----------- ----------- ----------- ----------- -----------
GROSS PROFIT............ 39,289,556 36,583,800 26,511,684 13,175,972 21,225,457
----------- ----------- ----------- ----------- -----------
OPERATING EXPENSES
General and
administrative
expenses............. 17,874,879 15,195,802 10,852,925 9,672,514 9,455,819
Nonrental depreciation
and amortization..... 878,342 627,534 237,427 358,520 421,916
----------- ----------- ----------- ----------- -----------
TOTAL OPERATING
EXPENSES........... 18,753,221 15,823,336 11,090,352 10,031,034 9,877,735
----------- ----------- ----------- ----------- -----------
INCOME FROM OPERATIONS.. 20,536,335 20,760,464 15,421,332 3,144,938 11,347,722
INTEREST EXPENSE........ (11,185,934) (7,508,226) (3,691,638) (4,220,244) (6,434,136)
OTHER INCOME (EXPENSE).. 2,858,438 854,658 (28,356) 198,381 793,290
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES.................. 12,208,839 14,106,896 11,701,338 (876,925) 5,706,876
PROVISION FOR INCOME TAX
EXPENSE (BENEFIT)...... 1,242,142 2,073,617 1,517,539 (2,637,684) 575,365
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $10,966,697 $12,033,279 $10,183,799 $ 1,760,759 $ 5,131,511
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-7
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995... 581 $1,500 $ -- $14,408,232 $14,409,732
Net income................. -- -- -- 10,183,799 10,183,799
Stockholders'
distributions............. -- -- -- (3,861,677) (3,861,677)
Capital contributions...... -- -- 170,406 -- 170,406
--- ------ -------- ----------- -----------
BALANCE, December 31,
1995...................... 581 1,500 170,406 20,730,354 20,902,260
Net income................. -- -- -- 12,033,279 12,033,279
Stockholders'
distributions............. -- -- -- (4,166,875) (4,166,875)
Capital contributions...... -- -- 155,888 -- 155,888
--- ------ -------- ----------- -----------
BALANCE, December 31,
1996...................... 581 1,500 326,294 28,596,758 28,924,552
Net income................. -- -- -- 10,966,697 10,966,697
Stockholders'
distributions............. -- -- -- (2,937,557) (2,937,557)
Capital contributions...... -- -- 37,514 -- 37,514
Adjustment related to
affiliate with
different fiscal year..... -- -- -- 537,223 537,223
--- ------ -------- ----------- -----------
BALANCE, December 31,
1997...................... 581 1,500 363,808 37,163,121 37,528,429
Net income (unaudited)..... -- -- -- 1,760,759 1,760,759
Stockholders' distributions
(unaudited)............... -- -- -- (1,268,795) (1,268,795)
--- ------ -------- ----------- -----------
BALANCE, June 30, 1998
(unaudited)............... 581 $1,500 $363,808 $37,655,085 $38,020,393
=== ====== ======== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-8
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------- ------------------------
1997 1996 1995 1998 1997
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income............. $ 10,966,697 $ 12,033,279 $ 10,183,799 $ 1,760,759 $ 5,131,511
Adjustments to
reconcile net income
to net cash flows
provided by operating
activities
Depreciation and
amortization........ 21,275,372 16,010,648 8,081,861 10,775,137 11,196,031
Provision for bad
debts............... 1,038,549 374,056 828,734 -- --
Loss (Gain) on sale
of equipment........ (3,052,334) (2,101,247) (4,555,863) (1,148,432) (1,174,905)
Gain on sale of
marketable
securities.......... (390,410) (126,747) (37,345) -- (413,631)
Deferred income
taxes............... (112,094) 743,691 961,861 (2,944,822) (127,771)
Adjustment related to
affiliate with
different fiscal
year................ 537,223 -- -- -- 537,223
Changes in operating
assets and
liabilities:
(Increase) decrease
in accounts
receivable.......... (2,533,434) (4,603,457) (4,789,132) (440,653) (1,275,848)
(Increase) decrease
in inventories...... 14,608 (945,385) (824,220) (1,273,103) (384,360)
(Increase) decrease
in prepaid expenses
and other assets.... (1,975,943) 122,694 587,072 527,646 (233,087)
Increase (decrease)
in accounts
payable............. 792,611 1,436,552 1,560,529 (1,261,085) 3,933,297
Increase (decrease)
in income taxes
payable............. (184,297) 1,076,242 689,302 233,633 (474,120)
Increase in deferred
leasing costs....... 4,379,594 -- -- 1,247,395 --
Increase (decrease)
in deferred rental
income.............. 387,893 627,699 499,251 248,808 175,016
Increase (decrease)
in other
liabilities......... (736,536) 914,657 1,015,997 1,616,004 (527,352)
------------ ------------ ------------ ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES... 30,407,499 25,562,682 14,201,846 9,341,287 16,362,004
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchases of
equipment............. (21,445,901) (73,822,654) (32,957,168) (664,200) (12,537,761)
Acquisitions of
affiliated
companies............. -- (11,807,987) (7,829,319) -- --
Proceeds from sale of
equipment............. 8,102,210 11,935,375 7,741,552 3,280,299 3,150,044
Sales (purchases) of
marketable
securities............ 1,493,764 (414,665) 397,153 -- (347,750)
------------ ------------ ------------ ----------- -----------
NET CASH (USED IN)
PROVIDED BY INVESTING
ACTIVITIES............. (11,849,927) (74,109,931) (32,647,782) 2,616,099 (9,735,467)
------------ ------------ ------------ ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from debt..... $ 12,869,925 $ 79,950,621 $ 28,777,004 $ 2,634,890 $11,729,779
Repayment of capital
lease obligations..... (3,341,413) (4,419,085) (2,177,919) (1,774,650) (2,004,361)
Repayment of debt...... (25,460,192) (18,525,872) (4,207,118) (9,927,699) (14,536,422)
Payment of loan
acquisition fees...... (28,728) (299,978) (88,493) (586) (26,183)
(Increase) decrease in
due to/from
stockholders.......... (2,672,562) (1,673,052) 35,425 (874,508) (2,555,699)
Capital
contributions......... 37,514 155,887 170,406 -- --
Stockholders'
distributions......... (2,937,557) (4,166,875) (3,861,677) (1,268,795) (1,809,911)
------------ ------------ ------------ ----------- -----------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES............. (21,535,013) 51,021,646 18,647,627 (11,211,348) (9,202,797)
------------ ------------ ------------ ----------- -----------
NET (DECREASE) INCREASE
IN CASH AND CASH
EQUIVALENTS............ (2,977,441) 2,474,397 201,691 746,038 (2,576,260)
CASH AND CASH
EQUIVALENTS, beginning
of year................ $ 4,015,527 $ 1,541,130 $ 1,339,439 $ 1,038,086 $ 4,015,527
------------ ------------ ------------ ----------- -----------
CASH AND CASH
EQUIVALENTS, end of
year................... $ 1,038,086 $ 4,015,527 $ 1,541,130 $ 1,784,124 $ 1,439,267
============ ============ ============ =========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCIAL ACTIVITIES
Acquisition of
equipment in exchange
for capital lease
obligations........... $ 260,760 $ 7,121,669 $ 6,997,926 $ 174,541 $ 228,467
Goodwill related to
acquisitions.......... $ -- $ -- $ 1,897,761 $ -- $ --
Assets acquired from
purchase of
companies............. $ -- $ 13,165,000 $ 9,524,479 $ -- $ --
Liabilities assumed
from purchase of
companies............. $ -- $ 3,357,013 $ 3,151,101 $ -- $ --
============ ============ ============ =========== ===========
OTHER SUPPLEMENTAL
DISCLOSURES
Taxes paid............. $ 2,226,828 $ 315,814 $ 276,960 $ 73,505 $ 1,280,867
Interest paid.......... $ 11,116,164 $ 7,250,310 $ 3,568,958 $ 4,401,870 $ 6,572,411
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-9
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The combined financial statements include the accounts of Equipment Supply
Co., Inc. ("Equipment Supply") and its affiliated companies: High Reach Co.,
Inc. ("High Reach") and Rylan, Inc. ("Rylan") (collectively the "Company")
which have common ownership and activities. For financial reporting purposes,
Equipment Supply has been treated as the parent company and the purchaser of
both High Reach and Rylan during 1995. The 1995 acquisitions of the stock of
these companies were made by the stockholders of Equipment Supply.
The Company rents, sells and services aerial platform equipment throughout
the mid-Atlantic region of 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 balance sheets are presented on an unclassified
basis.
All significant intercompany balances and transactions have been eliminated
in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The combined balance sheet as of June 30, 1998 and the combined statements
of income, stockholders' equity and cash flows for the six months ended June
30, 1998 and 1997 are unaudited and have been prepared on the same basis as
the audited financial statements included herein. In the opinion of
management, such unaudited financial statements include all adjustments
necessary to present fairly the information set forth therein, which consists
solely of normal recurring adjustments. The results of operations for the
interim periods are not necessarily indicative of results for the full year.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Debt and Equity Securities" requires investments in debt and equity securities
to be classified into one of three categories based on the Company's intent.
The Company has classified its investments in marketable securities as
available for sale which requires the Company to record these investments at
fair market value and record the unrealized gain or loss on the original
investment as a separate component of stockholders' equity. Such unrealized
gains or losses were not material in any period presented.
INVENTORIES
Inventories consisting of equipment and parts are stated at the lower of
average weighted cost or market.
DEPRECIATION AND AMORTIZATION
All equipment and property is stated at cost. Depreciation of rental
equipment is computed, using an estimated 5% residual value, by the straight-
line method at rates adequate to allocate the cost of rental equipment over
their estimated useful lives, ranging from five to ten years.
F-10
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Depreciation of property and equipment and amortization of leasehold
improvements are computed by the straight-line method at rates adequate to
allocate the cost of applicable assets over their estimated useful lives.
Ordinary maintenance and repair costs are charged to operations as incurred.
DEFERRED FINANCING COSTS
Deferred financing costs, which are incurred by the Company in connection
with debt, are charged to operations over the life of the underlying
indebtedness and are included in goodwill and other intangible assets. The net
book value of deferred financing costs at December 31, 1997 and 1996 and June
30, 1998 is $369,421, $340,693 and $321,445, respectively.
INCOME TAXES
The Company adopted in 1995 the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
No. 109 requires a company to recognize deferred income tax liabilities and
assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred income tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
For all periods presented, Equipment Supply has elected, with the consent of
its stockholders, to be taxed as an S Corporation for federal and certain
state reporting purposes. In lieu of federal and certain state corporation
income taxes, the stockholders are taxed on their proportionate share of the
Company's taxable income. Provision has been made for state income taxes for
those states not recognizing S Corporation status.
During 1998, Rylan elected, with the consent of its stockholders, to be
taxed as an S Corporation for federal and state income tax reporting purposes.
Consequently, all applicable federal and state deferred income taxes have been
reversed during the six months ended June 30, 1998. As a result, the effect on
the 1998 combined statement of income was to increase net income by
approximately $2.9 million.
During 1997, High Reach elected, with the consent of its stockholders, to be
taxed as an S Corporation for federal and state income tax reporting purposes.
Provision has been made for state income taxes for those states not
recognizing S Corporation status. A provision for federal and state income
taxes has been recorded for all periods through September 30, 1997. As of
October 1, 1997, all applicable federal and state deferred income taxes
approximating $81,000 have been reversed in accordance with SFAS 109 and have
been recorded in the statement of income.
ACQUISITIONS
High Reach
On April 1, 1995, the stockholders of Equipment Supply purchased all of the
capital stock of High Reach for an aggregate purchase price of approximately
$3.1 million, of which approximately $2.5 million was paid in cash with the
balance in the form of a note maturing no later than March 31, 1997, bearing
interest at 7% per annum.
F-11
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The High Reach acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair values. In accordance with SFAS 109,
the Company recorded an additional increase to goodwill of approximately
$737,000 and a corresponding increase to a deferred income tax liability,
representing the difference between the financial and tax bases of certain
assets acquired. The goodwill is being amortized over fifteen years on a
straight-line basis.
The results of operations of High Reach have been included in the Company's
combined financials since the effective date of the acquisition. The
stockholders borrowed approximately $2.5 million from the Company and such
amounts have been recorded as part of the purchase price. Additionally, other
amounts paid by the stockholders in connection with the acquisition have been
treated as additional capital contributions and as part of the purchase price.
During 1995 and 1996, High Reach was combined using its fiscal year end of
September 30. In 1997, the Company reported the results of operations for High
Reach on a calendar year basis. Net income for High Reach's three month period
ended December 31, 1996 has been reflected as an adjustment to stockholders'
equity. No unusual trends or transactions were noted in this three month
period.
Rylan
On April 27, 1995, the stockholders of Equipment Supply purchased all of the
capital stock of Rylan for an aggregate cash purchase price of $4.8 million.
The Rylan acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the net assets
acquired based on their estimated fair values. In accordance with SFAS 109,
the Company recorded an additional increase to goodwill of approximately $1.2
million and a corresponding increase to a deferred income tax liability,
representing the difference between the financial and tax bases of certain
assets acquired.
The results of operations of Rylan have been included in the Company's
combined financial statement since the effective date of the acquisition.
Total goodwill arising from the acquisition, in the amount of approximately
$1.9 million, is being amortized over fifteen years on a straight-line basis.
The stockholders financed the Rylan acquisition in the amount of $4.8
million by obtaining a term loan from a financial institution. Such debt has
been recorded on the Company's financial statements, as the Company has been
making the required principal and interest payments on behalf of the
stockholders and have guaranteed this debt (see Note 9).
Freestate
Effective May 1, 1996, Rylan acquired substantially all of the assets and
assumed certain liabilities of Freestate Industries, Inc. for approximately
$11.8 million in cash. Such amount included payments specified for covenants
not to compete for three key employees. The acquisition was accounted for
using the purchase method of accounting. Accordingly, the purchase price was
allocated to the net assets acquired based on their estimated fair values.
Total goodwill and other intangible assets, amounting to approximately
$2,000,000, are being amortized over a period ranging from five to fifteen
years on a straight-line basis. The results of operations of Freestate have
been included in the Company's combined financial statements since the
effective date of the acquisition.
F-12
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The Company borrowed approximately $10.8 million to finance a portion of the
purchase price (see Note 9).
REVENUE RECOGNITION
The Company rents equipment to its customers under agreements not exceeding
one month, consequently the rental agreements are classified as operating
leases.
Revenues from rental leases are recognized over the term of the respective
agreements. Revenues from product sales are recognized when the product is
shipped. Revenue from equipment repairs is recognized at the time of service.
Revenues from maintenance contracts are recognized over the term of the
respective contracts as service is provided.
Amounts billed in advance are recorded as prebilled rentals which is
classified as deferred rental income on the combined balance sheet.
DEFERRED LEASING COSTS
The Company receives volume rebates for leasing and purchasing certain
equipment. The rebates related to operating leases are recognized as a
reduction in lease expense over the terms of the respective leases, generally
five years. Rebates related to purchased equipment are treated as a reduction
in the cost of equipment. The Company amortizes the costs of its leases on a
straight-line basis over the respective lease terms.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable based on undiscounted estimated future operating cash
flows. As of December 31, 1997, the Company has determined that no impairment
has occurred.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards which are effective for financial statements for periods
beginning after December 15, 1997.
F-13
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "Disclosure about Segments of a Business Enterprise and
Related Information," which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments
as components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
The Company believes that its operations compose a single segment and there
are no components of comprehensive income.
3. FINANCIAL INVESTMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of periodic temporary
investments of excess cash and trade receivables. The Company places its
temporary excess cash investments in high quality short-term money market
instruments and the carrying value approximates market value. A significant
portion of the Company's rental sales and equipment sales are to customers in
the construction industry and, as such, the Company is directly affected by
the well-being of that industry. However, the credit risk associated with
trade receivables is minimal due to the Company's large customer base,
geographical dispersion and ongoing control procedures which monitor the
credit worthiness of its customers.
4. DUE FROM STOCKHOLDERS
From time to time, the Company makes advances to its stockholders.
Generally, there are no formal repayment terms and the amounts are
noninterest-bearing.
5. RENTAL EQUIPMENT
Rental equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- JUNE 30,
1997 1996 1998
------------ ------------ ------------
<S> <C> <C> <C>
Rental equipment................... $168,047,372 $156,891,144 $163,566,080
Less accumulated depreciation...... 45,892,484 29,547,946 51,948,388
------------ ------------ ------------
$122,154,888 $127,343,198 $111,617,692
============ ============ ============
</TABLE>
F-14
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Depreciation expense amounted to $18,948,184, $14,385,916, $7,332,808,
$9,686,871 and $10,130,648 for the years ended December 31, 1997, 1996 and
1995 and the six months ended June 30, 1998 and 1997, respectively.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1996 1998 LIVES
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Shop equipment................. $ 834,355 $ 760,669 $ 525,492 5-7 years
Transportation equipment....... 9,134,757 6,887,232 8,008,297 5 years
Furniture and fixtures......... 1,288,479 962,474 1,071,448 5-7 year
Building and lease hold im-
provements.................... 635,895 590,132 701,146 15-39 years
----------- ---------- -----------
Total........................ 11,893,486 9,200,507 10,306,383
Less accumulated depreciation
and amortization.............. 5,344,708 3,799,232 5,039,173
----------- ---------- -----------
$ 6,548,778 $5,401,275 $ 5,267,210
=========== ========== ===========
</TABLE>
Depreciation and amortization amounted to $1,749,408, $1,180,285, $625,324,
$838,767 and $774,830 for the years ended December 31, 1997, 1996 and 1995 and
the six months ended June 30, 1998 and 1997, respectively.
7. CAPITAL LEASE OBLIGATIONS
Capitalized leased assets include machinery and transportation equipment.
Interest on the respective capital lease obligations range from 7.3% to 11.4%
at December 31, 1997 and 1996 and June 30, 1998.
Capital lease obligations, all of which are collateralized by the leased
equipment, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1997 1996 1998
---------- ----------- ----------
<S> <C> <C> <C>
Various equipment capital lease obligations,
lease terms of 60 months with monthly lease
payments of $512 to $52,463 ending April
1999 to June 2001.......................... $6,451,715 $8,807,391 $5,290,680
Various vehicle capital lease obligations,
lease terms of 60 months with monthly lease
payments of $590 to $10,751 ending August
1998 to April 2002......................... 2,204,559 2,826,490 1,825,700
Various vehicle capital lease obligations
lease terms of 48 months with monthly lease
payments of $578 to $4,049 ending January
1999 to June 2000.......................... 184,962 290,008 124,747
---------- ----------- ----------
$8,841,236 $11,923,889 $7,241,127
========== =========== ==========
</TABLE>
F-15
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
The future minimum lease payments under capital leases, together with the
present value of the net minimum lease payments as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER
31, AMOUNT
-------- -----------
<S> <C>
1998........................................................ $ 3,628,913
1999........................................................ 3,416,347
2000........................................................ 2,478,665
2001........................................................ 845,860
2002........................................................ 9,965
-----------
Total minimum lease payments................................. 10,379,750
Less amount representing interest............................ 1,538,514
-----------
Capital lease obligations.................................... $ 8,841,236
===========
</TABLE>
The net book value of equipment under capital leases at December 31, 1997
and 1996 and June 30, 1998 amounted to $11,165,421, $13,800,349 and
$9,990,153, respectively.
8. NOTES PAYABLE, BANK
At December 31, 1997 and June 30, 1998, the Company had a line of credit
with a bank for $2,500,000. Borrowings under the lines bear interest at a rate
of 1/2% above the bank's prime rate (9%, at December 31, 1997 and June 30,
1998) and are secured by certain Company assets. At December 31, 1997 and June
30, 1998, $-0- and $1,993,000, respectively, was outstanding under this line.
F-16
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
9. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1997 1996 1998
----------- ------------ -----------
<S> <C> <C> <C>
Notes payable to banks and finance compa-
nies with fixed interest rates ranging
from prime plus .5% to prime plus 2% (9%
and 10.5% at December 31, 1997) due in
monthly installments ranging from $546 to
$211,242 ending in September 1999 to De-
cember 2001 including interest. Collater-
alized either by a specific security in-
terest in equipment, a general lien on
equipment or by all assets owned or here-
after acquired by the Company............ $51,164,326 $ 64,098,599 $46,140,944
Term note payable to a finance company
with interest of 9.93% due in monthly in-
stallments of $221,314, including inter-
est, through April 2002. Collateralized
by a specific security interest in equip-
ment and guaranteed by the President of
the Company. (During 1998, the balance of
the loan was converted to and is included
in the note payable to a finance company
noted below.)............................ 9,310,102 -- --
Note payable, bank, in connection with
Rylan acquisition, due in monthly in-
stallments of $99,519, including interest
at 9.25%: collateralized by certain as-
sets of Rylan and guaranteed by the
stockholders and the Company; final pay-
ment due July 2000....................... 391,362 2,041,928 --
Note payable, sellers in connection with
the High Reach acquisition, due in
monthly installments of $10,213 plus in-
terest at 7% with final payment of
$377,844 made during March 1997.......... -- 408,523 --
Note payable, bank (see Note 8).......... -- -- 1,993,000
Note payable to a finance company with an
interest rate of LIBOR plus 3.25% (9.41%
at December 31, 1997) due in varying
monthly installments. Collateralized by a
specific security interest in equipment
and guaranteed by the President of the
Company.................................. 34,004,722 40,911,729 39,443,759
----------- ------------ -----------
$94,870,512 $107,460,779 $87,577,703
=========== ============ ===========
</TABLE>
F-17
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
At December 31, 1997, the aggregate maturities of debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ------------
<S> <C>
1998.......................................................... $ 26,007,808
1999.......................................................... 25,586,393
2000.......................................................... 23,492,367
2001.......................................................... 18,116,590
2002.......................................................... 1,208,650
Thereafter.................................................... 458,704
------------
$ 94,870,512
============
</TABLE>
Certain agreements require the Company to maintain specified minimum net
worth and working capital and certain financial ratios. At December 31, 1997,
the Company was in violation of certain covenants, including obtaining a
specified level of minimum tangible net worth and a debt service coverage
ratio.
From the proceeds of the sale, more fully described in Note 15, the Company
repaid substantially all of its debt.
10. INCOME TAXES
Deferred income taxes reflect the net tax effect of differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Deferred income taxes relate primarily to depreciation and amortization,
differences in the accounting treatment of capital leases and bases of certain
assets of acquired businesses.
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1997 1996 1995 1998 1997
---------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
CURRENT INCOME TAXES
Federal............... $ 482,568 $ 928,915 $ 277,900 $ -- $232,612
State................. 871,648 401,011 277,778 307,138 470,532
---------- ---------- ---------- ----------- --------
TOTAL CURRENT INCOME
TAX EXPENSE........ 1,354,216 1,329,926 555,678 307,138 703,144
---------- ---------- ---------- ----------- --------
DEFERRED INCOME TAXES
(BENEFIT)
Federal............... 393,018 133,507 452,061 -- 311,611
State................. (424,092) 610,184 509,800 (20,000) (439,382)
Reversal of deferred
income taxes relating
to sub S elections... (81,000) -- -- (2,924,822) --
---------- ---------- ---------- ----------- --------
TOTAL DEFERRED
INCOME TAX EXPENSE
(BENEFIT).......... (112,074) 743,691 961,861 (2,944,822) (127,771)
---------- ---------- ---------- ----------- --------
TOTAL INCOME TAX
EXPENSE (BENEFIT).. $1,242,142 $2,073,617 $1,517,539 $(2,637,684) $575,373
========== ========== ========== =========== ========
</TABLE>
F-18
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Differences which give rise to a significant portion of deferred income
taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -----------
1997 1996 1998
----------- ----------- -----------
<S> <C> <C> <C>
DEFERRED INCOME TAX (ASSETS)
LIABILITIES
Depreciation and amortization...... $ 2,256,399 $ 2,393,302 $ 1,072,381
Reserves and allowances............ (269,491) (294,300) (132,534)
Difference in basis of certain
acquired assets................... 1,897,761 1,897,761 --
----------- ----------- -----------
$ 3,884,669 $ 3,996,763 $ 939,847
=========== =========== ===========
</TABLE>
The differences between the income tax provision and the tax that would have
resulted from applying federal statutory rates on income before taxes is
primarily due to Equipment Supply being taxed as an S Corporation and High
Reach being taxed as an S Corporation for the three months ended December 31,
1997.
The effect of Rylan's conversion to an S Corporation in 1998 was for the
Company to recognize a deferred income tax benefit of approximately $2.9
million.
11. RETIREMENT PLANS
The Company participates in several defined contribution plans covering
substantially all nonunion employees. The Plans allow matching contributions
based on a percentage of the employees' contributions. The Company
contributions for the years ended December 31, 1997, 1996 and 1995 and the six
months ended June 30, 1998 and 1997 amounted to $139,572, $96,931, $30,821,
$91,351 and $70,393, respectively.
Additionally, the Company participates in a multi-employer plan that
provides defined contributions to the Company's union employees. For
collectively bargained, multi-employer pension plans, contributions are made
in accordance with negotiated labor contracts and generally are based on the
number of hours worked. With the passage of the Multi-Employer Pension Plan
Amendments Act of 1980 (the "Act"), the Company may, under certain
circumstances, become subject to liabilities in excess of contributions made
under collective bargaining agreements. Generally, these liabilities are
contingent upon the termination, withdrawal or partial withdrawal from the
plans. Company contributions for the years ended December 31, 1997, 1996 and
1995 and the six months ended June 30, 1998 and 1997 amounted to $96,737,
$75,930, $62,372, $57,991 and $43,609, respectively.
On January 1, 1998, the Company terminated its defined contribution plans
for Equipment Supply, High Reach and Rylan and established a combined defined
contribution plan covering substantially all nonunion employees. The plan
allows employees to make voluntary contributions processed through payroll
deductions.
12. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company leases various facilities under lease agreements, including
those with related parties. Some of these leases require the Company to pay
property taxes and other related costs.
F-19
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
Future minimum lease payments, by year, and in the aggregate for
noncancelable operating leases, including those with related parties, with
initial or remaining terms of one year or more are as follows at December 31,
1997:
<TABLE>
<CAPTION>
FACILITIES LEASES
YEAR ENDED (SUBSTANTIALLY WITH EQUIPMENT TOTAL OPERATING
DECEMBER 31, RELATED PARTIES) LEASES LEASES
------------ ------------------- ----------- ---------------
<S> <C> <C> <C>
1998....................... $ 2,120,949 $11,035,372 $13,156,321
1999....................... 1,938,559 10,001,175 11,939,734
2000....................... 1,921,804 7,768,161 9,689,965
2001....................... 1,917,196 6,567,617 8,484,813
2002....................... 1,912,170 4,870,393 6,782,563
Thereafter................. 876,000 -- 876,000
----------- ----------- -----------
$10,686,678 $40,242,718 $50,929,396
----------- ----------- -----------
</TABLE>
Rent expense under noncancelable operating leases for the years ended
December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and
1997 amounted to $10,210,657, $6,674,413, $1,179,277, $7,886,107 and
$2,405,348, respectively.
The following related party transactions including rent expense is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------- -----------------
1997 1996 1995 1998 1997
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Rent expense................... $963,600 $756,000 $18,168 $748,200 $515,500
Other expense.................. 79,190 109,173 58,689 80,100 59,300
</TABLE>
The Company has guaranteed a personal loan of the stockholders, which is
included as a liability in the financial statements. The loan proceeds were
used to purchase Rylan (see Note 9).
From time to time, the Company is a defendant in various lawsuits incident
to the ordinary course of business. It is not possible to determine with any
precision the probable outcome or the amount of liability, if any, under these
lawsuits; however, in the opinion of the Company and its counsel, the
disposition of these lawsuits will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.
13. FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable and other liabilities approximate fair value due to the
immediate to short-term maturity of these financial instruments. The fair
value of debt approximates cost as interest rates approximate market.
14. SUPPLIER CONCENTRATION
During 1997, two suppliers accounted for approximately 73% of total
purchases and leased equipment costs. During 1996, three suppliers (of which
two were the same in 1997) accounted for approximately 84% of total purchases
and lease costs. During 1995, three suppliers (of which two were the same in
1996 and 1997) accounted for approximately 68% of total purchases and lease
costs.
F-20
<PAGE>
EQUIPMENT SUPPLY CO., INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 IS UNAUDITED)
During 1997, volume activities with one vendor generated approximately $2
million in marketing rebates. Such amount has been recorded as other income.
15. SUBSEQUENT EVENT
Sale of Business Operations
Subsequent to December 31, 1997, the Company sold its principal business
operations, a substantial portion of its net assets and certain stock for
approximately $225 million.
Additionally, the Company anticipates paying approximately $1.5 million in
bonuses to certain of its employees.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Power Rental Co., Inc.
We have audited the balance sheet of Power Rental Co., Inc. as of July 31,
1997 and the related statements of operations, stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Power Rental Co., Inc. at
July 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
June 24, 1998
F-22
<PAGE>
POWER RENTAL CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................... $ 53,462 $ --
Accounts receivable, net of allowance for doubtful
accounts of
$200,000 and $170,000 at 1997 and 1998, respectively.. 4,193,529 4,136,551
Due from related parties............................... 612,717 1,173,050
Inventory.............................................. 51,476 63,576
Rental equipment, net.................................. 35,575,067 38,139,754
Property and equipment, net............................ 7,301,836 8,269,235
Prepaid expenses and other assets...................... 1,413,651 1,762,667
Intangible assets, net................................. 378,269 335,289
----------- -----------
Total assets....................................... $49,580,007 $53,880,122
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabili-
ties................................................ $ 4,831,620 $ 4,674,375
Debt................................................. 30,841,647 38,067,418
Deferred rent........................................ 72,200 84,800
Deferred income taxes................................ 2,921,231 1,983,119
----------- -----------
Total liabilities.................................. 38,666,698 44,809,712
Commitments and contingencies
Stockholders' equity:
Common stock--Class A voting, $1.00 par value, 10,000
shares authorized, 10 issued and outstanding........ 10 10
Common stock--Class B non-voting, $1.00 par value,
90,000 shares authorized, 20,000 issued and
outstanding......................................... 20,000 20,000
Additional paid in capital........................... 522,550 522,550
Retained earnings.................................... 10,370,749 8,527,850
----------- -----------
Total stockholders' equity......................... 10,913,309 9,070,410
----------- -----------
Total liabilities and stockholders' equity......... $49,580,007 $53,880,122
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
POWER RENTAL CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED MAY 31,
JULY 31, ------------------------
1997 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals..................... $34,943,308 $28,469,107 $27,578,967
Sales of rental equipment............. 4,484,056 3,428,774 4,020,158
Sales of parts and supplies........... 1,462,391 1,226,682 1,140,346
----------- ----------- -----------
Total revenues...................... 40,889,755 33,124,563 32,739,471
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........ 11,392,273 8,867,084 10,726,582
Depreciation, equipment rentals....... 9,753,507 8,150,000 8,967,724
Cost of sales of rental equipment..... 2,915,751 2,402,610 1,898,704
Cost of sales of parts and supplies... 1,316,267 1,032,410 902,963
----------- ----------- -----------
Total cost of revenues.............. 25,377,798 20,452,104 22,495,973
----------- ----------- -----------
Gross profit............................ 15,511,957 12,672,459 10,243,498
Selling, general and administrative
expenses............................... 11,865,623 9,781,625 10,320,661
Non-rental depreciation................. 1,214,796 913,500 1,242,846
----------- ----------- -----------
Operating income (loss)................. 2,431,538 1,977,334 (1,320,009)
Interest expense........................ 2,171,959 1,593,657 2,389,562
Interest income......................... (176,612) (97,471) (137,826)
Other (income), net..................... (398,159) (334,337) (182,304)
----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes....................... 834,350 815,485 (3,389,441)
Provision (benefit) for income taxes.... 317,053 282,070 (1,546,542)
----------- ----------- -----------
Net income (loss)....................... $ 517,297 $ 533,415 $(1,842,899)
=========== =========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
POWER RENTAL CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL
------------- -------------- PAID IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ ------ ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 1,
1996.................... 10 $10 20,000 $20,000 $522,550 $ 9,853,452
Net income............. 517,297
--- --- ------ ------- -------- -----------
Balance at July 31,
1997.................... 10 10 20,000 20,000 522,550 10,370,749
Net loss (unaudited)... (1,842,899)
--- --- ------ ------- -------- -----------
Balance at May 31, 1998
(unaudited)............. 10 $10 20,000 $20,000 $522,550 $ 8,527,850
=== === ====== ======= ======== ===========
</TABLE>
See accompanying notes.
F-25
<PAGE>
POWER RENTAL CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TEN MONTHS ENDED
YEAR ENDED MAY 31,
JULY 31, --------------------------
1997 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................... $ 517,297 $ 533,414 $ (1,842,899)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 11,018,848 9,097,833 10,253,550
Gain on equipment sales........... (1,294,474) (815,756) (1,603,959)
Gain on property and equipment
sales............................ (29,468) (47,940) (27,709)
Deferred income taxes............. 87,846 86,530 (938,112)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable..................... (135,231) 392,008 56,978
Decrease (increase) in
inventory...................... 8,973 (21,226) (12,100)
Increase in prepaid expenses and
other assets................... (648,001) (486,370) (349,016)
Increase (decrease) in accounts
payable, accrued expenses and
other liabilities 622,048 381,560 (157,244)
Increase in deferred rent....... 40,800 29,000 12,600
------------ ------------ ------------
Total adjustments............. 9,671,341 8,615,639 7,234,988
------------ ------------ ------------
Cash provided by operating
activities......................... 10,188,638 9,149,053 5,392,089
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment........ (1,769,523) (3,339,078) (684,337)
Purchase of property and equipment.. (2,757,539) (2,237,093) (903,864)
Intangibles associated with purchase
of certain assets.................. (110,000) (110,000)
Proceeds from sale of rental
equipment.......................... 3,882,235 2,956,554 3,243,356
Proceeds from sale of property and
equipment.......................... 139,723 65,562 204,980
------------ ------------ ------------
Cash provided by (used in) investing
activities......................... (615,104) (2,664,055) 1,860,135
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt.......... (9,810,236) (7,567,820) (10,800,353)
Principal payments on credit
facility........................... (26,748,605) (19,096,555) (17,990,000)
Borrowings on debt.................. 207,000 207,000 220,000
Borrowings under credit facility.... 26,726,605 20,089,955 21,825,000
Repayments from related parties..... 681,553 352,200 824,504
Advances to related parties......... (599,788) (491,933) (1,384,837)
------------ ------------ ------------
Cash used in financing activities... (9,543,471) (6,507,153) (7,305,686)
------------ ------------ ------------
Increase (decrease) in cash......... 30,063 (22,155) (53,462)
Cash balance at beginning of
period............................. 23,399 23,399 53,462
------------ ------------ ------------
Cash balance at end of period....... $ 53,462 $ 1,244 $ --
============ ============ ============
</TABLE>
See accompanying notes.
F-26
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Power Rental Co., Inc. (the "Company") rents, sells and repairs construction
equipment for use by contractor, industrial and homeowner markets. The rentals
are on a daily, weekly or monthly basis. The Company has eighteen locations
and their principal market area is the Pacific Northwest of 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 balance sheets are presented on an
unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 10.
Interim Financial Statements
The accompanying balance sheet at May 31, 1998 and the statements of
operations, stockholders' equity and cash flows for the ten-month periods
ended May 31, 1997 and 1998 are unaudited and have been prepared on the same
basis as the audited financial statements included herein. In the opinion of
management, such unaudited 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.
Inventory
Inventories consist primarily of general replacement parts and are stated at
the lower of cost, determined under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statement of
operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
ranging from three to seven years. Leasehold improvements are amortized using
the straight-line method over the estimated lives of the improvements or the
remaining life of the lease, whichever is shorter.
F-27
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Intangible Assets
Intangible assets are recorded at cost and consist of goodwill of $372,480
and covenants not to compete of $207,000. Accumulated amortization at July 31,
1997 and May 31, 1998 is $201,211 and $244,191, respectively. Goodwill is
being amortized by the straight-line method over its estimated useful life of
forty years. The covenants not to compete reflect agreements made regarding
confidentiality and restricting competitive activity and are being amortized
by the straight-line method over the period of the agreements, which is 5
years. Amortization expense was $50,545, $34,333 and $42,980 for the year
ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998,
respectively.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through sponsorships, trade journals,
trade associations and phone directories. All advertising costs are expensed
as incurred. Advertising expense amounted to approximately $714,680, $609,100
and $653,300 in the year ended July 31, 1997 and for the ten months ended May
31, 1997 and 1998, respectively.
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse.
Accounting Estimates
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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
F-28
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Rental equipment.................................. $61,168,264 $69,016,929
Less accumulated depreciation..................... 25,593,197 30,877,175
----------- -----------
Rental equipment, net............................. $35,575,067 $38,139,754
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Transportation equipment.......................... $ 5,143,693 $ 5,984,589
Office and shop equipment......................... 2,236,792 2,683,017
Leasehold improvements............................ 3,573,110 4,419,965
----------- -----------
10,953,595 13,087,571
Less accumulated depreciation and amortization.... 3,651,759 4,818,336
----------- -----------
Property and equipment, net....................... $ 7,301,836 $ 8,269,235
=========== ===========
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
JULY 31, MAY 31,
1997 1998
--------- -----------
(UNAUDITED)
<S> <C> <C>
Caterpillar Credit-Note with a monthly payment of $1,668
including interest of 5.6%............................. $ 24,020 $ 9,758
Ingersoll Rand--Various non-interest bearing notes with
combined monthly payments of $100,064 and $2,850 in
1997 and 1998, respectively............................ 289,690 26,308
Allegro Escrow--Two notes with combined monthly payments
of $4,297 including interest of 9.0%................... 175,653 144,831
Associates Commercial--Various notes with combined
monthly payments of $24,451 including interest from
7.6% to 8.9%........................................... 905,505 4,149,252
Case Credit--Various notes with combined monthly
payments of $211,021 including interest from 4.9% to
8.9%................................................... 3,823,564 3,079,867
J.D. Fulwiler--Note with monthly payment of $3,134
including interest of 8.0%............................. 27,285 --
Concord Commercial--Various notes with combined monthly
payments of $143,858 including interest from 8.1% to
8.9%................................................... 4,019,259 3,365,279
John Deere Credit--Various notes with combined monthly
payments of $133,615 including interest from 6.9% to
9.7%................................................... 2,399,434 1,571,762
Ford Motor Credit--Various notes with combined monthly
payments of $121,192 including interest from 8.2% to
9.2%................................................... 1,918,226 1,756,489
</TABLE>
F-29
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, MAY 31,
1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
AT&T Credit--Note with monthly payment of $2,599
including interest of 10.6%........................... $ 101,393 $ 77,829
Navistar Financial--Various notes with combined monthly
payments of $53,762 including interest from 7.3% to
9.0%.................................................. 1,271,686 922,509
Seafirst Bank--Various notes with combined monthly
payments of $523,962 including interest from 7.3% to
8.5%.................................................. 12,075,932 13,420,418
Seafirst Bank--Line of credit up to $19,000,000,
expiring in February 1999 with interest payable
monthly at 8.5%....................................... 3,810,000 7,645,000
JCB Finance--Note with monthly payment of $8,529
including interest of 8.51%........................... -- 236,637
Pacific Atlantic--Note with monthly payment of $2,610
including interest of 10.9%........................... -- 74,107
PACCAR Financial--Note with monthly payment of $3,663
including
interest of 7.8%...................................... -- 150,654
Deutsche Financial--Note with monthly payment of
$28,932 including
interest of 8.13%..................................... -- 1,436,718
----------- -----------
$30,841,647 $38,067,418
=========== ===========
</TABLE>
Substantially all rental equipment collateralize the above notes.
All debt was paid off in June 1998 in connection with the acquisition
discussed in Note 10.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED MAY
JULY 31, 31,
1997 1997 1998
---------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal................................. $229,197 $195,530 $ (608,430)
State................................... 10 10
-------- -------- -----------
229,207 195,540 (608,430)
Deferred:
Federal................................. 34,832 34,612 (876,200)
State................................... 53,014 51,918 (61,912)
-------- -------- -----------
87,846 86,530 (938,112)
-------- -------- -----------
$317,053 $282,070 $(1,546,542)
======== ======== ===========
</TABLE>
F-30
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Significant components of the Company's deferred tax liability at July 31,
1997 and May 31, 1998 are as follows:
<TABLE>
<S> <C> <C>
JULY 31, MAY 31,
1997 1998
---------- -----------
(UNAUDITED)
Net operating loss carryforward.................. $ (469,000) $(1,085,000)
Cumulative tax depreciation in excess of book.... 3,390,231 3,068,119
---------- -----------
Deferred tax liability, net...................... $2,921,231 $ 1,983,119
========== ===========
</TABLE>
At July 31, 1997, the Company has net operating loss carryforwards of
$1,142,326 for income tax purposes that expire in 2012.
7. RELATED PARTY TRANSACTIONS
During the year ended July 31, 1997 and the ten months ended May 31, 1997
and 1998, the Company paid $628,533, $565,295 and $530,687 for advertising
expenses to a partnership controlled by the Company's president and principal
stockholder.
The accompanying financial statements at July 30, 1997 and May 31, 1998,
reflect amounts receivable of $509,473 and $659,174, respectively, from the
president of the Company. These advances are made within the framework of a
special drawing and loan account which bears interest at 8%.
In addition, the Company is owed amounts from relatives of and related
entities controlled by the president of the Company totaling $103,244 and
$454,406 at July 31, 1997 and May 31, 1998, respectively. These advances are
non-interest bearing.
The Company conducts its operations primarily from various separate
facilities under noncancellable lease agreements. Three of these facilities
are owned either by the Company's president and principal stockholder or
related entities controlled by the president of the Company. Another facility
is leased to a limited partnership in which the general partner is the
Company's president and principal stockholder. These leases expire at various
dates through the year 2001. All of these agreements require the payment by
the Company of property taxes, maintenance and insurance. Total rent expense
paid to related parties and charged to current operations totaled $630,000,
$516,450 and $704,850 for the year ended July 31, 1997 and ten months ended
May 31, 1997 and 1998, respectively.
In connection with the acquisition discussed in Note 10, the lease terms
with related parties have been renegotiated.
The remaining lease agreements are with unrelated third parties. These
leases expire at various dates through the year 2006. Most of these agreements
contain certain renewal options and provide for first right of refusal toward
purchase. These agreements generally require the Company to pay all utilities,
insurance, taxes and maintenance. Total rent expense charged to operations on
unrelated third party leases for the year ended July 31, 1997 and ten months
ended May 31, 1997 and 1998 were $786,928, $609,674 and $644,800,
respectively.
F-31
<PAGE>
POWER RENTAL CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS
ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
Some leases include scheduled base rent increases over the term of the
leases. The total amount of the base rent payments is being charged to expense
on a straight-line method over the terms of the leases. The Company recorded a
liability for deferred rent to reflect the excess of rent expense over cash
payments which is included in the accompanying balance sheets.
The future minimum lease commitments under all unrelated third party
operating leases that have noncancellable lease terms in excess of one year
are as follows:
<TABLE>
<S> <C>
Fiscal 1998.............. $ 868,660
1999.................. 667,360
2000.................. 586,600
2001.................. 449,440
2002.................. 317,940
Thereafter............ 399,030
----------
$3,289,030
==========
</TABLE>
At July 31, 1997 and May 31, 1998 the Company was contingently liable as a
guarantor on bank loans in the amount of $1,662,098 and $1,516,740,
respectively, owed to the bank by its president and principal stockholder.
These bank loans are also secured by substantial personal and real property
assets of such stockholder.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, total interest paid was $2,019,792, $1,588,185 and $2,394,938,
respectively.
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, total taxes paid was $899,655, $899,655 and $0, respectively.
For the year ended July 31, 1997 and the ten months ended May 31, 1997 and
1998, the Company purchased $17,555,968, $12,719,662 and $13,971,123,
respectively, of equipment which was financed.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) pension plan which covers
substantially all employees. The Company makes discretionary contributions.
Company contributions to the plan were $300,000, $300,000 and $0 for the year
ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998,
respectively.
10. SUBSEQUENT EVENT
On June 8, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-32
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Adco Equipment, Inc.
We have audited the combined balance sheet of Adco Equipment, Inc. (see
Note 1) (the "Companies") as of December 31, 1997 and the related combined
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Adco
Equipment, Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
July 17, 1998
F-33
<PAGE>
ADCO EQUIPMENT, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER
31, JUNE 30,
ASSETS 1997 1998
------ ----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash................................................... $ 1,634,205 $ 2,890,453
Accounts receivable, net of allowance for doubtful
accounts of $322,000 at 1997 and 1998................. 2,350,314 3,679,084
Inventory.............................................. 1,263,667 1,372,957
Rental equipment, net.................................. 8,227,480 8,597,740
Property and equipment, net............................ 891,894 821,862
Prepaid expenses and other assets...................... 60,172 61,127
----------- -----------
Total assets....................................... $14,427,732 $17,423,223
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Accounts payable, accrued expenses and other
liabilities......................................... $ 849,960 $ 725,516
Debt................................................. 2,526,175 3,124,603
Stockholder loan..................................... 200,000 200,000
----------- -----------
Total liabilities.................................. 3,576,135 4,050,119
Commitments and contingencies
Stockholders' equity:
Common stock, Adco Equipment, Inc., no par value,
7,500 shares authorized, 100 issued and outstanding;
Adco Equipment Supply, Inc., no par value, 7,500
shares authorized, 1,000 issued and outstanding..... 20,000 20,000
Retained earnings.................................... 10,831,597 13,353,104
----------- -----------
Total stockholders' equity......................... 10,851,597 13,373,104
----------- -----------
Total liabilities and stockholders' equity......... $14,427,732 $17,423,223
=========== ===========
</TABLE>
See accompanying notes.
F-34
<PAGE>
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER ------------------------
31, 1997 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals..................... $16,313,470 $ 8,461,446 $ 9,298,812
Sales of parts, supplies and new
equipment............................ 6,968,972 3,619,348 4,012,727
----------- ----------- -----------
Total revenues.......................... 23,282,442 12,080,794 13,311,539
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........ 6,191,738 2,689,474 2,906,348
Depreciation, equipment rentals....... 2,465,331 1,232,666 1,393,939
Cost of parts, supplies and new
equipment sales...................... 5,932,862 3,111,352 3,467,749
----------- ----------- -----------
Total cost of revenues.................. 14,589,931 7,033,492 7,768,036
----------- ----------- -----------
Gross profit............................ 8,692,511 5,047,302 5,543,503
Selling, general and administrative
expenses............................... 6,374,453 3,063,353 2,991,891
Non-rental depreciation................. 249,572 124,786 143,020
----------- ----------- -----------
Operating income........................ 2,068,486 1,859,163 2,408,592
Interest expense........................ 267,639 143,470 141,892
Other (income), net..................... (226,501) (116,398) (254,807)
----------- ----------- -----------
Net income.......................... $ 2,027,348 $ 1,832,091 $ 2,521,507
=========== =========== ===========
</TABLE>
See accompanying notes.
F-35
<PAGE>
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------- RETAINED
SHARES AMOUNT EARNINGS
------ ------- -----------
<S> <C> <C> <C>
Balance at January 1, 1997.......................... 1,100 $20,000 $ 8,804,249
Net income.......................................... 2,027,348
----- ------- -----------
Balance at December 31, 1997........................ 1,100 20,000 10,831,597
Net income (unaudited).............................. 2,521,507
----- ------- -----------
Balance at June 30, 1998 (unaudited)................ 1,100 $20,000 $13,353,104
===== ======= ===========
</TABLE>
See accompanying notes.
F-36
<PAGE>
ADCO EQUIPMENT, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, ------------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................ $ 2,027,348 $ 1,832,091 $ 2,521,507
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 2,714,903 1,357,452 1,536,959
Changes in assets and liabilities:
Accounts receivable, net.......... 22,910 (906,199) (1,328,770)
Inventory......................... 500,839 229,882 (109,290)
Prepaid expenses and other
assets........................... (5,733) (25,819) (955)
Accounts payable, accrued expenses
and other liabilities............ (272,050) (578,559) (124,444)
----------- ----------- -----------
Total adjustments............... 2,960,869 76,757 (26,500)
----------- ----------- -----------
Cash provided by operating
activities..................... 4,988,217 1,908,848 2,495,007
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.......... (3,451,755) (1,797,573) (1,764,199)
Purchase of property and equipment.... (400,350) (61,723) (72,988)
----------- ----------- -----------
Cash used in investing activities..... (3,852,105) (1,859,296) (1,837,187)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt............ (1,712,003) (773,727) (1,250,521)
Borrowings on debt.................... 867,886 649,784 1,848,949
----------- ----------- -----------
Cash (used in) provided by financing
activities........................... (844,117) (123,943) 598,428
----------- ----------- -----------
Increase (decrease) in cash........... 291,995 (74,391) 1,256,248
Cash balance at beginning of period... 1,342,210 1,342,210 1,634,205
----------- ----------- -----------
Cash balance at end of period......... $ 1,634,205 $ 1,267,819 $ 2,890,453
=========== =========== ===========
</TABLE>
See accompanying notes.
F-37
<PAGE>
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Adco Equipment, Inc. include the
accounts of Adco Equipment, Inc. ("Equipment") and Adco Equipment Supply, Inc.
("Supply") (collectively the "Companies"). The Companies are affiliated
through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
9.
Business Activity
The Companies rent, sell and repair construction equipment for use by
construction, industrial, entertainment and municipal markets. The rentals are
on a daily, weekly or monthly basis. The Companies have two locations and
their principal market area is Southern California. The nature of the
Companies' business is such that short-term obligations are typically met by
cash flow generated from long-term assets. Consequently, consistent with
industry practice, the combined balance sheet is presented on an unclassified
basis.
Interim Financial Statements
The accompanying combined balance sheet at June 30, 1998 and the combined
statements of operations, 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 combined financial statements
included herein. In the opinion of management, such unaudited combined
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The combined results of operations for such interim period are
not necessarily indicative of results for the full year.
Inventory
Inventories consist primarily of general replacement parts and equipment
held for resale and are stated at the lower of cost, determined under the
first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the combined
statement of operations.
F-38
<PAGE>
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $50,800, $28,200 and $38,600 in
the year ended December 31, 1997 and for the six months ended June 30, 1997
and 1998, respectively.
Income Taxes
The Companies have elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal purposes. Under those provisions, the Companies do not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Companies' profits.
Accounting Estimates
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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER JUNE 30,
31, 1997 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
Rental equipment................................. $28,619,154 $30,383,353
Less accumulated depreciation.................... 20,391,674 21,785,613
----------- -----------
Rental equipment, net............................ $ 8,227,480 $ 8,597,740
=========== ===========
</TABLE>
F-39
<PAGE>
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Transportation equipment......................... $2,201,586 $2,274,574
Furniture, fixtures and equipment................ 48,820 48,820
---------- ----------
2,250,406 2,323,394
Less accumulated depreciation.................... 1,358,512 1,501,532
---------- ----------
Property and equipment, net...................... $ 891,894 $ 821,862
========== ==========
</TABLE>
5. DEBT AND STOCKHOLDER LOAN
Debt and stockholder loan consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Bank of America--Various notes with combined
monthly payments of $150,000 and $207,000 in
1997 and 1998, respectively, including
interest of 8%.............................. $2,526,175 $3,124,603
Stockholder Loan--No set principal payments,
nor due date. The loan accrues interest at a
rate of 10.25% per year..................... 200,000 200,000
---------- ----------
$2,726,175 $3,324,603
========== ==========
</TABLE>
Substantially all rental equipment collateralize the above Bank of America
notes which are secured by UCC Filings.
All debt was paid off in July 1998 in connection with the acquisition
discussed in Note 9.
6. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997 and the six months ended June 30,
1997 and 1998, the Companies paid $294,000, $147,000 and $147,000 for
equipment rental expenses to the principal stockholder.
The Companies conduct their operations primarily from two separate
facilities which are owned by the Companies principal stockholder. These
leases expire at June 30, 1998. The Companies are required to pay the property
taxes, maintenance and insurance for these facilities. Total rent expense paid
to related parties and charged to current operations totaled $330,000,
$165,000 and $165,000 for the year ended December 31, 1997 and six months
ended June 30, 1997 and 1998, respectively.
In connection with the acquisition discussed in Note 9, the lease terms with
related parties have been renegotiated.
F-40
<PAGE>
ADCO EQUIPMENT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and the six months ended June 30, 1997
and 1998, total interest paid was approximately $267,600, $121,900 and
$106,900, respectively.
8. EMPLOYEE PROFIT SHARING PLAN
Equipment maintains a profit-sharing plan which covers substantially all
employees. Equipment's contributions are discretionary and amounted to
$160,000, $0 and $0 for the year ended December 31, 1997 and for the six
months ended June 30, 1997 and 1998, respectively.
9. SUBSEQUENT EVENT
On July 2, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Companies.
F-41
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of McClinch, Inc.:
We have audited the accompanying consolidated balance sheet of McClinch Inc.
and Subsidiaries as of January 31, 1998, and the related consolidated
statements of income and retained earnings and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 McClinch,
Inc. and Subsidiaries as of January 31, 1998, and the consolidated results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
March 25, 1998
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
October 28, 1998
To the Stockholders of
McClinch, Inc.:
In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of McClinch, Inc. and
Subsidiaries at August 31, 1998 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this
statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
F-43
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................... $ 754,000 $ 2,545,000
Accounts receivable, less allowance for doubtful
accounts of $106,000 and $151,000.................. 4,168,000 4,334,000
Due from related parties (Note 6)................... 293,000 1,295,000
Inventories......................................... 1,181,000 1,281,000
Net investment in sales-type leases (Note 3)........ 32,000 9,000
Property and rental equipment, net (Note 4)......... 17,249,000 21,230,000
Other assets........................................ 217,000 228,000
----------- -----------
Total assets...................................... $23,894,000 $30,922,000
=========== ===========
LIABILITIES:
Notes payable (Note 5).............................. $10,388,000 $15,446,000
Accounts payable and accrued expenses............... 1,759,000 1,631,000
Income taxes payable................................ 1,000 324,000
Deferred income taxes............................... 2,476,000 2,660,000
----------- -----------
Total liabilities................................. 14,624,000 20,061,000
----------- -----------
Commitments (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, issued and
outstanding, 1,000 shares.......................... 26,000 26,000
Retained earnings................................... 9,862,000 11,453,000
Treasury stock, at cost; 103 shares (Note 6)........ (618,000) (618,000)
----------- -----------
Total stockholders' equity........................ 9,270,000 10,861,000
----------- -----------
Total liabilities and stockholders' equity........ $23,894,000 $30,922,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-44
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED AUGUST 31,
JANUARY 31, -----------------------
1998 1998 1997
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals and service (Note
6).................................... $18,474,000 $12,419,000 $9,776,000
Sales.................................. 4,659,000 3,522,000 2,770,000
----------- ----------- ----------
23,133,000 15,941,000 12,546,000
Cost of equipment rentals and service.... 11,672,000 8,221,000 6,138,000
Cost of sales............................ 2,843,000 2,121,000 1,734,000
----------- ----------- ----------
Gross profit......................... 8,618,000 5,599,000 4,674,000
Selling expenses......................... 1,484,000 890,000 664,000
General and administrative expenses...... 3,136,000 1,503,000 1,336,000
----------- ----------- ----------
3,998,000 3,206,000 2,674,000
Other income (expenses):
Interest income........................ 134,000 23,000 70,000
Interest expense....................... (1,028,000) (591,000) (589,000)
Rental of property, net (Note 9)....... 71,000 18,000 43,000
Other income........................... 44,000 9,000 1,000
Loss on sale of property............... -- (130,000) --
----------- ----------- ----------
Income before provision for income
taxes............................... 3,219,000 2,535,000 2,199,000
Provision for income taxes (Note 7)...... 1,082,000 944,000 964,000
----------- ----------- ----------
Net income........................... 2,137,000 1,591,000 1,235,000
Retained earnings, beginning of period... 7,793,000 9,862,000 7,793,000
Dividends paid........................... (68,000) -- --
----------- ----------- ----------
Retained earnings, end of period..... $ 9,862,000 $11,453,000 $9,028,000
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-45
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED AUGUST 31,
JANUARY 31, ------------------------
1998 1998 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,137,000 $ 1,591,000 $ 1,235,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 3,387,000 2,343,000 1,916,000
Gain on sale of property and rental
equipment........................... (1,313,000) (903,000) (740,000)
Deferred income taxes................ 328,000 184,000 385,000
----------- ----------- -----------
4,539,000 3,215,000 2,796,000
Changes in assets and liabilities:
Accounts receivable................ (643,000) (166,000) (529,000)
Due to or from related parties for
operating expenses................ 519,000 (837,000) (13,000)
Current income taxes receivable.... 58,000 -- 58,000
Inventories........................ (201,000) (100,000) (76,000)
Other assets....................... (165,000) (11,000) (18,000)
Accounts payable and accrued ex-
penses............................ 201,000 (128,000) (402,000)
Income taxes payable............... 1,000 323,000 168,000
----------- ----------- -----------
Net cash provided by operating
activities...................... 4,309,000 2,296,000 1,984,000
----------- ----------- -----------
Cash flows from investing activities:
Advances to related parties.......... (318,000) (165,000) (188,000)
Acquisition of property and rental
equipment........................... (7,227,000) (7,593,000) (5,935,000)
Proceeds from sale of property and
rental equipment.................... 2,292,000 2,172,000 1,448,000
Net investment in sales-type leases.. 88,000 23,000 80,000
----------- ----------- -----------
Net cash used in investing
activities...................... (5,165,000) (5,563,000) (4,595,000)
----------- ----------- -----------
Cash flows from financing activities:
Repayments of notes payable.......... (8,040,000) (4,352,000) (3,788,000)
Borrowings of notes payable.......... 7,145,000 9,410,000 6,000,000
Repayment of note payable to related
party............................... (41,000) -- (41,000)
Dividends paid....................... (68,000) -- --
----------- ----------- -----------
Net cash (used in) provided by
financing activities............ (1,004,000) 5,058,000 2,171,000
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents............ (1,860,000) 1,791,000 (440,000)
Cash and cash equivalents, beginning of
period................................ 2,614,000 754,000 2,614,000
----------- ----------- -----------
Cash and cash equivalents, end of
period.......................... $ 754,000 $ 2,545,000 $ 2,174,000
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest........................... $ 1,029,000 $ 562,000 $ 572,000
Income taxes, net of refunds....... 695,000 437,000 353,000
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-46
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
1. BUSINESS AND ORGANIZATION
The accompanying consolidated financial statements include the accounts of
McClinch, Inc. and its wholly-owned subsidiaries McClinch Leasing Corporation,
McClinch Equipment Corporation, McClinch Crane Services, Inc. and McClinch
Aviation Corporation, (the "Company"). During August of 1998 McClinch Aviation
Corporation was sold to a shareholder for approximately net book value.
The Company is an exclusive dealer for JLG Industries, Inc. and Genie
Industries in the State of Connecticut, metropolitan New York, Long Island,
Westchester County and other counties in New York State. The Company is also
an exclusive dealer for Lull Corporation in various counties in the States of
Connecticut and New York. In addition, the Company has distribution agreements
with other manufacturers in Connecticut and New York. The Company's revenues
are derived principally from the rental of aerialift and material handling
equipment and the sale of new and used equipment to a diversified customer
base including contractors and other users.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated balance sheet is presented on an unclassified basis since
it more properly reflects the Company's operations as a rental equipment
company.
Basis of Consolidation:
All intercompany transactions and balances have been eliminated.
Interim Financial Statements:
The accompanying statements of income and retained earnings and cash flows
for the seven month periods ended August 31, 1998 and 1997 are unaudited and
have been prepared on the same basis as the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments necessary to present fairly the information
set forth therein, which consists solely of normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative
of results for the full year.
Revenue Recognition:
Operating Leases--Rental revenue is recognized over the lease term
(generally less than one year) as earned.
Sales-Type Leases--Sales are recorded at amounts equal to the present value
of the minimum lease payments at the inception of the lease. The unearned
interest income represents the difference between the minimum lease payments
and the present value of such payments. Such interest income is recognized
over the life of the lease using the interest method.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments, which consist principally of U.S. Treasury Notes, with
original maturities of less than 90 days. Temporary cash investments of
$144,000 as of January 31, 1998, are recorded at cost plus accrued interest
which approximates market value. The Company maintains all of its cash
balances in one institution. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000.
F-47
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
Inventories:
Inventories, consisting principally of aerialift equipment and related spare
parts, are recorded at the lower of first-in, first-out cost or market.
Property and Rental Equipment:
Property and rental equipment, consisting principally of the Company's
rental fleet of aerialift and material handling equipment, is stated at cost
and is depreciated using the straight-line method over the following estimated
useful lives: buildings and building improvements, 30 years; rental equipment,
furniture and fixtures and computer equipment, 7 years; and vehicles, 5 years.
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
income.
Income Taxes:
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in a company's
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the temporary differences
are expected to reverse.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts have been reclassified between balance sheet accounts to
more properly reflect the nature of the item.
3. SALES-TYPE LEASES
The net investment in sales-type leases consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
----------- ----------
<S> <C> <C>
Minimum lease payments receivable.................... $34,000 $10,000
Lease, Unearned interest income.................... (2,000) (1,000)
------- -------
Net investment in sales-type leases.................. $32,000 $ 9,000
======= =======
Minimum lease payments as of January 31, 1998 and August 31, 1998 are
receivable as follows:
<CAPTION>
ISCAL YEARF
- -----------
JANUARY 31, AUGUST 31,
1998 1998
----------- ----------
<S> <C> <C>
1999................................................. $29,000 $ 5,000
2000................................................. 5,000 5,000
</TABLE>
F-48
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
4. PROPERTY AND RENTAL EQUIPMENT
Property and rental equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
------------ ------------
<S> <C> <C>
Rental equipment................................. $ 30,965,000 $ 35,119,000
Land............................................. 530,000 130,000
Buildings and improvements....................... 377,000 200,100
Vehicles......................................... 2,381,000 2,652,000
Furniture, fixtures and computer equipment....... 528,000 640,000
------------ ------------
34,781,000 38,241,000
Less, Accumulated depreciation................. (17,532,000) (17,511,000)
------------ ------------
Total........................................ $ 17,249,000 $ 21,230,000
============ ============
</TABLE>
5. NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
----------- -----------
<S> <C> <C>
Note payable to a bank syndicate bearing interest at
LIBOR plus 1 3/4%.................................. $ 9,695,000 $15,000,000
Note payable to Citicorp Dealer Finance bearing
interest at 8.5%, payable in monthly installments
of $7,839 through September 2004, including
interest........................................... 477,000 446,000
First mortgage to Edith Godwin on real property
located in Bridgeport, Connecticut, bearing
interest at 9.0%, payable in monthly installments
of $3,066 through January 2002, including
interest........................................... 123,000 --
Notes payable to Orix Credit Alliance bearing
interest at 8.5%, payable in monthly installments
of $3,657 through May 2000, including interest..... 93,000 --
----------- -----------
$10,388,000 $15,446,000
=========== ===========
</TABLE>
The Company has available a revolving line of credit with a bank syndicate
totaling the lesser of $22,000,000, or an amount based on eligible accounts
receivable, parts inventory, new equipment inventory, vehicles and rental
equipment. The line of credit includes cross-guarantees of amounts outstanding
with affiliates which amounted to approximately $17,935,000 and $22,550,000 at
January 31, 1998 and August 31, 1998, respectively. The unused portion of the
line of credit was $12,305,000 and $7,000,000 at January 31, 1998 and August
31, 1998, respectively. The Company pays a commitment fee of 1/4% per annum on
the unused portion of the line of credit.
The outstanding balance bears interest at a fluctuating 30-day LIBOR rate
plus 1 3/4% (7.38% and 7.4% at January 31, 1998 and August 31, 1998,
respectively). The Company has the option to borrow additional funds and/or
convert all or a portion of the outstanding balance to a fluctuating interest
rate equal to the lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1
3/4%, for 90, 180 or 360 days.
F-49
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
The line of credit terminates on November 30, 1999 and extends automatically
every six months unless either party gives written notice to the other. Upon
termination or default, amounts outstanding under this line of credit convert
to a note which is payable in at least 48 monthly installments.
Although no fixed payments are required under the revolving credit
agreement, the Company expects aggregate maturities under this agreement and
other notes payable at January 31, 1998 to approximate the following:
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------------------------------------
<S> <C>
1999........................................................... $2,544,000
2000........................................................... 2,554,000
2001........................................................... 2,536,000
2002........................................................... 2,530,000
2003........................................................... 78,000
Thereafter..................................................... 146,000
</TABLE>
The lenders require, among other terms, that the Company and its affiliate
(see Note 6) on a combined basis meet certain financial ratios and obtain
approval prior to the issuing of advances or loans to stockholders or officers
which exceed certain amounts, as defined.
Substantially all of the assets of the Company have been pledged as
collateral under the debt agreement. On September 1, 1998, the notes payable
to the bank syndicate and Citicorp were paid in full (see Note 10).
6. RELATED PARTY TRANSACTIONS
Due from related parties consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
----------- ----------
<S> <C> <C>
Due (to) from affiliated companies................... $(72,000) $ 764,000
Loans receivable from officer/stockholder............ 365,000 531,000
-------- ----------
$293,000 $1,295,000
======== ==========
</TABLE>
The Company rents equipment from affiliates with common ownership under
informal equipment sharing agreements for ultimate rental to customers in New
York and Connecticut. In addition, the Company rents equipment to affiliates
for ultimate rental to the affiliates' customers. The net expenses incurred or
net revenue earned (included in cost of equipment rentals and service) by the
Company under these arrangements were net expenses incurred of $744,000 for
the year ended January 31, 1998 and $609,000 for the seven months ended August
31, 1998, and net revenues earned of $174,000 for the seven months ended
August 31, 1997. In addition, the Company provides services to affiliates in
connection with their operations. The primary expenses incurred and paid by
the Company, which are allocated or billed to the affiliates include salaries
($2,059,000, for the year ended January 31, 1998 and $750,000 and $416,000 for
the seven months ended August 31, 1998 and 1997, respectively, deducted from
general and administrative expenses and $154,000 for the year ended January
31, 1998 and $-0- and $104,000 for the seven months ended August 31, 1998 and
1997, respectively, deducted from selling expenses), spare parts inventory,
trucking services and insurance expenses ($699,000 for the year ended January
31, 1998 and $522,000 and $478,000 for the seven months ended August 31, 1998
and 1997, respectively, included in cost of equipment rentals and service).
F-50
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
During fiscal year 1998, the Company purchased $243,000 ($75,000 and
$146,000 during the seven months ended August 31, 1998 and 1997, respectively)
of used machinery and equipment from an affiliate for ultimate sale to
unrelated third parties. Additionally, the Company sold used machinery and
equipment with a selling price of $980,000 ($621,000 and $776,000 during the
seven months ended August 31, 1998 and 1997, respectively) to an affiliate for
ultimate sale to unrelated third parties.
These transactions are settled in the normal course of business.
Loans to officer/stockholder are due on demand and bear interest at the
applicable federal rate (5.66%) as published by the Internal Revenue Service.
The loans were repaid on September 1, 1998 (see Note 10).
Pursuant to a stockholders agreement between the Company and certain of its
stockholders, a stockholder desiring to sell its shares of common stock must
first offer them to the Company. The repurchase price is based on a formula of
one and one-half times the Company's consolidated book value at the end of the
fiscal year preceding the date on which the sale is made.
Refer to Note 9 for commitments with related parties.
7. INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
SEVEN
MONTHS ENDED
YEAR ENDED AUGUST 31,
JANUARY 31, ------------------
1998 1998 1997
----------- -------- --------
<S> <C> <C> <C>
Current:
State and local............................. $ 232,000 $236,000 $173,000
Federal..................................... 522,000 524,000 406,000
---------- -------- --------
754,000 760,000 579,000
Deferred:
State and local............................. 57,000 (138,000) 115,000
Federal..................................... 271,000 322,000 270,000
---------- -------- --------
328,000 184,000 385,000
---------- -------- --------
$1,082,000 $944,000 $964,000
========== ======== ========
</TABLE>
The components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31, AUGUST 31,
1998 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable............................. $ 37,000 $ 62,000
Deferred tax liabilities:
Property and rental equipment and other......... (2,513,000) (2,722,000)
----------- -----------
$(2,476,000) $(2,660,000)
=========== ===========
</TABLE>
No valuation allowance has been recognized for deferred tax assets.
F-51
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
The income tax provision differs from the provision computed at the
statutory rate as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED AUGUST 31,
JANUARY 31, ---------------
1998 1998 1997
----------- ------ ------
<S> <C> <C> <C>
Federal statutory tax rate.................... 34 34 34
Tax effect of state taxes..................... 9 9 9
Reduction for changes in enacted state tax
rates........................................ (3) (5) --
Cash surrender value of life insurance........ (2) -- --
Certain adjustments for prior estimates....... (4) (1) --
--- ------ ------
Provision as reported....................... 34% 37% 43%
=== ====== ======
</TABLE>
8. PROFIT-SHARING PLAN
The Company participates in a profit sharing plan with its affiliates which
provides for a discretionary contribution to a trust fund based on the
Company's net income for the year, to be allocated to all eligible employees
based on their proportional compensation. Nonunion employees are eligible for
participation in the plan after the completion of one year of service,
provided they have also reached age 21. After becoming eligible, employees
vest at an annual rate of 20%. Discretionary contributions under the plan were
$150,000 for the year ended January 31, 1998. There were no discretionary
contributions for the six months ended August 31, 1998 and 1997, respectively.
The plan also provides for a salary deferral plan pursuant to Section 401(k)
of the Internal Revenue Code, as amended. The plan requires the Company to
contribute 25% of employee's contributions not to exceed 6% of their annual
compensation up to $160,000. Participants vest in the Company's contribution
at the rate of 20% annually after becoming eligible. Matching contributions
under the plan by the Company were $27,000 for the year ended January 31, 1998
and $20,000 and $13,000 for the seven months ended August 31, 1998 and 1997,
respectively.
9. COMMITMENTS
The Company has a formal employment agreement with an officer of the Company
which extends through February 1999. The agreement provides for a minimum
annual salary and a bonus based upon the Company's performance.
The Company owns land and buildings which it rents to a third party in the
form of an operating lease. Future minimum rental income from this
noncancelable operating lease as of January 31, 1998 amounted to approximately
$58,000 which is expected to be received as follows: 1999, $30,000; 2000,
$28,000.
F-52
<PAGE>
MCCLINCH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
The Company leases a building from an affiliated company under the terms of
a lease expiring on July 31, 1999. The Company guarantees the debt of the
affiliated company which was $1,681,000 and $1,627,000 at January 31, 1998 and
August 31, 1998, respectively. Additionally, the Company has commitments under
an operating lease, expiring in 2002, with Fleet Capital Corporation for an
aircraft (See Note 1). The lease provides the Company with certain end of term
rights and early purchase options. The following is a schedule of all future
minimum lease payments, as of August 31, 1998:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1999............................................................ $135,000
2000............................................................ 135,000
--------
$270,000
========
</TABLE>
Total rent expense was $329,000, $192,000 and $192,000 for the year ended
January 31, 1998 and the seven months ended August 31, 1998 and 1997,
respectively.
10. SUBSEQUENT EVENT
On September 1, 1998, United Rentals, Inc. acquired all of the outstanding
shares of common stock of the Company.
F-53
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Industrial Lift, Inc.
Vincentown, New Jersey
We have audited the accompanying balance sheets of Industrial Lift, Inc. (a
New Jersey State Corporation) as of December 31, 1996 and 1997, and the
related statements of income, retained earnings 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 audit.
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
statements 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 Industrial Lift, Inc. as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Schalleur & Surgent, LLC
Devon, Pennsylvania
February 26, 1998, except for
Note J which is as of
September 15, 1998
F-54
<PAGE>
INDUSTRIAL LIFT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MAY 12,
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash............................... $ 186,093 $ 533,499 $ 297,689
Accounts receivable--trade......... 1,853,061 2,485,668 1,823,681
Investment in sales--type leases
(Note D).......................... 390,009 274,181 336,827
Inventory (Note C)................. 1,468,070 2,501,870 2,854,061
Prepaid expenses................... 45,361 39,289 35,712
------------ ------------ ------------
Total current assets........... 3,942,594 5,834,507 5,337,980
------------ ------------ ------------
Property, plant and equipment: (Note
A)
Rental equipment................... 17,660,046 18,533,702 18,118,513
Land............................... 40,393 40,393 40,393
Building........................... 650,000 650,000 650,000
Machinery and equipment............ 739,126 748,735 666,316
------------ ------------ ------------
19,089,565 19,972,830 19,475,222
Less: accumulated depreciation..... (11,049,573) (11,879,828) (11,828,604)
------------ ------------ ------------
Net property, plant and
equipment....................... 8,039,992 8,093,002 7,646,618
------------ ------------ ------------
Other assets:
Security deposits.................. 4,443 8,412 8,412
Investment in sales--type leases
(Note D).......................... 1,823,833 1,282,955 1,529,343
Notes receivable--officers (Note
G)................................ 455,068 438,319 573,319
------------ ------------ ------------
Total other assets............. 2,283,344 1,729,686 2,111,074
------------ ------------ ------------
Total assets................... $ 14,265,930 $ 15,657,195 $ 15,095,672
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
(Note E).......................... $ 3,620,426 $ 5,398,778 $ 3,459,388
Accounts payable................... 590,032 352,571 155,957
Accrued expenses (Note G).......... 136,181 182,362 77,581
Deposits and credits............... 74,500 335,441 196,490
------------ ------------ ------------
Total current liabilities........ 4,421,139 6,269,152 3,889,416
Long-term liabilities:
Long-term debt, net of current por-
tion (Note E)..................... 8,405,283 7,271,718 9,518,587
------------ ------------ ------------
Total liabilities................ 12,826,422 13,540,870 13,408,003
------------ ------------ ------------
Stockholders' equity:
Capital stock, no par value, 1,000
shares authorized, 200 shares
issued and outstanding............ 220,000 220,000 220,000
Retained earnings.................. 1,219,508 1,896,325 1,467,669
------------ ------------ ------------
Total stockholders' equity....... 1,439,508 2,116,325 1,687,669
------------ ------------ ------------
Total liabilities & equity....... $ 14,265,930 $ 15,657,195 $ 15,095,672
============ ============ ============
</TABLE>
See accountant's audit report and notes to the financial statements.
F-55
<PAGE>
INDUSTRIAL LIFT, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, MAY 12, 1998
----------------------- ----------------------
<S> <C> <C> <C> <C>
1996 1997 1997 1998
----------- ----------- ---------- ----------
(UNAUDITED)
Income
Sales, rentals, services, and
interest on leases.......... $15,873,782 $21,502,996 $8,221,446 $7,754,774
Cost of sales
Beginning inventory.......... 1,341,337 1,468,070 1,468,070 2,501,870
Purchases.................... 5,527,726 11,027,711 2,932,170 3,842,272
Direct labor................. 826,677 710,655 470,211 545,665
Cost of used equipment
sales....................... 471,293 900,367 374,284 329,470
Other costs.................. 4,016,301 4,005,126 2,601,818 1,543,505
----------- ----------- ---------- ----------
Total goods available for
sale...................... 12,183,334 18,111,929 7,846,553 8,762,782
Less: ending inventory..... 1,468,070 2,501,870 1,724,926 2,854,061
----------- ----------- ---------- ----------
Total cost of sales........ 10,715,264 15,610,059 6,121,627 5,908,721
----------- ----------- ---------- ----------
Gross profit................... 5,158,518 5,892,937 2,099,819 1,846,053
Operating expenses............. 5,146,620 5,264,130 1,903,993 2,314,803
----------- ----------- ---------- ----------
Net income from operations..... 11,898 628,807 195,826 (468,750)
----------- ----------- ---------- ----------
Other income
Gain on disposal of non-
rental assets............... 24,228 14,861 8,807 24,482
Miscellaneous income......... 707 1,219 (2,814) 1,809
Interest income.............. 18,909 31,930 304 13,803
----------- ----------- ---------- ----------
Total other income......... 43,844 48,010 6,297 40,094
----------- ----------- ---------- ----------
Net income .................... 55,742 676,817 202,123 (428,656)
Retained earnings--beginning... 1,163,766 1,219,508 1,219,508 1,896,325
----------- ----------- ---------- ----------
Retained earnings--ending...... $ 1,219,508 $ 1,896,325 $1,421,631 $1,467,669
=========== =========== ========== ==========
</TABLE>
See accountant's audit report and notes to the financial statements.
F-56
<PAGE>
INDUSTRIAL LIFT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD ENDED
DECEMBER 31, MAY 12,
---------------------- ---------------------
1996 1997 1997 1998
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................... $ 55,742 $ 676,817 $ 202,123 $ (428,656)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................. 1,717,389 1,639,844 616,669 655,600
Gain on sale of assets....... (436,420) (477,760) (198,633) (171,595)
(Increase)/decrease in:
Accounts receivable--trade... 136,810 (632,607) (414,358) 661,987
Inventory.................... (126,733) (1,033,800) (256,856) (352,191)
Prepaid expenses............. 4,682 6,072 3,577
Security deposits............ -- (3,969) (4,014) --
Increase/(decrease) in:
Accounts payable............. (94,283) (237,461) (329,106) (196,614)
Accrued expenses............. 22,068 46,181 19,864 (104,781)
Deposits and credits......... 74,500 260,941 (60,376) (138,952)
---------- ---------- --------- ----------
Net cash provided/(used)
operating activities.......... 1,353,755 244,258 (424,687) (71,625)
---------- ---------- --------- ----------
Cash flows from investing
activities:
Capital expenditures--
property, plant and
equipment................... (2,066,163) (2,153,839) (897,450) (346,778)
Proceeds on sale of
equipment................... 1,076,908 1,465,872 247,485 367,519
Investment in sales--type
leases...................... (966,008) (185,545) (91,209) (458,764)
Proceeds received on lease
payments.................... 352,191 315,124 103,956 101,359
---------- ---------- --------- ----------
Net cash provided/(used) by
investing activities.......... (1,603,072) (558,388) (637,218) (336,664)
---------- ---------- --------- ----------
Cash flows from financing
activities:
Net borrowing/(repayments) on
note payable................ 258,175 644,787 975,812 307,479
(Advances)/repayments on note
receivable--officers........ (2,156) 16,749 (100,000) (135,000)
---------- ---------- --------- ----------
Net cash provided/(used) by
financing activities.......... 256,019 661,536 875,812 172,479
---------- ---------- --------- ----------
Net inc/(decrease) in cash and
cash equivalents.............. 6,702 347,406 (186,093) (235,810)
Cash--Beginning of the year.... 179,391 186,093 186,093 533,499
---------- ---------- --------- ----------
Cash--End of the year.......... $ 186,093 $ 533,499 $ 0 $ 297,689
========== ========== ========= ==========
Supplementary disclosure of
cash flow information:
Interest paid................ $1,097,114 $1,179,133 $ 334,261 $ 493,040
========== ========== ========= ==========
</TABLE>
See accountant's audit report and notes to the financial statements
F-57
<PAGE>
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Industrial Lift, Inc. (the Company) is engaged in selling, rental and
leasing of commercial lift equipment. The Company's headquarters are located
in Vincentown, New Jersey and also has plant locations in Odenton, Maryland,
Newport News, Virginia, and Ashland, Virginia.
INTERIM FINANCIAL STATEMENTS
The accompanying balance sheet as of May 12, 1998 and the statements of
income and retained earnings and cash flows for the period ended May 12, 1997
and 1998 are unaudited and have been prepared on the same basis as the audited
financial statements included herein. In the opinion of management, such
unaudited 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.
METHOD OF ACCOUNTING
The Company maintains its books and records, and files its tax returns on
the accrual basis of accounting. The financial statements have been prepared
on that basis, in which revenue and gains are recognized when earned and
expenses and losses are recognized when incurred.
Preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
INCOME TAXES
The Company, with the consent of its shareholders, elected to be taxed under
the provisions of Subchapter S of the Internal Revenue Code, which provides
that, in lieu of corporation income taxes, the stockholders are taxed on the
Company's taxable income. Therefore, no provision or liability for income
taxes is reflected in these financial statements.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements and
betterments that materially extend the life of the asset are capitalized.
Expenditures for maintenance and repairs that do not add materially to
productive capacity or extend the life of an asset are expensed as incurred.
The Company computes depreciation for financial reporting purposes using the
straight line method over the estimated useful lives of the related assets.
Both the straight-line and accelerated methods are utilized for tax purposes.
When non-rental assets are retired, sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the accounts, and any
gain or loss thereon is reflected in the current year as other income.
F-58
<PAGE>
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
NOTE B--CONCENTRATION OF CREDIT RISK
The Company has concentrated its credit risk for cash by maintaining
deposits in banks located within the same geographic region. The maximum loss
that would have resulted from that risk totaled $196,567 and $301,682 at
December 31, 1996 and 1997, respectively, and $197,688 as of May 12, 1998 for
the excess of the deposit liabilities reported by the banks over the amounts
that would have been covered by federal insurance.
The Company provides sales on credit to substantially all of their
customers, the majority of which are construction companies. As of December
31, 1996 and 1997, outstanding credit to customers is $1,853,061 and
$2,485,668, respectively, and $1,823,681 as of May 12, 1998.
NOTE C--INVENTORIES
Inventories, which are stated at the lower of cost (first in/first out) or
market, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MAY 12,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
New equipment............................ $ 850,650 $1,892,561 $2,296,124
Used equipment........................... 6,590 22,632 16,841
Parts, accessories and labor............. 610,830 586,677 541,096
---------- ---------- ----------
Total.................................. $1,468,070 $2,501,870 $2,854,061
========== ========== ==========
</TABLE>
NOTE D--INVESTMENT IN LEASES
The Company leasing operations consist of leasing commercial lift equipment
under short term and long term rental agreements. Certain of these long term
leases fall under the classification as sales-type leases, whereby the lease
gives rise to a dealers profit at the inception of the lease. The Company's
net investment in sales-type leases consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MAY 12,
1996 1997 1998
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Minimum lease payment receivable..... $1,576,242 $1,034,885 $1,183,128
Estimated residual value of leased
property............................ 637,600 522,251 673,052
---------- ---------- ----------
2,213,842 1,557,136 1,856,180
Less current portion................. (390,009) (274,181) (326,837)
---------- ---------- ----------
$1,823,833 $1,282,955 $1,529,343
========== ========== ==========
</TABLE>
Future annual minimum lease payments receivable on these leases are:
<TABLE>
<S> <C>
1998.............................................................. $274,181
1999.............................................................. 235,026
2000.............................................................. 193,609
2001.............................................................. 152,611
2002.............................................................. 87,532
</TABLE>
F-59
<PAGE>
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
The Company retains title to the leased equipment. The lessees pay taxes,
licenses and insurance costs on the equipment.
SHORT-TERM RENTALS
The value of future minimum rental payments under operating lease agreements
is not determinable. The Company does not maintain the accounting to summarize
this information due to the short term nature of the leases and the high
volume of which leases are entered.
NOTE E--NOTES PAYABLE
The Company has entered into various security agreements whereby they
finance the equipment they purchased for leasing, rental and resale. The
maturity dates vary according to the purchase date of the equipment and range
between three to eight years. Equipment financing agreements consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MAY 12,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
1. Security agreement with Gehl
Company, payable in monthly
installments of interest only
payments, interest rate averaging
between 8.0% to 10.0%, secured by
inventory and accounts receivable... $ 451,355 $ 968,098 $ 989,196
2. Security agreement with Associates
Commercial Corporation, payable in
monthly installments, floating
interest rate averaging between 7.5%
to 9.5%, secured by inventory,
accounts receivable and rights to
equipment financed.................. 10,622,836 10,006,648 9,600,997
3. Security agreement with CitiCorp,
payable in monthly installments,
interest averaging between 8.0% to
10.0%, secured by new and used
inventory and rights to equipment
financed............................ 153,428 -- --
4. Mortgage payable to Associates
Commercial Corporation payable in
monthly installments of $9,544,
interest at 10%, secured by property
and plant. Effective April 1, 1998
the payment will be $8,870 as a
result of a change in the interest
rate to 8.4%........................ 798,089 761,728 748,475
5. Security agreement with Grove North
America is payable within 360 days
of original invoice date. Interest
is calculated by Grove North America
when the invoice is issued based on
360 day repayment terms. Interest is
calculated at 8.25%, secured by
inventory........................... -- 934,022 1,639,307
----------- ----------- -----------
12,025,708 12,670,496 12,977,975
Less: Current Portion................ 3,620,426 5,398,776
3,459,388
----------- ----------- -----------
$ 8,405,282 $ 7,271,720 $ 9,518,587
=========== =========== ===========
</TABLE>
F-60
<PAGE>
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
Long-Term Maturities at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1999.................................. $ 2,311,740
2000.................................. 2,282,507
2001.................................. 1,832,837
2002.................................. 308,428
Thereafter............................ 536,208
-----------
$ 7,271,720
===========
</TABLE>
NOTE F--PROFIT SHARING CONTRIBUTION PAYABLE
The Company has a profit sharing plan that provides coverage for all
eligible employees who have been employed by the Company for at least six
months at the end of the year. Each participant receives a proportionate share
of the contribution based on his or her compensation to total compensation.
The amount of the employer contributions is determined by the board of
directors during the course of the year. Profit sharing contributions for the
years ended December 31, 1996 and 1997 was $30,000 and $35,000, respectively,
and $13,416 and $15,133 for the period ended May 12, 1997 and 1998,
respectively.
NOTE G--RELATED PARTY TRANSACTIONS
Included in other assets as of December 31, 1996 and 1997 and May 12, 1998
is $455,068, $438,319 and $573,319 in loans to shareholders including $34,694,
$17,946 and $18,710 of accrued interest respectively. The notes have no
repayment terms and are accruing interest at 4%. Repayment of $34,694 was made
on the loans in 1997.
NOTE H--OPERATING LEASES
The Company, as lessee, leases certain equipment and plant facilities under
operating lease agreements.
The Company entered into a three year lease agreement in April, 1997 for its
facilities located in Odenton, Maryland. This lease calls for monthly rental
payments of $4,213 and $4,424 over the next two consecutive years of the
lease.
The Company also rents its facilities located in Newport News, Virginia. The
two year lease agreement was entered into in August, 1996. Monthly payments
for the next year lease is $3,800 per month.
The Company has a lease agreement for their Ashland, Virginia facility which
began in June, 1997. The monthly lease payments for the 1998-1999 lease year
are $1,200 per month.
Certain commercial lift equipment rented to customers under the company's
leasing operations are leased under the following operating lease agreements:
. Eighty-four month lease beginning in December, 1997--First two payments
at $3,235 per month--Eighty-two payments at $9,185 per month
. Seventy-two month lease beginning in December, 1997--First two payments
at $18,858 per month--Seventy payments at $28,578 per month
. Seventy-two month lease beginning in November, 1997--First two payments
at $5,703 per month--Seventy payments at $18,598 per month
F-61
<PAGE>
INDUSTRIAL LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1997
(THE INFORMATION AS OF MAY 12, 1998 AND
FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED)
The company has a lease agreement for their telephone and computer system
which began in December, 1997. The agreement is for sixty months at $4,667 per
month.
Rent expense associated with the above leases was approximately $438,548 for
the year ending December 31, 1997.
Future rental payments under these operating leases at December 31, 1997 is
as follows:
<TABLE>
<S> <C>
1998................................... $1,094,000
1999................................... 1,002,460
2000................................... 857,531
2001................................... 805,448
2002................................... 795,580
Thereafter............................. 751,182
----------
$5,306,201
==========
</TABLE>
NOTE I--LITIGATION
In 1996 the Company settled a claim with the State of New Jersey and was
assessed $1,700 in sales tax, which it paid.
During 1995 the Company had been in a personal injury claim based upon
theories of negligence, product liability, and willful and wanton disregard.
This claim was settled in 1996 at no cost to the Company.
NOTE J--SUBSEQUENT EVENT
On May 12 , 1998, United Rentals, Inc. purchased all of Industrial Lift,
Inc.'s issued and outstanding common stock.
F-62
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Able Equipment Rental, Inc.
We have audited the combined balance sheet of Able Equipment Rental, Inc.
(See Note 1) (the "Companies") as of December 31, 1997 and the related
combined statements of income, stockholders' equity and partners' capital and
cash flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Able
Equipment Rental, Inc. at December 31, 1997 and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 15, 1998
F-63
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER FEBRUARY
31, 1997 28, 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash.................................................. $ 489,330 $ 273,090
Accounts receivable, net of allowance for doubtful
accounts of $166,000 and $181,000 in 1997 and 1998,
respectively......................................... 2,725,794 2,670,554
Unbilled receivables.................................. 359,000 395,000
Inventory............................................. 583,013 413,617
Rental equipment, net................................. 9,413,628 9,518,678
Property and equipment, net........................... 696,070 1,008,900
Prepaid expenses and other assets..................... 145,742 116,589
----------- -----------
Total assets...................................... $14,412,577 $14,396,428
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL
Liabilities:
Accounts payable, accrued expenses and other
liabilities........................................ $ 989,038 $ 784,412
Debt................................................ 8,120,710 8,395,970
Stockholder loan.................................... 364,600 364,600
Deferred rent....................................... 18,247 18,247
Deferred tax liability.............................. 86,348 113,735
----------- -----------
Total liabilities................................. 9,578,943 9,676,964
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholders' equity:
Common stock........................................ 17,000 17,000
Additional paid-in capital.......................... 102,978 102,978
Retained earnings................................... 4,278,962 4,151,355
----------- -----------
4,398,940 4,271,333
Partners' capital.................................... 434,694 448,131
----------- -----------
Total stockholders' equity and partners' capital.. 4,833,634 4,719,464
----------- -----------
Total liabilities and stockholders' equity and
partners' capital.................................... $14,412,577 $14,396,428
=========== ===========
</TABLE>
See accompanying notes.
F-64
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
TWO MONTHS TWO MONTHS
YEAR ENDED ENDED ENDED
DECEMBER FEBRUARY 28, FEBRUARY
31, 1997 1997 28, 1998
----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals........................ $17,081,826 $1,631,226 $2,633,136
Sales of rental equipment................ 365,670 -- --
Sales of parts, supplies and new
equipment............................... 1,847,708 503,961 757,212
----------- ---------- ----------
Total revenues............................. 19,295,204 2,135,187 3,390,348
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation........... 6,944,226 1,005,933 1,306,857
Depreciation, equipment rentals.......... 1,667,366 201,010 302,678
Cost of rental equipment sales........... 293,238 -- --
Cost of parts, supplies and new equipment
sales................................... 1,518,807 239,576 272,657
----------- ---------- ----------
Total cost of revenues..................... 10,423,637 1,446,519 1,882,192
----------- ---------- ----------
Gross profit............................... 8,871,567 688,668 1,508,156
Selling, general and administrative
expenses.................................. 6,438,632 627,098 1,241,182
Non-rental depreciation.................... 172,489 14,440 27,130
----------- ---------- ----------
Operating income........................... 2,260,446 47,130 239,844
Interest expense........................... 591,701 42,099 113,995
----------- ---------- ----------
Income before provision for income taxes... 1,668,745 5,031 125,849
Provision for income taxes................. 61,235 19,436 36,269
----------- ---------- ----------
Net income (loss).......................... $ 1,607,510 $ (14,405) $ 89,580
=========== ========== ==========
</TABLE>
See accompanying notes.
F-65
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------- PAID-IN RETAINED PARTNERS'
SHARES AMOUNT CAPITAL EARNINGS CAPITAL
------ ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997... 1,700 $17,000 $102,978 $3,290,014 $ 483,975
Capital contributions...... -- 6,000
Stockholders and capital
distributions............. (322,246) (351,597)
Net income................. 1,311,194 296,316
----- ------- -------- ---------- ---------
Balance at December 31,
1997........................ 1,700 $17,000 $102,978 $4,278,962 $ 434,694
Stockholders distributions
(unaudited)............... (203,750) --
Net income (unaudited)..... 76,143 13,437
----- ------- -------- ---------- ---------
Balance at February 28, 1998
(unaudited)................. 1,700 $17,000 $102,978 $4,151,355 $ 448,131
===== ======= ======== ========== =========
</TABLE>
See accompanying notes.
F-66
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWO MONTHS ENDED
YEAR ENDED FEBRUARY 28,
DECEMBER 31, --------------------
1997 1997 1998
------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................... $ 1,607,510 $ (14,405) $ 89,580
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation............................ 1,839,855 215,450 329,808
Gain on sale of property and equipment.. (72,432) (6,556) (559)
Deferred tax liability.................. 26,340 19,436 27,387
Changes in assets and liabilities:
(Increase) Decrease in accounts
receivable........................... (956,085) 57,264 55,240
Increase in unbilled receivables...... (142,000) (23,000) (36,000)
Increase (Decrease) in inventory...... (346,085) 102,170 169,396
Decrease (Increase) in prepaid
expenses and other assets............ 5,467 (62,149) 29,153
Increase (Decrease) in accounts
payable, accrued expenses and other
liabilities.......................... 724,666 (29,375) (204,627)
Increase in deferred rent............. 18,247 -- --
----------- --------- ---------
Cash provided by operating
activities......................... 2,705,483 258,835 459,378
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.............. (5,395,221) (399,294) (407,728)
Proceeds from sale of rental equipment.... 365,670 22,249 613
Purchases of property and equipment....... (468,927) (54,417) (340,014)
----------- --------- ---------
Cash used in investing activities... (5,498,478) (431,462) (747,129)
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions..................... 6,000 -- --
Stockholders and capital distributions.... (673,843) -- (203,750)
Principal payments on debt................ (2,495,519) (343,900) (311,207)
Borrowings under credit facility.......... 6,116,144 346,667 586,468
----------- --------- ---------
Cash provided by financing
activities......................... 2,952,782 2,767 71,511
----------- --------- ---------
Increase (Decrease) in cash............... 159,787 (169,860) (216,240)
Cash balance at beginning of period....... 329,543 329,543 489,330
----------- --------- ---------
Cash balance at end of period....... $ 489,330 $ 159,683 $ 273,090
=========== ========= =========
</TABLE>
See accompanying notes.
F-67
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE TWO MONTHS ENDED FEBRUARY
28, 1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Able Equipment Rental, Inc. include the
accounts of the following entities: Rental Equipment, Inc.; Butler & Son,
Inc.; Butler & Derbyshire, Inc.; Butler & O'Connor; Butler & Butler; Butler,
Rollins & Butler; Butler, Schlerf & Butler; Butler, Westbrook & Butler;
Butler, Binder & Butler; Butler, Cook & Butler; Butler, Henkle & Butler;
Butler, McKenney & Butler; Butler, Breitenstein & Butler; Butler, Escalante &
Butler; and Butler, Paeper & Butler (collectively the "Companies"). The
Companies are affiliated through common ownership. All significant
intercompany accounts and transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
10.
Business Activity
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies have six locations and their principal
market area is Southern California. The nature of the Companies' business is
such that short-term obligations are typically met by cash flow generated from
long-term assets. Consequently, consistent with industry practice, the balance
sheet is presented on an unclassified basis.
On March 29, 1997 Rental Equipment, Inc. acquired for $1,500,000 a
substantial amount of rental equipment and fixed assets from Sam's-U-Rent,
Inc. and assumed all operations. The Company utilized the funds available
under its line of credit to finance the purchase. The acquisition has been
accounted for as a purchase and, accordingly, at such date the Company
recorded the assets acquired at their estimated fair values.
Interim Financial Statements
The accompanying combined balance sheet at February 28, 1998 and the
combined statements of income, stockholders' equity and partners' capital and
cash flows for the two-month periods ended February 28, 1997 and 1998 are
unaudited and have been prepared on the same basis as the audited combined
financial statements included herein. In the opinion of management, such
unaudited combined 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.
Inventory
Inventory consists primarily of general replacement parts, fuel and
equipment held for resale and are stated at the lower of cost, determined
under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated seven-year useful
life with no salvage value.
F-68
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
rental equipment and cost of sales of rental equipment, respectively, in the
combined statement of income.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated useful
life of seven years. Leasehold improvements are amortized using the straight-
line method over the estimated lives of the leasehold improvement or the
remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $144,000, $17,000 and $24,000 in
the year ended December 31, 1997 and in the two months ended February 28, 1997
and 1998, respectively.
Income Taxes
Rental Equipment, Inc. and Butler & Son, Inc. have elected, by unanimous
consent of their shareholders, to be taxed under the provisions of Subchapter
S of the Internal Revenue Code for both federal and state purposes. Under
those provisions, the Companies do not pay federal or state income taxes;
instead, the shareholders are liable for individual income taxes on their
profits.
Butler & Derbyshire, Inc., a C Corporation for federal tax purposes, applied
an asset and liability approach to accounting for income taxes. Deferred
income tax assets and liabilities arise from differences between the tax basis
of an asset or liability and its reported amount in the combined financial
statements. Deferred tax balances are determined by using tax rates to be in
effect when the taxes will actually be paid or refunds received.
All the other entities included in these combined financial statements are
partnerships. No provision has been made in the accompanying financial
statements for any federal, state, or local income taxes since they are the
liability of the individual partners.
Accounting Estimates
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.
F-69
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Rental equipment................................... $16,709,153 $17,116,881
Less accumulated depreciation...................... 7,295,525 7,598,203
----------- -----------
Rental equipment, net.............................. $ 9,413,628 $ 9,518,678
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Transportation equipment........................... $ 901,400 $1,228,870
Furniture and fixtures............................. 321,638 330,289
Leasehold improvements............................. 259,854 259,854
---------- ----------
1,482,892 1,819,013
Less accumulated depreciation...................... 786,822 810,113
---------- ----------
Total............................................ $ 696,070 $1,008,900
========== ==========
</TABLE>
5. DEBT AND STOCKHOLDER LOAN
Debt and stockholder loan consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Sanwa Bank--Various lines of credit with combined
monthly payments of $122,452 and $163,958, in
1997 and 1998 respectively including interest
from 8.1% to 9.5%............................... $8,120,710 $8,395,970
Stockholder Loan--No set principal payments. Loan
is due on December 13, 1999. The loan accrues
interest at a rate of 10% per year. ............ 364,600 364,600
---------- ----------
$8,485,310 $8,760,570
========== ==========
</TABLE>
Substantially all rental equipment collateralized the above bank notes. All
debt was paid off in connection with the acquisition discussed in Note 10.
F-70
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED
YEAR ENDED FEBRUARY 28,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal....................................... $20,009 $ -- $ 7,023
State......................................... 14,886 -- 1,859
------- ------- -------
34,895 -- 8,882
Deferred:
Federal....................................... -- --
State......................................... 26,340 19,436 27,387
------- ------- -------
26,340 19,436 27,387
------- ------- -------
$61,235 $19,436 $36,269
======= ======= =======
</TABLE>
Significant components of the Companies deferred tax liability are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, FEBRUARY 28,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Difference in basis of accounting................. $34,375 $ 54,566
Cumulative tax depreciation in excess of book..... 51,973 59,169
------- --------
Deferred tax liability............................ $86,348 $113,735
======= ========
</TABLE>
7. OPERATING LEASES
The Companies lease six store locations on long-term leases. The Companies
are responsible for all operating expenses of the facilities including
property taxes, assessments, insurance, repairs and maintenance. These leases
have various terms and extend through May 2007 and include scheduled base rent
increases over the term of the leases. The total amount of the base rent
payments is being charged to expense on the straight-line method over the
terms of the leases. The Companies recorded a liability for deferred rent to
reflect the excess of rent expense over cash payments which is included in the
accompanying combined balance sheet.
Total rent expense for the year ended December 31, 1997 and for the two
months ended February 28, 1997 and 1998 was approximately $846,000, $66,000
and $182,000, respectively.
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year, are as follows:
<TABLE>
<S> <C>
1998......................................................... $ 918,000
1999......................................................... 851,000
2000......................................................... 810,000
2001......................................................... 810,000
2002......................................................... 810,000
Thereafter................................................... 3,230,000
----------
Total...................................................... $7,429,000
==========
</TABLE>
F-71
<PAGE>
ABLE EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMON STOCK
The common stock of the Companies at December 31, 1997 and February 28, 1998
(unaudited) is summarized as follows:
<TABLE>
<CAPTION>
SHARES
----------------------
ISSUED AND
PAR VALUE AUTHORIZED OUTSTANDING AMOUNT
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Rental Equipment, Inc. ............ $10 7,500 500 $ 5,000
Butler & Son, Inc. ................ no par 5,000 200 2,000
Butler & Derbyshire, Inc........... no par 5,000 1,000 10,000
----- -------
1,700 $17,000
===== =======
</TABLE>
9. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and for the two months ended February
28, 1997 and 1998, total interest paid was $554,701, $48,666 and $114,822,
respectively.
For the year ended December 31, 1997 and for the two months ended February
28, 1997 and 1998, total income taxes paid was $9,000, $0 and $0, respectively
10. SUBSEQUENT EVENT
On March 23, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of Rental Equipment
Inc., Butler & Son, Inc. and Butler & Derbyshire, Inc. as well as the net
assets of the partnerships included herein.
F-72
<PAGE>
INDEPENDENT AUDITORS' REPORT ON COMBINED FINANCIAL STATEMENTS
Board of Directors Grand Valley Equipment Co., Inc. and Kubota of Grand
Rapids, Inc.
We have audited the accompanying combined balance sheet of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997
and the related combined statements of income and retained earnings and cash
flows for the year 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 audit.
We conducted our audit 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 combined 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 audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997
and the results of operations and cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ Beene Garter LLP
July 23, 1998
Grand Rapids, Michigan
F-73
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash................................................ $ 440,146 $1,304,088
Accounts receivable................................. 911,325 1,402,058
Refundable income taxes............................. 63,287 --
Inventories......................................... 1,296,093 2,231,832
---------- ----------
TOTAL CURRENT ASSETS.................................. 2,710,851 4,937,978
Rental Equipment, net................................. 4,724,733 3,438,583
Property, Plant and Equipment, net.................... 238,388 237,995
---------- ----------
$7,673,972 $8,614,556
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank overdraft...................................... $ 311,917 $ --
Notes payable....................................... 2,070,106 1,526,658
Accounts payable.................................... 289,310 275,169
Accrued expenses
Federal income tax................................ -- 637,560
Other............................................. 215,915 142,869
Customer deposits................................... 154,472 6,769
Deferred income taxes............................... 150,000 150,000
---------- ----------
TOTAL CURRENT LIABILITIES............................. 3,191,720 2,739,025
Stockholders' Equity
Common stock, no par value; authorized 50,000
shares; issued and outstanding 6,000............... 6,000 6,000
Common stock, $1 par value; authorized 50,000
shares; issued and outstanding 21,750.............. 21,750 21,750
Retained earnings................................... 4,454,502 5,847,781
---------- ----------
4,482,252 5,875,531
---------- ----------
$7,673,972 $8,614,556
========== ==========
</TABLE>
See accompanying notes
F-74
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FIVE MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MAY 31, MAY 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues
Equipment rentals....................... $3,082,730 $1,255,473 $1,123,104
Sales of new, used and rental equipment,
parts and other........................ 15,188,885 6,921,749 6,007,118
---------- ---------- ----------
18,271,615 8,177,222 7,130,222
Cost of Sales
Rental equipment depreciation........... 1,697,339 748,000 635,000
Cost of sales........................... 11,509,080 4,393,854 4,783,983
---------- ---------- ----------
13,206,419 5,141,854 5,418,983
---------- ---------- ----------
GROSS PROFIT.............................. 5,065,196 3,035,368 1,711,239
Selling, General and Administrative
Expenses................................. 3,420,352 902,584 1,139,258
Non-rental Depreciation and Amortization.. 102,359 35,350 38,250
---------- ---------- ----------
Operating Income.......................... 1,542,485 2,097,434 533,731
---------- ---------- ----------
Other Income (Expense)
Interest income......................... 45,631 33,621 5,503
Gain on sale of non-rental equipment.... 38,471 -- --
Other income............................ 75,857 22,028 34,293
Interest expense........................ (111,927) (32,804) (51,729)
---------- ---------- ----------
48,032 22,845 (11,933)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................ 1,590,517 2,120,279 521,798
Provision for Income Taxes................ 544,138 727,000 187,000
---------- ---------- ----------
NET INCOME................................ 1,046,379 1,393,279 334,798
Beginning Retained Earnings............... 3,408,123 4,454,502 3,408,123
---------- ---------- ----------
ENDING RETAINED EARNINGS.................. $4,454,502 $5,847,781 $3,742,921
========== ========== ==========
</TABLE>
See accompanying notes
F-75
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FIVE MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, MAY 31, MAY 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income............................. $ 1,046,379 $1,393,279 $ 334,798
Adjustments to reconcile net income to
net cash provided by operating
activities............................
Depreciation and amortization........ 1,799,698 783,350 673,250
Gain sale of non-rental equipment.... (38,741) -- --
Gain on sale of rental equipment..... (604,752) (912,841) (209,378)
Deferred income taxes................ 185,000 -- --
Changes in assets and liabilities
Accounts receivable................ (187,919) (427,446) (540,038)
Inventories........................ 313,739 (935,739) (315,768)
Accounts payable, accrued expenses
and other liabilities............. (575,471) 402,670 22,895
----------- ---------- -----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES.............................. 1,937,933 303,273 (34,241)
Cash Flows from Investing Activities
Purchase of rental equipment........... (9,056,754) (902,990) (1,948,032)
Purchase of non-rental equipment....... (73,591) (34,958) (56,649)
Proceeds from sale of rental
equipment............................. 7,205,622 2,353,982 2,239,869
Proceeds from sale of non-rental
equipment............................. 81,873 -- --
----------- ---------- -----------
NET CASH (USED) PROVIDED BY INVESTING
ACTIVITIES.............................. (1,842,850) 1,416,034 235,188
Cash Flows from Financing Activities
Bank overdraft......................... (156,626) (311,917) (468,543)
Change in notes payable................ 285,939 (543,448) 142,528
----------- ---------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES.............................. 129,313 (855,365) (326,015)
----------- ---------- -----------
INCREASE (DECREASE) IN CASH.............. 224,396 863,942 (125,068)
Cash Balance at Beginning of Period...... 215,750 440,146 215,750
----------- ---------- -----------
CASH BALANCE AT END OF PERIOD............ $ 440,146 $1,304,088 $ 90,682
=========== ========== ===========
Supplemental Cash Flow Information
Cash paid for interest................. $ 111,927 $ 32,804 $ 51,729
Cash paid for income taxes............. $ 415,280 $ 26,153 $ 103,820
</TABLE>
See accompanying notes
F-76
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION AS OF MAY 31, 1998 AND FOR THE THREE MONTHS
ENDED MAY 31, 1998 AND 1997 IS UNAUDITED)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
The combined financial statements include the accounts of Grand Valley
Equipment Co., Inc. and Kubota of Grand Rapids, Inc. (collectively the
"Company"). Grand Valley Equipment Co., Inc. ("GVE") and Kubota of Grand
Rapids, Inc. ("KGR") are combined due to common ownership and operations which
are complimentary. The financial statements of GVE as of October 31, 1997
(GVE's fiscal year end) are combined with the financial statements of KGR as
of December 31, 1997. The financial statements of GVE as of March 31, 1998 and
1997 are combined with the financial statements of KGR as of May 31, 1998 and
1997.
The Company rents and sells heavy and light machinery and equipment
primarily in the Western Michigan area. All significant intercompany accounts
and transactions have been eliminated on combination.
Interim Financial Statements
The accompanying combined balance sheets at May 31, 1998, and the combined
statements of income, and retained earnings and cash flows for the five month
periods ended May 31, 1998 and 1997 are unaudited and have been prepared on
the same basis as the audited combined financial statements included herein.
In the opinion of management, such unaudited combined 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.
Inventories
Inventories, which consist of heavy and light machinery and equipment, are
valued at the lower of cost or net realizable value.
Revenue Recognition
Revenue related to the sale of heavy and light machinery and equipment is
recognized at the point of sale. Revenue related to the rental of heavy and
light machinery is recognized at the time of return for rentals of one month
or less, and ratably over the contract term for rentals in excess of one
month.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using an accelerated method over an estimated five-year useful life
with no salvage value.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided on accelerated methods over the estimated useful lives
of the respective assets.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations. Ordinary maintenance and repair costs
are charged to operations as incurred.
F-77
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax assets and liabilities would be determined based on
the difference between the financial statement and tax basis of assets and
liabilities, primarily due to differences in the carrying value of rental
equipment, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2--CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with quality financial institutions and,
consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
NOTE 3--RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Rental equipment.................................. $ 7,694,776 $ 7,156,627
Less: Accumulated depreciation.................... (2,970,043) (3,718,044)
----------- -----------
Rental Equipment, net............................. $ 4,724,733 $ 3,438,583
=========== ===========
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land................................................ $ 5,000 $ 5,000
Buildings........................................... 60,957 60,957
Machinery and equipment............................. 270,759 270,759
Office furniture and equipment...................... 17,066 10,434
Vehicles............................................ 368,476 410,065
--------- ---------
722,258 757,215
Less: Accumulated depreciation...................... (483,870) (519,220)
--------- ---------
$ 238,388 $ 237,995
========= =========
</TABLE>
F-78
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
$2,500,000 line-of-credit, providing for interest
at prime rate (8.5% at December 31, 1997), due in
March, 1999, secured by the assets of the
Company.......................................... $1,605,000 $ 480,000
Amounts due under manufacturer floor plan
arrangement represent amounts on which principle
and interest are not yet due..................... 465,106 1,046,658
---------- ----------
$2,070,106 $1,526,658
========== ==========
</TABLE>
NOTE 6--LEASES
The Company leases operating facilities under operating leases from entities
under similar ownership. Rent expense under these leases totaled $184,000 for
the year ended December 31, 1997 and $30,000 and $77,000 for five months ended
May 31, 1998 and 1997, respectively. Under the lease agreements, aggregate
rent is payable in monthly installments of $6,000. The agreements provide for
an increase in annual rent based on the Consumer Price Index of the previous
five years. Future minimum rent commitments are $72,000 each for years ended
December 31, 1998 to December 31, 2004, to be adjusted based on the increase
in the Consumer Price Index. There is no formal lease agreement for the GVE
lease, they are leasing on a month to month basis.
NOTE 7--INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
MAY 31,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Currently payable....................... $359,138 $187,000 $727,000
Deferred................................ 185,000 -- --
-------- -------- --------
Federal income tax...................... $544,138 $187,000 $727,000
======== ======== ========
</TABLE>
The effective rate for income tax expense differs from the statutory rate of
34% when applied to income from continuing operations before income taxes due
to certain nondeductible expenses of the Company.
NOTE 8--RETIREMENT PLAN
The Company has adopted a profit-sharing plan and a 401(k) plan that covers
substantially all employees and provides for discretionary employer and
voluntary employee contributions.
KGR has established a defined contribution 401(k) retirement plan which
covers substantially all full-time employees. The employees may contribute up
to $9,500 annually. Company contributions are discretionary. Company
contributions to the plan were $20,102, $6,114 and $6,057 for the year ended
December 31, 1997 and for the five month periods ended May 31, 1998 and 1997,
respectively.
GVE has established a Profit-Sharing Plan under section 401 and 501 of the
Internal Revenue Code. Substantially all full-time employees are eligible for
the plan. Yearly employer contributions are discretionary.
F-79
<PAGE>
GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Employees may also elect to contribute to the plan. Company contributions to
the plan were $151,152 for the year ended December 31, 1997. Company
contributions to the plan were $63,000 and $62,500 for the five month periods
ended May 31, 1998 and 1997, respectively.
NOTE 9--CONTINGENCIES
The Company may occasionally be subject to certain liability claims
resulting from the normal course of business.
NOTE 10--SUBSEQUENT EVENT
On June 9, 1998, the Company entered into a stock purchase agreement with
United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
both GVE and KGR.
F-80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
McClinch Equipment Services, Inc:
We have audited the accompanying balance sheet of McClinch Equipment
Services, Inc. as of December 31, 1997, and the related statements of income
and retained earnings and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 McClinch Equipment
Services, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
March 6, 1998.
F-81
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
October 28, 1998
To the Stockholders of
McClinch Equipment Services, Inc.:
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of McClinch Equipment Services, Inc.
at August 31, 1998 in conformity with generally accepted accounting
principles. This financial statement is the responsibility of the Company's
management; our responsibility is to express an opinion on this financial
statement based on our audit. We conducted our audit of this statement in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statement, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
F-82
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1998
------------ -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................ $ 314,000 $ 1,160,000
Accounts receivable, less allowance for doubtful
accounts of $75,000................................. 3,611,000 3,388,000
State income taxes receivable........................ 1,000 11,000
Inventories.......................................... 354,000 499,000
Net investment in sales-type leases (Note 2)......... 49,000 114,000
Fixed assets, net (Note 3)........................... 18,631,000 24,031,000
Other assets......................................... 29,000 24,000
Due from related parties............................. 151,000 --
----------- -----------
Total assets....................................... $23,140,000 $29,227,000
=========== ===========
LIABILITIES:
Notes payable (Note 4)............................... $16,200,000 $20,600,000
Accounts payable and accrued expenses................ 1,237,000 940,000
Due to related parties............................... -- 248,000
Deferred state income taxes (Note 6)................. 500,000 389,000
----------- -----------
Total liabilities.................................. 17,937,000 22,177,000
----------- -----------
Commitments (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, no par value; authorized, 6,000 shares;
issued and outstanding, 100 shares.................. -- --
Additional paid-in capital........................... 10,000 10,000
Retained earnings.................................... 5,193,000 7,040,000
----------- -----------
Total stockholders' equity......................... 5,203,000 7,050,000
----------- -----------
Total liabilities and stockholders' equity......... $23,140,000 $29,227,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED AUGUST 31,
DECEMBER 31, ----------------------
1997 1998 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals and service........... $12,141,000 9,341,000 $7,205,000
Sales................................... 4,759,000 2,958,000 2,936,000
----------- ---------- ----------
16,900,000 12,299,000 10,141,000
----------- ---------- ----------
Cost of equipment rentals and service
(Note 5)................................. 6,520,000 5,080,000 3,954,000
Cost of sales............................. 3,642,000 2,267,000 2,280,000
----------- ---------- ----------
Gross profit.......................... 6,738,000 4,952,000 3,907,000
Selling expenses (Note 5)................. 1,540,000 1,006,000 921,000
General and administrative expenses (Note
5)....................................... 2,445,000 1,359,000 909,000
----------- ---------- ----------
2,753,000 2,587,000 2,077,000
Other income (expense):
Other income............................ 410,000 52,000 300,000
Interest income......................... 56,000 16,000 32,000
Interest expense........................ (1,167,000) (913,000) (722,000)
----------- ---------- ----------
Income before provision for state in-
come taxes........................... 2,052,000 1,742,000 1,687,000
Provision (benefit) for state income
taxes:
Current................................. 7,000 6,000 5,000
Deferred................................ 100,000 (111,000) 95,000
----------- ---------- ----------
Net income............................ 1,945,000 1,847,000 1,587,000
Retained earnings, beginning of period.... 3,248,000 5,193,000 3,248,000
----------- ---------- ----------
Retained earnings, end of period...... $ 5,193,000 $7,040,000 $4,835,000
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-84
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED AUGUST 31,
DECEMBER 31, ------------------------
1997 1998 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 1,945,000 $ 1,847,000 $ 1,587,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 3,215,000 2,772,000 2,033,000
Gain on sale of equipment........... (180,000) (143,000) (91,000)
Deferred state income taxes......... 100,000 (111,000) 95,000
----------- ----------- -----------
5,080,000 4,365,000 3,624,000
Changes in assets and liabilities:
Accounts receivable................. (1,460,000) 223,000 (352,000)
State income taxes receivable....... 1,000 (10,000) (1,000)
Inventories......................... (2,000) (145,000) 69,000
Other assets........................ (9,000) 5,000 --
Accounts payable and accrued
expenses........................... 449,000 (297,000) 99,000
Due to or from related parties...... (243,000) 399,000 162,000
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,816,000 4,540,000 3,601,000
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and rental
equipment............................ (8,814,000) (8,394,000) (7,934,000)
Net investment in sales-type leases... 26,000 (65,000) 46,000
Proceeds from the sale of equipment... 495,000 365,000 220,000
----------- ----------- -----------
Net cash used in investing
activities....................... (8,293,000) (8,094,000) (7,668,000)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under line of credit....... 8,750,000 7,700,000 7,550,000
Repayments under line of credit....... (4,050,000) (3,300,000) 2,650,000
----------- ----------- -----------
Net cash provided by financing
activities....................... 4,700,000 4,400,000 4,900,000
----------- ----------- -----------
Net increase in cash and cash
equivalents...................... 223,000 846,000 833,000
Cash and cash equivalents, beginning of
period................................. 91,000 314,000 91,000
----------- ----------- -----------
Cash and cash equivalents, end of
period........................... $ 314,000 $ 1,160,000 $ 924,000
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest............................. $ 1,131,000 $ 892,000 $ 704,000
State income taxes................... 6,000 9,000 6,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-85
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
(ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Business:
McClinch Equipment Services, Inc. (the "Company") is an exclusive dealer for
JLG Industries in New Jersey, Delaware, Maryland, Washington D.C., and
Northern Virginia. The Company also has distribution agreements with other
manufacturers in New Jersey, Delaware, Maryland, Pennsylvania, Washington,
D.C. and Virginia. Revenues are derived principally from the rental of
aerialift equipment and material handling equipment and the sale of new and
used aerialift equipment to a diversified customer base including contractors
and other users.
Basis of Presentation:
The balance sheet is presented on an unclassified basis since it more
properly reflects the Company's operations as an equipment rental company.
Interim Financial Statements:
The accompanying statements of income and retained earnings and cash flows
for the eight month periods ended August 31, 1998 and 1997 are unaudited and
have been prepared on the same basis as the audited financial statements
included herein. In the opinion of management, such unaudited financial
statements include all adjustments necessary to present fairly the information
set forth therein, which consists solely of normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative
of results for the full year.
Revenue Recognition:
a. Operating Leases. Rental revenue is recognized over the lease term
(generally less than one year) as earned.
b. Sales-Type Leases: Sales are recorded at amounts equal to the present
value of the minimum lease payments at the inception of the lease. The
unearned interest income represents the difference between the minimum lease
payments and the present value of such payments. Such interest income is
recognized over the life of the lease using the interest method.
Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments with original maturities of less than 90 days. These balances
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Inventories:
Inventories, consisting principally of aerialift equipment and related spare
parts, are recorded at the lower of first-in, first-out cost or market.
Fixed Assets:
Fixed assets, consisting principally of the Company's fleet of aerialift
equipment, primarily held for rental under operating leases, is stated at cost
and is depreciated using the straight-line method over the following estimated
useful lives: rental equipment, shop equipment, furniture and fixtures and
computer equipment, 7 years; vehicles, 5 years; and leasehold improvements,
over the remaining term of the lease.
F-86
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and the resulting gains or losses are included in
income.
Income Taxes:
The Company has elected to be taxed as a Small Business Corporation under
the Internal Revenue Code. Under this regulation the Company's income is
reported for federal income tax purposes by the stockholders on their
individual tax returns. Accordingly, the financial statements reflect no
provision or liability for federal income taxes.
The small business corporation election can be made in some of the states in
which the Company does business and accordingly, the financial statements only
reflect state income tax provisions for the states in which the election can
not be made.
The Company recognizes deferred tax assets and liabilities for the expected
future state tax consequences of events that have been recognized in the
Company's financial statements or state tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statement carrying amounts and the tax bases of assets
and liabilities using enacted tax rates in effect in the years in which the
temporary differences are expected to reverse. A valuation allowance is
established when it is more likely than not that deferred tax assets will not
be realized.
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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications:
Certain amounts have been reclassified between balance sheet accounts to
more properly reflect the nature of the item.
2. SALES-TYPE LEASES
The net investment in sales-type leases consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1998
------------ ----------
<S> <C> <C>
Minimum lease payments receivable.................... $53,000 $125,000
Less, Unearned interest income..................... (4,000) (11,000)
------- --------
Net investment in sales-type leases.................. $49,000 $114,000
======= ========
</TABLE>
All future minimum lease payments are receivable during 1998 and 1999.
F-87
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
3. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31, AUGUST 31,
1997 1998
----------- -----------
<S> <C> <C>
Land and building.................................. $ -- $ 242,000
Rental equipment................................... 24,854,000 32,175,000
Vehicles........................................... 1,043,000 1,290,000
Shop equipment..................................... 35,000 79,000
Office equipment................................... 28,000 31,000
Leasehold improvements............................. -- 32,000
----------- -----------
25,960,000 33,849,000
Less, Accumulated depreciation................... (7,329,000) (9,818,800)
----------- -----------
$18,631,000 $24,031,000
=========== ===========
</TABLE>
4. NOTES PAYABLE
The Company has available a revolving line of credit with a bank syndicate
totaling the lesser of $28,000,000 or an amount based on eligible accounts
receivable, parts inventory, new equipment inventory, vehicles and rental
equipment. The unused portion of the line of credit was $11,800,000 and
$7,400,000 at December 31, 1997 and August 31, 1998, respectively.
At December 31, 1997, the outstanding balance bears interest at fluctuating
30-day LIBOR rate plus 2 1/4% (8.2% at December 31, 1997). Effective in
January 1998, the outstanding balance bears interest at the fluctuating 30-day
LIBOR rate plus 1 3/4% (7.4% at August 31, 1998) and the Company pays a
commitment fee of 1/4% per annum on the unused portion of the line of credit.
The Company has the option to borrow additional funds and/or convert all or a
portion of the outstanding balance to a fluctuating interest rate equal to the
lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1 3/4% for 90, 180 or
360 days.
The line of credit terminates on November 30, 1999 and extends automatically
every six months unless either party gives written notice to the other. Upon
termination or default, amounts outstanding under this line of credit convert
to a note which is payable in 48 monthly installments.
Although there are no fixed payments on the principal, the Company expects
the aggregate maturities of debt outstanding at December 31, 1997 to
approximate the following:
<TABLE>
<S> <C>
1998........................................................... $4,050,000
1999........................................................... 4,050,000
2000........................................................... 4,050,000
2001........................................................... 4,050,000
</TABLE>
Substantially all of the assets of the Company have been pledged as
collateral under the debt agreement. In addition, an affiliate of the Company
has guaranteed this debt.
The lenders require, among other terms, that the Company and its affiliate
on a combined basis meet certain financial ratios and obtain approval prior to
issuing of advances or loans to stockholders or officers which exceed certain
amounts, as defined.
On September 1, 1998, the note payable was paid in full (see Note 9).
F-88
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
5. RELATED PARTY TRANSACTIONS
An affiliate (through common ownership) provides services to the Company in
connection with its operations. The primary expenses, which are incurred and
paid by the affiliate and allocated to the Company, include salaries
($1,750,000 for the year ended December 31, 1997 and $750,000 and $520,000 for
the eight months ended August 31, 1998 and 1997, respectively, included in
general and administrative expenses) and spare parts inventory, trucking
services and insurance expenses ($850,000, for the year ended December 31,
1997, and $590,000 and $489,000 for the eight months ended August 31, 1998 and
1997, respectively, included in cost of equipment rentals and service).
The Company rents equipment to the affiliate under an informal equipment
sharing agreement for ultimate rental to the affiliate's customers in New York
and Connecticut. In addition, the Company rents equipment from the affiliate
for ultimate rental to customers in its operating areas. The net revenue
earned (included in equipment rentals and service revenues) by the Company
under these arrangements for the year ended December 31, 1997 was $178,000 and
$352,000 and $127,000 for the eight months ended August 31, 1998 and 1997,
respectively.
The Company purchased used rental equipment from an affiliate for ultimate
sale to unrelated third parties amounting to $964,000 for the year ended
December 31, 1997 and $657,000 and $795,000 for the eight months ended June
30, 1998 and 1997, respectively. Additionally, the Company sold used rental
equipment to the affiliate for ultimate sale to unrelated third parties. The
selling price of such equipment amounted to $239,000 for the year ended
December 31, 1997 and $75,000 and $153,000 for the eight months ended August
31, 1998 and 1997, respectively.
These transactions are settled in the normal course of business.
6. INCOME TAXES
Deferred state income taxes are recorded to reflect primarily the tax
consequences on future years of temporary differences between the tax bases of
assets and liabilities, principally fixed assets and accounts receivable, and
their financial reporting amounts at each year-end and for tax operating loss
carryforwards.
The components of deferred state tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
1997 1998
------------ ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $ 22,000 $ 10,000
Accounts receivable............................... 5,000 4,000
Deferred tax liabilities:
Fixed assets...................................... (377,000) (303,000)
Other............................................. (150,000) (100,000)
--------- ---------
$(500,000) $(389,000)
========= =========
</TABLE>
No valuation allowance has been recognized for deferred tax assets. The
Company has various state net operating loss carryforwards at December 31,
1997 of approximately $357,000 which expire from 2002 through 2012.
F-89
<PAGE>
MCCLINCH EQUIPMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS
UNAUDITED)
7. PROFIT-SHARING PLAN
The Company participates in a profit sharing plan with its affiliates which
provides for a discretionary contribution to a trust fund based on the
Company's net income for the year, to be allocated to all eligible employees
based on their proportional compensation. Nonunion employees are eligible for
participation in the plan after the completion of one year of service,
provided they have also reached age 21. After becoming eligible, employees
vest at an annual rate of 20%. Discretionary contributions under the plan by
the Company were $75,000 for the year ended December 31, 1997. There were no
discretionary contributions under the plan by the Company for the eight months
ended August 31, 1998 and 1997.
The plan also provides for a salary deferral plan pursuant to Section 401(k)
of the Internal Revenue Code, as amended. The plan requires the Company to
contribute an amount equal to 25% of employees' contributions not to exceed 6%
of their annual compensation up to $160,000. Participants vest in the
Company's contribution at the rate of 20% annually after becoming eligible.
Matching contributions under the plan by the Company were $12,000 for the year
ended December 31, 1997 and $14,000 and $10,000 for the eight months ended
August 31, 1998 and 1997, respectively.
8. COMMITMENTS
The Company leases buildings in Delaware, Virginia, Maryland and New Jersey
from unrelated parties in the form of operating leases which expire in 1998
and 1999. Total future minimum lease payments of $190,000 are as follows:
1998, $163,000; and 1999, $27,000. In addition, the Company leases buildings
in New Jersey and Virginia on a month-to-month basis. Total rent expense of
$243,000 was incurred for the year ended December 31, 1997 and $178,000 and
$152,000 for the eight months ended August 31, 1998 and 1997, respectively.
9. SUBSEQUENT EVENT
On September 1, 1998, United Rentals, Inc. acquired all of the outstanding
shares of common stock of the Company.
F-90
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Valley Rentals, Inc.
We have audited the combined balance sheet of Valley Rentals, Inc. (see Note
1) (the "Companies") as of December 31, 1997 and the related combined
statements of income, stockholders' equity and partners' capital and cash
flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Valley
Rentals, Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 20, 1998, except for Note 10,
as to which the date is April 22,
1998
F-91
<PAGE>
VALLEY RENTALS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................. $ 663,540 $ 86,842
Accounts receivable, net of allowance for doubtful
accounts of $117,275................................ 2,116,829 1,955,545
Inventory............................................ 169,514 171,114
Rental equipment, net................................ 9,696,900 9,846,963
Property and equipment, net.......................... 1,791,348 1,763,087
Prepaid expenses and other assets.................... 94,146 50,945
----------- -----------
Total assets..................................... $14,532,277 $13,874,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
Liabilities:
Accounts payable, accrued expenses and other
liabilities....................................... $ 1,684,216 $ 1,436,169
Stockholder loan................................... 137,385 103,675
Debt............................................... 1,109,707 1,432,271
----------- -----------
Total liabilities................................ 2,931,308 2,972,115
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholders' equity:
Common stock, Valley Rentals, Inc., no par value,
10,000 shares authorized, 3,633 shares issued and
outstanding....................................... 58,650 58,650
Additional paid-in capital......................... 1,854,431 1,854,431
Retained earnings.................................. 9,691,223 8,992,635
Partners' capital (deficit)--Valley Equipment
Leasing, LLC ...................................... (3,335) (3,335)
----------- -----------
Total stockholders' equity and partners'
capital......................................... 11,600,969 10,902,381
----------- -----------
Total liabilities and stockholders' equity and
partners' capital............................... $14,532,277 $13,874,496
=========== ===========
</TABLE>
See accompanying notes.
F-92
<PAGE>
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1997 1998
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals....................... $12,998,863 $2,984,396 $2,835,547
Sales of rental equipment............... 663,776 201,797 351,103
Sales of parts, supplies and new
equipment.............................. 1,965,431 203,804 226,372
----------- ---------- ----------
Total revenues........................ 15,628,070 3,389,997 3,413,022
Cost of revenues:
Cost of equipment rentals, excluding
equipment rental depreciation.......... 3,809,895 834,400 1,051,236
Depreciation, equipment rentals......... 3,475,710 758,568 783,393
Cost of rental equipment sales.......... 336,664 186,153 170,128
Cost of parts, supplies and new
equipment sales........................ 1,001,695 138,994 159,831
----------- ---------- ----------
Total cost of revenues................ 8,623,964 1,918,115 2,164,588
----------- ---------- ----------
Gross profit.......................... 7,004,106 1,471,882 1,248,434
Selling, general and administrative
expenses................................. 4,725,084 1,159,283 1,226,219
Non-rental depreciation................... 304,895 69,072 91,525
----------- ---------- ----------
Operating income (loss)............... 1,974,127 243,527 (69,310)
Interest expense.......................... 159,488 23,739 12,321
Interest (income)......................... (61,651) (15,784) (19,445)
Other (income), net....................... (37,427) 7,053 9,785
----------- ---------- ----------
Net income (loss)..................... $ 1,913,717 $ 228,519 $ (71,971)
=========== ========== ==========
</TABLE>
See accompanying notes.
F-93
<PAGE>
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL PARTNERS'
-------------- PAID-IN RETAINED CAPITAL
SHARES AMOUNT CAPITAL EARNINGS (DEFICIT)
------ ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997.... 3,633 $58,650 $1,854,431 $ 8,819,142 $(10,877)
Net income.................. 1,906,175 7,542
Stockholder distributions... (1,034,094)
----- ------- ---------- ----------- --------
Balance at December 31, 1997.. 3,633 58,650 1,854,431 9,691,223 (3,335)
Net loss (Unaudited)........ (71,971)
Stockholder distributions
(Unaudited)................ (626,617)
----- ------- ---------- ----------- --------
Balance at March 31, 1998
(Unaudited).................. 3,633 $58,650 $1,854,431 $ 8,992,635 $ (3,335)
===== ======= ========== =========== ========
</TABLE>
See accompanying notes.
F-94
<PAGE>
VALLEY RENTALS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1997 1997 1998
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss)...................... $ 1,913,717 $ 228,519 $ (71,971)
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 3,780,605 827,640 874,918
Gain on rental equipment sales....... (327,112) (15,644) (180,975)
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable......................... (245,964) (72,829) 161,284
Decrease (increase) in inventory.... 1,557 (2,500) (1,600)
(Increase) decrease in prepaid
expenses and other assets.......... (27,197) 34,521 43,201
Decrease in accounts payable,
accrued expenses and other
liabilities........................ (26,197) (358,397) (248,047)
----------- ---------- -----------
Cash provided by operating activities.. 5,069,409 641,310 576,810
Cash flows from investing activities
Purchase of rental equipment........... (3,479,228) (287,751) (1,006,687)
Proceeds from sale of rental
equipment............................. 663,776 201,797 351,103
Purchases of property and equipment.... (364,461) (127,632) (63,264)
----------- ---------- -----------
Cash used in investing activities...... (3,179,913) (213,586) (718,848)
Cash flows from financing activities
Stockholder distribution............... (1,034,094) (1,471,458) (626,617)
Principal payments on debt............. (2,706,431) (178,032) (253,043)
Borrowings under credit facilities..... 2,193,000 1,000,000 445,000
----------- ---------- -----------
Cash used in financing activities...... (1,547,525) (649,490) (434,660)
----------- ---------- -----------
Increase (decrease) in cash............ 341,971 (221,766) (576,698)
Cash balance at beginning of period.... 321,569 321,569 663,540
----------- ---------- -----------
Cash balance at end of period.......... $ 663,540 $ 99,803 $ 86,842
=========== ========== ===========
</TABLE>
See accompanying notes.
F-95
<PAGE>
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(THE INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The combined financial statements of Valley Rentals, Inc. include the
accounts of Valley Rentals, Inc. ("Valley") and Valley Equipment Leasing, LLC
("Valley Equipment") (collectively the "Companies"). The Companies are
affiliated through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
10.
BUSINESS ACTIVITIES
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies have three locations (Longview,
Vancouver and Turnwater) and the principal market area is Washington State.
The nature of the Companies' business is such that short-term obligations are
typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the balance sheet is presented on an
unclassified basis.
INTERIM FINANCIAL STATEMENTS
The accompanying combined balance sheet at March 31, 1998 and the combined
statements of income, stockholders' equity and partners' capital and cash
flows for the three-month periods ended March 31, 1997 and 1998 are unaudited
and have been prepared on the same basis as the audited combined financial
statements included herein. In the opinion of management, such unaudited
combined 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.
INVENTORY
Inventories consists primarily of equipment, general replacement parts and
fuel for the equipment and are stated at the lower of cost, determined under
the first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment costing less than
$1,500 is immediately expensed at the date of purchase. Depreciation for
rental equipment is computed using the straight-line method over an estimated
five to seven-year useful life with no salvage value. Ordinary maintenance and
repair costs are charged to operations as incurred. Proceeds from the disposal
and the related net book value of the equipment are recognized in the period
of disposal and reported as revenue from sales of rental equipment and cost of
sales of rental equipment, respectively, in the combined statement of income.
F-96
<PAGE>
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The Company capitalizes all
property and equipment purchases greater than $1,500. Depreciation of property
and equipment is computed on the straight-line method over estimated useful
lives of 5 to 10 years with no salvage value. Leasehold improvements are
amortized using the straight-line method over the estimated lives of the
improvements or the remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to $250,984, $49,386 and $51,026 in the year
ended December 31, 1997 and for the three months ended March 31, 1997 and
1998, respectively.
INCOME TAXES
Valley has elected, by unanimous consent of its shareholders, to be taxed
under the provisions of Subchapter S of the Internal Revenue Code for federal
purposes. Under those provisions, Valley does not pay federal income taxes;
instead, the shareholders are liable for individual income taxes on Valley's
profits. Valley Equipment, an LLC, is not a taxable entity and, therefore,
incurs no income tax liability. Any profits and losses of Valley Equipment
flow through to the individual members.
ACCOUNTING ESTIMATES
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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Rental equipment................................... $22,504,852 $22,858,436
Less accumulated depreciation...................... 12,807,952 13,011,473
----------- -----------
Rental equipment, net.............................. $ 9,696,900 $ 9,846,963
=========== ===========
</TABLE>
F-97
<PAGE>
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land................................................ $ 463,000 $ 463,000
Building and building improvements.................. 431,313 431,313
Transportation equipment............................ 1,360,766 1,424,030
Furniture, fixtures and equipment................... 487,153 487,153
Leasehold improvements.............................. 557,781 557,781
---------- ----------
3,300,013 3,363,277
Less accumulated depreciation....................... 1,508,665 1,600,190
---------- ----------
Total............................................... $1,791,348 $1,763,087
========== ==========
</TABLE>
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Columbia State Bank--Various notes with combined
monthly payments of $21,148 including interest of
9%................................................ $ 779,050 $ 739,337
Columbia State Bank--Revolving line of credit loan
of $1,500,000 expiring on June 1, 1998 and bearing
interest at 0.5% over prime....................... 0 445,000
John Deere Credit--Various notes with combined
monthly payments of $31,093 including interest
from 5.5% to 5.9%................................. 262,918 206,202
Ingersoll Rand--Various non-interest bearing notes
with combined monthly payments of $14,253......... 67,739 41,732
---------- ----------
$1,109,707 $1,432,271
========== ==========
</TABLE>
Substantially all assets collateralize the above notes.
All debt was paid off in connection with the acquisition discussed in Note
10.
6. OPERATING LEASES
The Companies lease two store locations on long term leases. The Companies
are responsible for all operating expenses of the facilities including
property taxes, assessments, insurance, repairs and maintenance. These leases
have various terms and extend through December 2001.
Total rent expense for the year ended December 31, 1997 and for the three
months ended March 31, 1997 and 1998 was approximately $136,100, $33,900 and
$33,900, respectively.
F-98
<PAGE>
VALLEY RENTALS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year, are as follows:
<TABLE>
<S> <C>
1998................................................................ $225,452
1999................................................................ 218,252
2000................................................................ 204,300
2001................................................................ 58,710
2002................................................................ 0
--------
Total............................................................... $706,714
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Companies lease two of its three operating facilities from the president
and a majority stockholder of the Companies on a five year lease basis
expiring October 31, 2000 and December 31, 2001. The Companies are responsible
for all operating expenses of the facilities including property taxes,
assessment, insurance, repairs and maintenance. Total rent expense for the
year ended December 31, 1997 and for the three months ended March 31, 1997 and
1998 was approximately $124,800, $31,200 and $31,200, respectively.
In connection with the acquisition discussed in Note 10, the lease terms
have been renegotiated.
The Companies paid $50,000, $0 and $0 during the year ended December 31,
1997, and the three months ended March 31, 1997 and 1998, respectively, to the
members of the board of directors, who are also shareholders.
The Companies also have a note payable to its majority stockholder totaling
$137,385 and $103,675 at December 31, 1997 and March 31, 1998, respectively,
bearing interest at 8.75%. No repayment schedule has been established.
In January and April 1998, the Companies made payments of $627,542 on behalf
of its Stockholders to the Internal Revenue Service.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 and for the three months ended March
31, 1997 and 1998 total interest paid was $159,517, $25,499 and $14,050,
respectively.
During 1997 the Companies purchased $508,830 of equipment which was financed
and $72,993 of equipment which was traded in like-kind exchanges. During the
three months ended March 31, 1997 and 1998 the Companies purchased $187,737
and $96,897 of equipment, respectively, which was financed.
9. PENSION AND PROFIT-SHARING PLANS
The Companies have a defined contribution 401(k) pension plan which covers
substantially all employees. The Companies match 10% up to the first six
percent of the employees contribution. Companies contributions to the plan
were $9,773, $2,762 and $3,577 for the year ended December 31, 1997 and for
the three months ended March 31, 1997 and 1998, respectively.
In addition, Valley maintains a profit-sharing plan which covers
substantially all employees. Valley's contributions are discretionary and
amounted to $140,000, $30,000 and $34,500 for the year ended December 31, 1997
and for the three months ended March 31, 1997 and 1998, respectively.
10. SUBSEQUENT EVENT
On April 22, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Companies.
F-99
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Lift Systems, Inc.
We have audited the balance sheet of Lift Systems, Inc. as of December 31,
1997 and the related statements of income, changes in stockholders' equity,
and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Lift Systems, Inc. as of
December 31, 1997 and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Altschuler, Melvoin and Glasser
LLP
Chicago, Illinois
March 12, 1998, except for Note 8 as
to which the date is July 28, 1998
F-100
<PAGE>
LIFT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER JULY 28,
31, 1997 1998
----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Rental Equipment:
Cost................................................. $20,050,950 $22,132,912
Less accumulated depreciation........................ 8,931,693 9,912,355
----------- -----------
11,119,257 12,220,557
----------- -----------
Cash and Cash Equivalents.............................. 176,993 48,043
Accounts Receivable, Net of Allowances of $135,000
(1997) and $135,000 (1998)............................ 3,359,585 3,129,623
Equipment Held for Resale.............................. 233,152 188,830
Other Assets........................................... 619,874 603,766
----------- -----------
4,389,604 3,970,262
----------- -----------
Other Depreciable Equipment, At Cost:
Vehicles............................................. 1,624,753 1,660,927
Mobile radio equipment............................... 19,134 19,134
Shop tools and equipment............................. 158,615 167,260
Maintenance equipment................................ 160,783 157,927
Office furniture and equipment....................... 162,785 162,864
Computer systems..................................... 390,873 390,502
----------- -----------
2,516,943 2,558,614
Less accumulated depreciation........................ 1,293,400 1,449,459
----------- -----------
1,223,543 1,109,155
----------- -----------
Land, Building and Improvements:
Cost................................................. 1,532,442 1,545,120
Less accumulated depreciation........................ 111,194 136,355
----------- -----------
1,421,248 1,408,765
----------- -----------
$18,153,652 $18,708,739
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term Debt Secured by Rental Equipment............. $ 9,267,350 $ 8,965,510
Bank Line of Credit Note Payable....................... 0
Trade Accounts Payable................................. 198,935 857,523
Other Accrued Liabilities.............................. 543,229 378,427
Deferred State Income Taxes............................ 93,475 35,025
Other Long-term Debt................................... 1,366,636 1,337,888
----------- -----------
11,469,625 11,574,373
----------- -----------
Stockholders' Equity:
Common stock:
$1.00 par value; 100,000 shares authorized; 800
shares issued and outstanding..................... 800 800
Additional paid-in capital........................... 79,200 114,225
Retained earnings.................................... 6,604,027 7,019,341
----------- -----------
6,684,027 7,134,366
----------- -----------
$18,153,652 $18,708,739
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-101
<PAGE>
LIFT SYSTEMS, INC.
STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED 209 DAY PERIODS
DECEMBER 31, ENDED JULY 28,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating Revenue:
Equipment sales...................... $2,812,545 $2,077,354 $ 1,655,935
Rentals.............................. 10,020,489 5,994,508 5,479,955
Transport............................ 1,030,373 647,914 555,513
Service and parts sales.............. 651,546 476,161 421,372
Other................................ 23,998 42,674 4,568
---------- ---------- -----------
14,538,951 9,238,611 8,117,344
Less cost of equipment sold.......... 1,734,679 1,200,550 981,070
---------- ---------- -----------
Gross Operating Profit................. 12,804,272 8,038,061 7,136,274
---------- ---------- -----------
Operating Expenses:
Direct cost of rental revenue (except
depreciation)....................... 1,817,749 964,109 1,049,802
External costs of transport revenue.. 29,767 31,982 605
Costs of service revenue and parts
sales............................... 427,230 261,500 269,604
Personnel costs, not charged to di-
rect costs above.................... 3,093,421 2,259,844 1,683,850
General and administrative expenses.. 940,036 727,807 525,820
Insurance based on revenue........... 113,627 80,424 78,176
Occupancy expenses................... 123,877 76,307 60,998
Provision for bad debts.............. 73,076 89,713 34,672
---------- ---------- -----------
6,618,783 4,491,686 3,703,527
---------- ---------- -----------
Income from Operations................. 6,185,489 3,546,375 3,432,747
Other Income (Expense):
Interest expense..................... (857,800) (512,066) (476,376)
Interest income...................... 28,897 17,737 15,705
Discretionary compensation........... (435,900) (113,301) (162,000)
Profit-sharing contribution.......... (212,622) (1,098) (86,274)
Gain (Loss) on sale of property and
equipment........................... 9,335 6,665 13,498
Other................................ 6,926 23,372 3,695
---------- ---------- -----------
Income before Depreciation,
Amortization and Income Taxes......... 4,724,325 2,967,684 2,740,994
Depreciation and Amortization.......... (3,824,466) (2,499,153) 2,128,033
Provision for Deferred State Income
Taxes................................. (15,000) 46,783 (10,000)
---------- ---------- -----------
Net Income............................. $ 884,859 $ 515,314 $ 602,961
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-102
<PAGE>
LIFT SYSTEMS, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997............ $800 $ 79,200 $5,823,929 $5,903,929
Net Income for 1997................. 884,859 884,859
Redemption of Common Stock.......... (4,761) (4,761)
Dividends........................... (100,000) (100,000)
---- -------- ---------- ----------
Balance, December 31, 1997.......... 800 79,200 6,604,027 6,684,027
Net Income for the 209 day Period
Ended July 28, 1998 (unaudited).... 515,314 515,314
Additional paid-in capital pledged.. 35,025
Dividends........................... (100,000) (100,000)
---- -------- ---------- ----------
Balance, July 28, 1998 (unaudited).. $800 $114,225 $7,019,341 $7,134,366
==== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-103
<PAGE>
LIFT SYSTEMS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
209 DAY PERIOD
YEAR ENDED ENDED JULY 28,
DECEMBER 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Collections from customers............ $12,312,047 $ 8,315,773 $ 6,630,049
Interest income collected............. 28,897 16,365 15,704
Commissions collected................. 23,997 42,674 4,568
Other income collected................ 6,926 23,372 3,695
Cash paid to suppliers................ (5,357,199) (3,313,052) (1,863,642)
Cash paid to employees................ (3,534,083) (2,146,085) (1,861,019)
Interest paid......................... (857,800) (517,375) (511,443)
State income taxes paid............... (6,000) (11,667) (6,000)
----------- ----------- -----------
Net cash provided by operating
activities........................... 2,616,785 2,410,005 2,411,912
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sales of rental
equipment............................ 1,453,297 1,203,051 1,200,245
Proceeds from sale of nonrental
property............................. 45,391 29,736 43,891
Purchases of rental equipment......... (5,274,037) (3,191,723) (3,640,472)
Purchases of other depreciable
property............................. (309,438) (136,753) (231,137)
Payments for land and building
improvements......................... 0 (12,678) 0
----------- ----------- -----------
Net cash used in investing
activities........................... (4,084,787) (2,108,367) (2,627,473)
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from bank loans for rental
equipment............................ 4,149,000 1,406,000 1,221,000
Proceeds from line of credit.......... 1,699,000 883,000 650,000
Payments on rental equipment loans.... (2,989,158) (1,707,840) (1,806,365)
Payments on line of credit............ (2,199,000) (883,000) (800,000)
Payments on other long-term debt...... (20,183) (6,416) (16,580)
Payments on real estate mortgage
loan................................. (13,987) (8,332) (8,016)
Payments on noncompete agreement...... (14,000) (14,000) 0
Payments on stock purchase............ (4,761) 0 0
Payments of dividends................. (100,000) (100,000) (100,000)
----------- ----------- -----------
Net cash provided by (used in)
financing activities................. 506,911 (430,588) (859,961)
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash
Equivalents............................ (961,091) (128,950) (1,075,522)
Cash and Cash Equivalents, Beginning of
Period................................. 1,138,084 176,993 1,138,084
----------- ----------- -----------
Cash and Cash Equivalents, End of
Period................................. $ 176,993 $ 48,043 $ 62,562
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-104
<PAGE>
LIFT SYSTEMS, INC.
STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
209 DAY PERIODS
ENDED JULY 28,
YEAR-ENDED
DECEMBER 31,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Reconciliation of Net Income to Net
Cash Provided by Operating
Activities:
Net income.......................... $ 884,859 $ 515,314 $ 602,961
----------- ---------- ----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 3,824,466 2,499,153 2,128,034
Provision for bad debts......... 73,076 (123,733) (126,920)
Provision for profit-sharing
contribution................... 212,622 1,098 86,273
Loss (Gain) on sale of other
depreciable property........... (9,335) (6,665) (13,498)
Purchases of equipment for
resale ........................ (233,152) (475,212) --
Proceeds from sales of rental
equipment...................... (1,453,297) (1,203,051) (1,200,245)
Original cost of rental
equipment sold................. 2,037,886 1,779,810 1,573,096
Accumulated depreciation of
rental equipment sold.......... (1,366,834) (1,206,748) (988,856)
Decrease (Increase) in accounts
receivable..................... (1,139,008) 140,249 (418,222)
Decrease (Increase) in other
assets......................... (57,006) (157,894) 192,684
Increase (Decrease) in accounts
payable........................ (6,875) 658,588 509,626
Increase (Decrease) in deferred
state income taxes............. 9,000 (58,450) 4,000
Decrease in other accrued
liabilities.................... (159,617) 47,546 62,979
----------- ---------- ----------
Total adjustments............. 1,731,926 1,894,691 1,808,951
----------- ---------- ----------
Net Cash Provided by Operating
Activities........................... $ 2,616,785 $2,410,005 $2,411,912
=========== ========== ==========
Supplemental Schedule of Noncash
Financing Activities:
During 1997, the Company did like-
kind exchanges of rental equipment
- one with a customer and nine
with a manufacturer/supplier. The
gross acquired cost and
accumulated depreciation of the
equipment given up in these
exchanges were $121,965 and
$38,326, respectively, yielding a
capitalized cost of $83,639 for
the items of equipment acquired.
During 1997, the Company entered
into financing leases totaling
$214,255 (see Note 5).
</TABLE>
The accompanying notes are an integral part of this statement.
F-105
<PAGE>
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE
209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED)
Lift Systems, Inc. sells, services, rents and transports aerial lift
equipment. Its primary customers are specialty construction contractors and
industrial maintenance departments in Northeast Illinois, Southeast Wisconsin
and Northwest Indiana. In management's opinion, the Company has no current
risk of significant vulnerability due to dependence on individual suppliers or
concentrations of revenue streams or receivables in a single or a limited
number of customers.
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 8.
Interim Financial Statements
The accompanying balance sheet at July 28, 1998 and the statements of
income, stockholders' equity and cash flows for the 209-day periods ended July
28, 1998 and 1997 are unaudited and have been prepared on the same basis as
the audited financial statements included herein. In the opinion of
management, such unaudited 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.
Rental Revenue
Rental revenue is recognized on a daily basis under operating leases
covering rental equipment. Such leases typically range from one day to several
months.
Depreciation and Amortization
Amounts capitalized to components of the headquarters facility, other than
land, are being depreciated on a straight-line basis with lives ranging from 5
to 39 years for both financial and tax reporting purposes. For financial
reporting purposes, all other depreciation is provided on a straight-line
basis over seven years for shop tools and equipment and office furniture and
equipment, and over five years for rental equipment and most other depreciable
assets. Total depreciation expense reflected in these financial statements for
1997 and for the 209-day periods ended July 28, 1998 and 1997 is $3,789,843,
$2,478,956 and $2,107,836, respectively. For tax purposes, equipment
depreciation is computed over the same lives but using the maximum rates
allowed by the Internal Revenue Code.
The cost of the noncompete agreement (see Note 3) is being amortized monthly
on a straight-line basis over five years, the term of the agreement. The
amount of such amortization reflected in these financial statements for 1997
and for the 209-day periods ended July 28, 1998 and 1997 is $34,000, $19,833
and $19,833, respectively.
F-106
<PAGE>
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE
209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED)
Total mortgage acquisition costs of $15,594 (see Note 5) are being amortized
over 25 years on a straight line basis.
Income Taxes
Lift Systems, Inc. has elected to be taxed as a Subchapter S corporation
whereby corporate taxable income is allocated to the stockholders and reported
on their individual income tax returns. Accordingly, no provision for federal
income taxes is required in the accompanying financial statements. However,
the Company is subject to Illinois, Wisconsin and Indiana state income taxes.
For income tax purposes, the Company reports income on a modified cash basis
and uses accelerated methods of depreciation as described above. Accordingly,
deferred state income taxes have been provided on the temporary differences in
reporting income for financial statement and tax reporting purposes.
Cash and Cash Equivalents
Cash and cash equivalents consist of unrestricted funds in checking accounts
and an interest bearing money market account.
NOTE 2--LAND AND BUILDING
On September 13, 1994, the Company purchased eight acres of land and a
masonry building of 22,500 square feet to serve as the Company's headquarters
and primary operating facility for the foreseeable future. The primary
financing for this property was provided by a purchase money mortgage secured
by a promissory note as more fully described in Note 5 below. The closing
purchase price of this property was $1.2 million. Operations recommenced from
the new location on Monday, January 30, 1995. At December 31, 1997 the
capitalized costs consisted of the following:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
---------- ------------ ----------
<S> <C> <C> <C>
Land................................... $ 407,512 -- $ 407,512
Building............................... $ 804,524 $ 59,137 $ 745,387
Land Improvements...................... $ 320,406 $ 52,057 $ 268,349
---------- -------- ----------
$1,532,442 $111,194 $1,421,248
========== ======== ==========
</TABLE>
NOTE 3--NONCOMPETE AGREEMENT
Included in Other Assets is the cost of a noncompete agreement, net of
accumulated amortization, which amortization method is described above. The
gross cost of this agreement was $170,000 consisting of an immediate payment
of $100,000 and annual installments of $14,000 to be paid on or about July 1
of each year for five years with the first installment due on July 1, 1994,
provided that the former shareholder is in compliance with the terms of the
agreement. The noncompete agreement arose concurrently with, as an integral
part of, and in partial consideration for, a Stock Redemption Agreement as
more fully described in Note 6 below. The liability related to the noncompete
agreement was $14,000 at December 31,1997 and zero at July 28, 1998. This
liability is included in Other Long-Term Debt.
F-107
<PAGE>
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE
209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED)
NOTE 4--SHORT-TERM LINES OF CREDIT
The Company has in place an overall credit facility as further described in
Note 5 below, under which the Company has available a $500,000 revolving line
of credit for working capital purposes. Amounts borrowed under this credit
agreement bear interest at a floating rate of .25% over the bank's prime rate.
There were no amounts outstanding under this line of credit at December 31,
1997 or at July 28, 1998.
Under the same bank credit facility, the Company may borrow up to $400,000
under a revolving equipment loan agreement. The purpose of this facility is to
provide short-term rental equipment financing until the total borrowed under
this facility reaches at least $350,000 or amounts have been outstanding under
this facility for six months. At such times, the total outstanding under this
revolving equipment loan will be converted to a five or seven year term note
bearing a fixed interest rate as further described below. Amounts outstanding
under this revolving agreement bear interest computed daily at a floating rate
of .25% over the bank's prime rate. There were no amounts outstanding under
this line of credit at December 31, 1997 or at July 28, 1998.
These credit facilities were renewed on April 30, 1998 for 90 days at the
same terms.
NOTE 5--LONG TERM DEBT AND LINES OF CREDIT
As of December 31, 1997, Lift Systems, Inc. had established an overall
credit facility of $12,000,000. This consists of a $500,000 revolving loan
commitment as described under Note 4 above and an $12,000,000 equipment loan
commitment. The $12,000,000 commitment amount is the maximum amount of
principal that may be outstanding under the short-term revolving equipment
loan arrangement and any long-term equipment loans owed to the bank. Long-term
equipment loans, other than "Large Equipment Term Loans", are repayable in
sixty equal monthly installments of principal and interest fixed at a rate of
2.5% or 2.25% over the five year Treasury rate at the time the loan is
established. Large Equipment Term Loans are defined as term loans up to the
aggregate maximum principal amount of $750,000, the proceeds of which are used
to finance or refinance the purchase price of booms and scissors-lifts that
are 50 feet and over in height and have a net cost exceeding $60,000. Such
Large Equipment Term Loans will be repayable over five years based on a seven
year amortization in equal monthly installments of principal and interest
fixed at a rate of 2.5% over the five year Treasury rate at the time the loan
is established.
The proceeds of all amounts borrowed under the equipment loan commitment
must be used to finance or refinance the purchase price of new rental
equipment inventory at not more than 80% of the net cost of such equipment.
Any term loan may be voluntarily prepaid in whole or in part, at any time,
provided that any voluntary prepayment in full prior to maturity must be
accompanied by a voluntary prepayment penalty of 3% if paid within one year of
original funding, 2.5% if between one and two years, 2% between two and three
years and 1% between three and four years. Mandatory prepayments, with no
penalty, must be made when any item of equipment listed as specific collateral
on a term loan is sold.
Among other covenants, the Company must maintain its principal accounts at
the lending bank, furnish the bank with audited annual financial statements
and unaudited quarterly financial statements and at all times maintain; a
tangible net worth of at least $4,500,000; a ratio of Unsubordinated
Liabilities to Tangible Net Worth of not more than 3 to 1; and a Debt Service
Coverage Ratio of at least 1.25 to 1.0.
F-108
<PAGE>
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE
209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED)
In addition to the equipment term loans being specifically collateralized by
various items of rental equipment any amounts borrowed under the overall
credit facility are secured by a blanket security interest in substantially
all the assets of the Company and the personal guarantee of the majority
stockholder of Lift Systems, Inc.
On September 13, 1994, the Company purchased property as more fully
described in Note 2 above. The funds to close this purchase were obtained
through a purchase money mortgage secured by a promissory note with a variable
rate. Installment payments of principal and interest are payable on the first
day of each calendar month beginning November 1, 1994, and all principal and
interest must be paid on or before 25 years from the date of the Note,
September 13, 1994. The variable interest rate is determined as 2% over the
prime rate as published in the Wall Street Journal. The first business day of
each calendar quarter constitutes an interest rate change date. The initial
interest rate from September 13 through October 2, 1994, was 9.25% per annum.
On December 31, 1997 and June 30, 1998, the interest rate in effect was 10.5%
per annum. Under Section 7(a) of the Small Business Act, the U.S. Small
Business Administration has guaranteed 62.5% of this loan to the lender. This
loan is also secured by the personal guarantee of each of the three
officer/employee/stockholders of Lift Systems, Inc. The remaining principal
balance of $1,162,394 and $1,154,083 at December 31, 1997 and July 28, 1998,
respectively, is also included under Other Long-term Debt.
During 1997, Lift Systems, Inc. entered into a Term Lease Master Agreement
with IBM Credit Corporation to provide financing for many of the out-of-pocket
costs incurred in acquiring and converting to the Company's new central
computer system. The first funding under this arrangement was a principal
amount of $186,040 on June 26, 1997 to be repaid at a monthly total amount of
$3,720 over 60 months (through June 2002) which includes interest at an
effective annual rate of 7.67%. The second funding occurred on October 21,
1997 for a principal amount of $28,215 to be repaid at a monthly total amount
of $601 over 59 months (through September 2002) which includes interest at an
effective annual rate of 9.97%. Inasmuch as these leases provide for $1
purchase options on the hardware items, these transactions have been recorded
as financing leases in these financial statements with the assets acquired
capitalized under Computer Systems and the net principal balance owing
included under Other Long-Term Debt on the balance sheet.
Principal amounts of all long-term debt outstanding at December 31, 1997,
are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 2,705,148
1999........................................................ 2,460,496
2000........................................................ 2,112,185
2001........................................................ 1,524,455
2002........................................................ 760,020
2003 through 2007........................................... 153,000
2008 through 2012........................................... 258,048
2013 through 2017........................................... 435,224
2018 through 2022........................................... 225,410
-----------
$10,633,986
===========
</TABLE>
NOTE 6--COMMITMENTS
Lease Commitments
Rental expenses on all facilities leased by Lift Systems, Inc. during 1997
and through July 28, 1998 were immaterial. On February 13, 1998 Lift Systems,
Inc. entered into a lease for a branch facility
F-109
<PAGE>
LIFT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE
209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED)
in Rockford, Illinois commencing April 1, 1998 for a fixed term of three
years. Annual basic rents are $48,000 for the first year payable $4,000 on the
first day of each month, $51,600 for the second year payable $4,300 on the
first day of each month, and $55,200 for the third year payable $4,600 on the
first day of each month. There is one option to extend the lease for two years
at the same rental amount as the third year stated above. The Company is
responsible for all real estate taxes, utility expenses, and all routine
maintenance and operating costs during the lease term and any extensions
thereof. The lessor is responsible for certain structural and mechanical
systems repair and maintenance costs. The Company has the option to purchase
the leased property during the first three years of the lease for $430,000
with a binding contract for purchase and sale to be completed six months prior
to the expiration of the initial lease term. The Company has an additional
option to purchase the property on these same conditions during the option
period at a purchase price $445,000.
Redemption Agreement
On July 1, 1993, Lift Systems, Inc. acquired and retired all 200 shares of
stock owned by a then 20% stockholder. Concurrently with and as conditions of
the Stock Redemption Agreement, the selling stockholder entered into a
Noncompete Agreement with Lift Systems, Inc. and the Company executed a
Contingent Promissory Note for the purchase price of the stock. The potential
maximum consideration for the stock is $330,000 (all of which has been paid or
accrued as of December 31, 1997), payable in accordance with the terms and
provisions and subject to the conditions, restrictions and contingencies
provided for in the Contingent Promissory Note. The Contingent Promissory Note
provides, in general, for an annual anniversary payment to be made on or after
July 1, of each year until the total payments equal $330,000 or until July 1,
2001, at which time any amount not computed to be payable up to the Maximum
Aggregate Amount of $330,000 would be extinguished as an obligation of Lift
Systems, Inc. The amount to be paid each year is defined as the lesser of 50%
of modified net income or the Annual Amount (as defined).
For each of the years ended December 31, 1993 through 1997, the Annual
Amount was due under this agreement on or after July 1 of the following year.
At December 31, 1997, the $4,761 present value of the final payment has been
recorded in Other Accrued Liabilities and as a cost of the stock redemption.
NOTE 7--PROFIT SHARING PLAN
The Company established a qualified profit-sharing plan effective January 1,
1993, primarily to provide retirement benefits for substantially all full time
employees with a minimum of one year of service. Contributions to the plan are
made in discretionary amounts as determined by the Company's Board of
Directors, limited to the maximum amount deductible for federal income tax
purposes.
NOTE 8--SUBSEQUENT EVENTS
The Company is defendant in certain litigation matters arising in the normal
course of business. In the opinion of management, the ultimate resolution of
such matters will not have a material effect on the financial position or
results of operations of the Company.
The stockholders of Lift Systems, Inc. sold all of the outstanding stock in
the Company to United Rentals, Inc. on July 28, 1998.
F-110
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
Perco Group Ltd.
We have audited the consolidated balance sheet of Perco Group Ltd. as at
December 31, 1997 and the consolidated statements of earnings, retained
earnings and changes in financial position for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of Perco Group Ltd. as at
December 31, 1997 and the results of its operations and the changes in its
financial position for the year then ended in accordance with generally
accepted accounting principles in Canada.
Generally accepted accounting principles in Canada vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected results of operations for the year ended
December 31, 1997 and stockholders' equity as at December 31, 1997 to the
extent summarized in note 12 to the consolidated financial statements.
KPMG
Montreal, Canada
February 2, 1998, except as to note 14 which
is as of May 22, 1998
F-111
<PAGE>
PERCO GROUP LTD.
CONSOLIDATED BALANCE SHEET
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................... $ 373,650 $ 530,617
Accounts receivable (note 2)....................... 4,373,577 3,256,006
Income taxes receivable............................ 183,914 693,930
Inventories........................................ 1,588,724 1,792,572
Prepaid expenses................................... 75,770 34,217
----------- -----------
6,595,635 6,307,342
Fixed assets (note 3)................................ 12,915,691 14,791,687
Deferred financing costs, at cost less accumulated
amortization........................................ 85,807 74,307
----------- -----------
$19,597,133 $21,173,336
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 4)......................... $ 771,465 $ 2,013,896
Accounts payable................................... 993,820 861,171
Accrued liabilities................................ 582,365 602,670
Current portion of long-term debt (note 5)......... 2,295,000 2,453,000
Current portion of obligation under capital leases
(note 6).......................................... 229,678 197,678
----------- -----------
4,872,328 6,128,415
Long-term debt (note 5).............................. 6,742,512 7,430,691
Obligation under capital leases (note 6)............. 171,042 150,579
Deferred income taxes................................ 1,753,145 1,823,983
Non-controlling interest............................. 1,004,523 916,084
Redeemable shares (note 7)........................... 1,062,500 1,062,500
Shareholders' equity:
Capital stock (note 8)............................. 312,500 862,500
Retained earnings.................................. 3,678,583 2,798,584
----------- -----------
3,991,083 3,661,084
Commitments (note 9).................................
Subsequent event (note 14)...........................
----------- -----------
$19,597,133 $21,173,336
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-112
<PAGE>
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF EARNINGS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
1998 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental income......................... $14,509,900 $3,806,126 $4,190,553
Sales................................. 4,334,959 1,950,448 1,584,392
Gain on disposal of fixed assets...... 647,352 231,616 324,940
----------- ---------- ----------
19,492,211 5,988,190 6,099,885
Direct rental expenses, excluding
equipment rental depreciation.......... 5,659,124 1,664,660 1,931,926
Depreciation on rental equipment........ 1,776,368 747,819 660,160
Cost of goods sold...................... 3,344,842 1,484,590 1,263,506
----------- ---------- ----------
10,780,334 3,897,069 3,855,592
----------- ---------- ----------
Earnings before undernoted items........ 8,711,877 2,091,121 2,244,293
Operating expenses:
Selling and administrative expenses... 5,516,606 2,305,247 2,097,712
Non-rental depreciation............... 411,626 134,082 152,915
Interest on long-term debt and
obligation under capital leases...... 837,963 348,449 279,915
Other financial expenses.............. 37,907 13,683 43,915
----------- ---------- ----------
6,804,102 2,801,461 2,574,457
----------- ---------- ----------
Earnings (loss) before income taxes and
non-controlling interest............... 1,907,775 (710,340) (330,164)
Income taxes:
Current (notes 10 and 11)............. 767,053 (362,740) (126,927)
Deferred.............................. 103,371 70,838 5,000
----------- ---------- ----------
870,424 (291,902) (121,927)
----------- ---------- ----------
Earnings (loss) before non-controlling
interest............................... 1,037,351 (418,438) (208,237)
Non-controlling interest................ 131,507 (88,439) (52,524)
----------- ---------- ----------
Net earnings (loss)..................... $ 905,844 $ (329,999) $ (155,713)
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-113
<PAGE>
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1998
YEAR ENDED THROUGH
DECEMBER 31, MAY 19,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Retained earnings, beginning of period................ $2,772,739 $3,678,583
Net earnings (loss)................................... 905,844 (329,999)
Transfer to paid-up capital of the outstanding Class B
shares
(note 8)............................................. -- (550,000)
---------- ----------
Retained earnings, end of period...................... $3,678,583 $2,798,584
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-114
<PAGE>
PERCO GROUP LTD.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(EXPRESSED IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, JANUARY 1,
YEAR ENDED 1998 1997
DECEMBER THROUGH MAY THROUGH MAY
31, 1997 19, 1998 19, 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash provided by (used in):
Operations:
Net earnings (loss)................... $ 905,844 $ (329,999) $ (155,713)
Items not involving cash:
Gain on disposal of fixed assets..... (647,352) (231,616) (324,940)
Depreciation of fixed assets......... 2,187,994 881,901 813,074
Amortization of deferred charges..... 27,600 11,500 9,200
Deferred income taxes................ 103,371 70,838 5,000
Non-controlling interest............. 131,507 (88,439) (52,524)
Net change in non-cash operating
working capital:
Accounts receivable.................. (296,315) 1,117,571 702,850
Income taxes receivable.............. (183,914) (510,016) (288,650)
Inventories.......................... (168,676) (203,848) (308,566)
Prepaid expenses..................... (27,975) 41,553 (97,906)
Accounts payable..................... 14,272 (132,649) 309,283
Accrued liabilities.................. 56,010 20,305 82,393
Income taxes payable................. (165,307) -- (165,307)
----------- ----------- -----------
1,937,059 647,101 528,194
Financing:
Increase in long-term debt............ 2,199,387 1,593,853 1,539,000
Decrease in long-term debt............ (2,008,686) (747,674) (498,098)
Decrease in obligation under capital
leases............................... (163,372) (52,463) (56,896)
----------- ----------- -----------
27,329 793,716 984,006
Investing:
Acquisition of fixed assets........... (3,561,771) (2,982,984) (2,297,799)
Proceeds of disposal of fixed assets.. 895,007 456,703 420,142
----------- ----------- -----------
(2,666,764) (2,526,281) (1,877,657)
----------- ----------- -----------
Decrease in cash........................ (702,376) (1,085,464) (365,457)
Cash (bank indebtedness net of cash),
beginning of
period................................. 304,561 (397,815) 304,561
----------- ----------- -----------
Bank indebtedness net of cash, end of
period................................. $ (397,815) $(1,483,279) $ (60,896)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-115
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN CANADIAN DOLLARS)
YEAR ENDED DECEMBER 31, 1997
(THE INFORMATION AT MAY 19, 1998 AND FOR THE PERIOD FROM JANUARY 1, THROUGH
MAY 19, 1998 AND 1997 IS UNAUDITED.)
The Company, incorporated under Part 1A of the Quebec Companies Act, is
involved primarily in the rental of industrial and building equipment in
Canada.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
The accompanying consolidated financial statements are presented in
accordance with accounting principles generally accepted in Canada (Canadian
GAAP).
As described in note 14, the Company was acquired by United Rentals of
Canada (Quebec), Inc. These financial statements are prepared on the basis of
their predecessor historical costs and do not include any adjustments that may
result from the acquisition of the Company by United Rentals of Canada
(Quebec), Inc.
(b) Basis of consolidation:
The consolidated financial statements include the accounts of Perco Group
Ltd. and its subsidiary, 2633-4680 Quebec Inc.
(c) Interim financial statements:
The accompanying balance sheet at May 19, 1998 and the statements of
earnings, retained earnings and changes in financial position for the period
from January 1, through May 19, 1998 and 1997 are unaudited and have been
prepared on a basis that is consistent with the audited consolidated financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The results of operation for such interim periods are not
necessarily indication of results for a full year.
(d) Inventories:
Goods and equipment for resale and supplies are valued at the lower of cost
and net realizable value. Spare parts and supplies are valued at the lower of
cost and replacement cost less an allowance for obsolescence. Cost is
determined using the first in, first out method.
(e) Fixed assets:
Fixed assets are stated at cost. Depreciation and amortization are provided
using the following methods and annual rates:
<TABLE>
<CAPTION>
ASSET METHOD RATE/PERIOD
----- ----------------- -------------
<S> <C> <C>
Buildings.................................. Declining balance 4%
Rental equipment........................... Straight-line 6 2/3% to 100%
Cars and trucks............................ Declining balance 30%
Furniture and fixtures..................... Declining balance 20%
Leasehold improvements..................... Straight-line 5 years
Computer hardware and software............. Declining balance 30%
Cars and trucks under capital leases....... Declining balance 30%
</TABLE>
F-116
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(f) Deferred financing costs:
The costs of obtaining bank and other debt financing are deferred and
amortized on a straight-line basis over the effective life of the debt to
which they relate.
(g) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ACCOUNTS RECEIVABLE:
Accounts receivable are net of allowance for doubtful accounts of $380,837
at December 31, 1997 and $443,318 at May 19, 1998.
3. FIXED ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ -----------
<S> <C> <C>
Land............................................... $ 901,503 $ 901,503
Buildings.......................................... 2,439,276 2,446,545
Rental equipment................................... 23,225,446 25,282,753
Cars and trucks.................................... 1,376,234 2,109,987
Furniture and fixtures............................. 466,277 476,007
Leasehold improvements............................. 752,424 809,584
Computer hardware and software..................... 382,148 402,221
Cars and trucks under capital leases............... 1,134,888 460,015
----------- -----------
30,678,196 32,888,615
Less accumulated depreciation and amortization..... 17,762,505 18,096,928
----------- -----------
$12,915,691 $14,791,687
=========== ===========
</TABLE>
4. BANK INDEBTEDNESS GUARANTEES:
The bank indebtedness and the long-term debt of the Company described in
note 5 are secured by hypothecs on inventories and accounts receivable, a
movable hypothec of $10,700,000 on all corporeal and incorporeal movable
property, including a hypothec of $10,700,000 on the all-risks insurance
coverage relating to the assets pledged as security to the bank.
F-117
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
<S> <C> <C>
Revolving term loan maturing in 2000, bearing interest
at the bank's Canadian base rate plus 1.5%, payable
in 24 monthly instalments of principal of $84,524,
with a final payment covering the principal balance.. $2,178,437 $2,393,086
Term loan maturing in 2000, bearing interest at the
bank's Canadian base rate plus 1%, payable in 35
equal monthly instalments of $20,286, (principal
only) with a final payment of $507,159............... 1,217,174 1,136,032
Loan from the Federal Business Development Bank
maturing in 1999, bearing interest at the bank's base
rate plus 2.5% and additional interest equal to 0.25%
of the Company's total annual revenue, payable in
monthly instalments of $16,700 (principal only)...... 388,200 321,400
Term loan maturing in 2001, bearing interest at the
bank's Canadian base rate plus 1%, payable in 47
equal monthly instalments of $18,335, (principal
only) with a final payment of $458,325............... 1,320,070 1,246,730
Term loan maturing in 2002, bearing interest at the
bank's Canadian base rate plus 1%, payable in 59
monthly instalments of $25,000 (principal only), with
a final payment of $625,000 covering the principal
balance.............................................. 2,100,000 2,000,000
Credit facility for acquisition of fixed assets
convertible in December 1998 into a term loan
maturing in 2003, bearing interest at the bank's
Canadian base rate plus 1%, payable in equal monthly
instalments (principal only), with a final payment to
be determined covering the principal balance......... -- 729,000
First mortgage loan in the amount of $1,000,000 and
second mortgage in the amount of $450,000 secured by
land and buildings with a net book value of
$1,222,596 as at December 31, 1997, 8.75%, payable in
monthly instalments of $15,137 (principal and
interest combined), renegotiable in December 1999,
maturing in April 2004............................... 871,903 835,826
First mortgage loan in the amount of $1,200,000
secured by land and a building with a net book value
of $1,113,832 as at December 31, 1997, 7.3%, payable
in monthly instalments of $10,770 (principal and
interest combined), renegotiable in December 1999,
maturing in December 2005............................ 784,480 753,905
Term loan maturing in 2003, bearing interest at the
bank's Canadian base rate plus 1% in 60 monthly
instalments of $2,893 (principal only), with a final
payment of $69,420 covering the principal balance.... -- 237,214
Conditional sale contracts maturing in 2001 and 2002,
bearing interest at various rates from 7% to 8.70%,
payable in monthly instalments of $4,274, including
interest. These debts are secured by trucks and
equipment............................................ 177,248 230,498
---------- ----------
9,037,512 9,883,691
Less current portion of long-term debt................ 2,295,000 2,453,000
---------- ----------
$6,742,512 $7,430,691
========== ==========
</TABLE>
F-118
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
The term loans and the Federal Business Development Bank loan are secured by
various assets, as described in note 4. Under the term loan agreements, the
Company is committed to maintain certain financial ratios.
5. LONG-TERM DEBT (CONTINUED):
Repayments of the long-term debt for each of the next five years are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ ---------
<S> <C> <C>
1998.................................................. $2,295,000 $ --
1999.................................................. 2,210,000 2,453,000
2000.................................................. 1,573,000 2,530,000
2001.................................................. 1,240,000 1,608,000
2002.................................................. 1,165,000 1,338,000
2003.................................................. -- 1,431,000
</TABLE>
6. OBLIGATION UNDER CAPITAL LEASES:
Total future minimum payments under capital leases are as follows as at:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ --------
<S> <C> <C>
1998................................................. $263,371 $ --
1999................................................. 100,242 228,410
2000................................................. 62,846 98,401
2001................................................. 26,066 51,171
2002................................................. -- 5,641
-------- --------
Total minimum lease payments......................... 452,525 383,623
Less amount representing interest at rates varying
from 9% to 12.2%.................................... 51,805 35,366
-------- --------
Balance of obligation................................ 400,720 348,257
Less current portion................................. 229,678 197,678
-------- --------
Obligation under capital leases...................... $171,042 $150,579
======== ========
</TABLE>
7. REDEEMABLE SHARES:
An unlimited number of authorized:
Class C shares, voting, without par value, mandatorily redeemable by the
Company at death of holder
Class D shares, non-voting, without par value, conveying one monthly
preferred, non-cumulative 1% dividend on the redemption value, redeemable
at the option of the holder and issuer at the paid-up capital and in the
case of Class A shares being converted into Class D shares equal to the
difference between the paid-up capital and the fair market value at the
time of exchange
Class E shares, non-voting, without par value, conveying one monthly
preferred, non-cumulative 1% dividend on the redemption value, redeemable
at the option of the holder and issuer at the fair market value of the
consideration received at issuance
F-119
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
7. REDEEMABLE SHARES (CONTINUED):
Class F shares, non-voting, without par value, conveying one yearly,
preferred, non-cumulative dividend of $1 per share, redeemable at the
option of the holder and issuer at the paid-up capital
Class G shares, non-voting, without par value, conveying one yearly,
preferred, non-cumulative dividend of $1 per share, redeemable at the
option of the issuer at the paid-up capital
Issued and fully paid:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
<S> <C> <C>
62,500 Class D shares, redeemable at $62,500........ $ 62,500 $ 62,500
100,000 Class G shares, redeemable at $1,000,000.... 1,000,000 1,000,000
---------- ----------
$1,062,500 $1,062,500
========== ==========
</TABLE>
8. CAPITAL STOCK:
An unlimited number of authorized:
Class A shares, voting, participating, without par value, convertible
into Class D shares only with the joint approval of the Board and positive
vote of Class A and D holders
Class B shares, voting, participating, without par value
Issued and fully paid:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ --------
<S> <C> <C>
312,500 Class A shares (250,000 shares on May 19,
1998).............................................. $312,500 $250,000
62,500 Class B shares .............................. -- 612,500
-------- --------
$312,500 $862,500
======== ========
</TABLE>
During the period ended May 19, 1998, 62,500 Class A shares were converted
into 62,500 Class B shares and the paid-up capital of these shares was
increased by $550,000.
9. COMMITMENTS:
The Company is committed under lease contracts for premises expiring at
various dates from January 1, 1998 to January 31, 2001. The minimum lease
payments for each of the next four years are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19,
1997 1998
------------ --------
<S> <C> <C>
1998................................................... $163,000 $ --
1999................................................... 153,000 176,000
2000................................................... 61,000 139,000
2001................................................... 4,000 58,000
-------- --------
$381,000 $373,000
======== ========
</TABLE>
F-120
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
10. INCOME TAXES:
The effective income tax rate differs from the statutory rate that would be
obtained by applying the combined basic federal and provincial tax rate to
earnings before income taxes. These differences result from the following
items:
<TABLE>
<CAPTION>
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ ------- -------
<S> <C> <C> <C>
Combined basic federal and provincial tax rate.... 38.7% 38.7% 38.7%
Increase (decrease) in income tax rate resulting
from:
Permanent differences as a result of purchase
accounting and non-deductible expenses......... (4.8) 2.4 3.4
Previous years' reassessment.................... 11.7 -- --
Manufacturing and processing profits deduction.. -- -- (5.2)
---- ---- ----
Effective income tax rate......................... 45.6% 41.1% 36.9%
==== ==== ====
</TABLE>
11. INCOME TAXES REASSESSMENT:
The Company has been reassessed for the tax credits (manufacturing and
processing profits deduction) it claimed in 1996 and in respect of the years
1994 to 1996 inclusive. The reassessment amounts to $224,000 and is included
in the December 31, 1997 current income taxes.
12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The company follows Canadian generally accepted accounting principles
(Canadian GAAP) which are different in some respects from those applicable in
the United States (U.S. GAAP).
(a) The following table presents a reconciliation of stockholder's equity
from Canadian GAAP to U.S. GAAP:
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
1998
YEAR ENDED THROUGH
DECEMBER 31, MAY 19,
1997 1998
------------ ----------
<S> <C> <C>
Stockholders' equity:
Per Canadian GAAP................................. $3,991,083 $3,661,084
Decrease in fixed assets net (i).................. (820,253) (721,123)
Decrease in deferred income taxes (ii)............ 784,933 743,298
---------- ----------
Per U.S. GAAP....................................... $3,955,763 $3,683,259
========== ==========
</TABLE>
(i) Under Canadian GAAP, as a result of negative goodwill from a business
combination accounted for as a purchase, the Company reduced the value of
fixed assets. Under U.S. GAAP, assets acquired in a purchase business
combination are recorded at their gross fair values, with separate deferred
tax assets and liabilities recognized for the tax effect of the differences
between such fair values and the tax bases.
(ii) The income tax provision in Canada is based on the deferral method
and adjustments are generally not made for changes in income tax rates.
Under U.S. GAAP, deferred tax liabilities are measured using the enacted
tax rate expected to apply to taxable income in the periods in which the
deferred tax asset on liability is expected to be settled. A U.S. GAAP
difference arises for the Company due to timing differences resulting from
the application of the purchase accounting adjustments described above.
F-121
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED):
(b) The following table presents a reconciliation of net earnings from
Canadian GAAP to U.S. GAAP:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 JANUARY 1, 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ --------------- ---------------
<S> <C> <C> <C>
Net (loss) earnings under
Canadian GAAP................ $ 905,844 $(329,999) $(155,713)
Income tax adjustment under
the asset and liability
method....................... (154,252) (41,635) (36,540)
Lower depreciation on fixed
assets....................... 258,546 99,130 99,389
---------- --------- ---------
Net earnings (loss) under U.S.
GAAP......................... $1,010,138 $(272,504) $ (92,864)
========== ========= =========
</TABLE>
(c) Statement of change in financial position:
Under U.S. GAAP, a statement of cash flow is required while a statement of
changes in financial position is required under Canadian GAAP. There are no
differences in the amounts presented in the accompanying statement of changes
in financial position from a cash flow statement prepared under U.S. GAAP,
except for the presentation of bank indebtedness. Under Canadian GAAP, cash in
the statement of changes in financial position is shown net of bank
indebtedness. Under U.S. GAAP, the net change in bank indebtedness, with
original maturities of 90 days or less, is presented as a financing activity.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, 1998 JANUARY 1, 1997
YEAR ENDED THROUGH THROUGH
DECEMBER 31, MAY 19, MAY 19,
1997 1998 1997
------------ --------------- ---------------
<S> <C> <C> <C>
Financing activity under
Canadian GAAP............... $ 27,329 $ 793,716 $ 984,006
Bank indebtedness increase... 724,833 1,242,431 353,368
-------- ---------- ----------
Financing activity under U.S.
GAAP........................ $752,162 $2,036,147 $1,337,374
======== ========== ==========
The reclassification results
in:
Cash at end of year under
U.S. GAAP................. $373,650 $ 530,617 $ 339,104
======== ========== ==========
</TABLE>
13. FINANCIAL INSTRUMENTS:
(a) Fair value:
The carrying value of the Company's accounts receivable, bank indebtedness,
accounts payable and accrued liabilities approximates their fair values due to
their demand nature or relatively short periods to maturity.
The fair value of the Company's long-term debt and obligation under capital
leases has been determined to be equal to their carrying values, as the
current financing arrangements represent the borrowing rate presently
available to the Company for loans with similar terms and maturities.
F-122
<PAGE>
PERCO GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(EXPRESSED IN CANADIAN DOLLARS)
13. FINANCIAL INSTRUMENTS: (CONTINUED)
(b) Credit risk:
Financial instruments that potentially subject the Company to significant
concentration risk consist principally of trade accounts receivable. Credit
risk with respect to trade accounts receivable is generally diversified due to
the large number of entities comprising the Company's customer base. The
Company performs ongoing credit evaluations of its customers' financial
condition. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions regarding the provision for doubtful accounts. However, actual
results could differ from those estimates.
14. SUBSEQUENT EVENT:
On May 21, 1998, all of the outstanding Class G shares were redeemed for a
cash consideration of $1,000,000.
On May 19, 1998 the Company entered into a stock purchase agreement with
United Rentals, Inc. Under the terms of the stock purchase agreement, the
transaction closed on May 22, 1998 and all of the remaining outstanding
capital stock described in notes 7 and 8 and all the shares held in 2633-4680
Quebec Inc. by the non-controlling interest were acquired by United Rentals of
Canada (Quebec), Inc. after Perco Group Ltd. amalgamated with its subsidiary,
2633-4680 Quebec Inc., and all outstanding shares were converted into shares
of the amalgamated company.
F-123
<PAGE>
AUDITORS' REPORT
To the Directors of
Reitzel Rentals Ltd.
We have audited the balance sheet of Reitzel Rentals Ltd. as at February 28,
1998 and the statements of operations, shareholders' equity and cash flow for
the year then ended. These audited financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at February 28, 1998 and
the results of its operations and cash flows for the year then ended in
accordance with generally accepted accounting principles in the United States.
PricewaterhouseCoopers
Chartered Accountants
Kitchener, Canada
July 27, 1998
F-124
<PAGE>
REITZEL RENTALS LTD.
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
FEBRUARY
28, MAY 31,
1998 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................... $ 46,301 $ --
Accounts receivable--trade, net of allowance for
doubtful accounts
of $84,980 ($93,292 as of May 31, 1998)............... 2,033,118 2,204,300
Inventory.............................................. 1,175,302 1,833,371
Rental equipment, net (Note 3)......................... 11,003,382 11,906,195
Property and equipment, net (Note 4)................... 2,264,061 1,552,663
Other assets........................................... 1,088,343 1,322,032
----------- -----------
$17,610,507 $18,818,561
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Bank operating line (Note 5)........................... $ -- $ 891,005
Accounts payable--trade................................ 860,221 1,969,854
Accrued management and staff bonuses................... 2,014,079 503,070
Other liabilities...................................... 348,468 1,415,692
Long-term debt (Note 6)................................ 5,423,076 5,008,469
Due to shareholders and related party (Note 7)......... 707,278 280,058
Deferred income taxes (Note 9)......................... 2,778,000 2,931,000
----------- -----------
12,130,122 12,999,148
Mandatorily redeemable shares (Note 8)................. 947,990 947,990
Commitments (Note 10)
Share capital (Note 8)................................. 56,050 56,050
Retained earnings...................................... 4,475,345 4,815,373
----------- -----------
4,531,395 4,871,423
----------- -----------
$17,610,507 $18,818,561
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-125
<PAGE>
REITZEL RENTALS LTD.
STATEMENTS OF OPERATIONS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS THREE MONTHS
FEBRUARY ENDED ENDED
28, MAY 31, MAY 31,
1998 1997 1998
---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Equipment rentals....................... $9,695,641 $1,832,811 $2,278,718
Sales of rental equipment............... 1,544,982 517,409 303,742
Sales of new equipment, merchandise and
other revenues......................... 5,977,848 1,712,996 1,469,432
---------- ---------- ----------
Total revenues........................ 17,218,471 4,063,216 4,051,892
Cost of revenues:
Cost of equipment rentals, excluding
depreciation........................... 3,639,956 688,077 855,481
Depreciation of rental equipment........ 857,104 214,276 214,276
Cost of rental equipment sales.......... 668,717 223,951 131,469
Cost of new equipment and merchandise
sales and other operating costs........ 4,232,725 1,212,918 1,040,458
---------- ---------- ----------
Total cost of revenues................ 9,398,502 2,339,222 2,241,684
---------- ---------- ----------
Gross profit............................. 7,819,969 1,723,994 1,810,208
Selling, general and administrative
expenses................................ 3,154,852 1,031,807 732,798
Non-rental depreciation and
amortization............................ 376,240 76,585 76,400
---------- ---------- ----------
Operating income......................... 4,288,877 615,802 1,001,010
Interest expense......................... 515,705 115,218 197,154
Management and staff bonuses............. 2,014,445 -- --
(Gain) loss on sale of property and
equipment............................... (363,928) (362,784) 31,847
---------- ---------- ----------
Income before provision for income
taxes................................... 2,123,015 863,368 772,009
Provision for income taxes............... 918,470 385,000 344,000
---------- ---------- ----------
Net income............................... $1,204,545 $ 478,368 $ 428,009
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-126
<PAGE>
REITZEL RENTALS LTD.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
COMMON RETAINED
SHARES EARNINGS TOTAL
------- ---------- ----------
<S> <C> <C> <C>
Balance, March 1, 1997.......................... $56,050 $3,270,800 $3,326,850
Net income...................................... -- 1,204,545 1,204,545
------- ---------- ----------
Balance, February 28, 1998...................... 56,050 4,475,345 4,531,395
Cash dividends.................................. -- (87,981) (87,981)
Net income (unaudited).......................... -- 428,009 428,009
------- ---------- ----------
Balance, May 31, 1998 (unaudited)............... $56,050 $4,815,373 $4,871,423
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-127
<PAGE>
REITZEL RENTALS LTD.
STATEMENTS OF CASH FLOWS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS THREE MONTHS
FEBRUARY ENDED ENDED
28, MAY 31, MAY 31,
1998 1997 1998
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................. $ 1,204,545 $ 478,368 $ 428,009
Items not requiring cash
Amortization.......................... 1,233,344 290,661 290,676
Gain on sale of rental equipment...... (876,265) (293,458) (172,273)
(Gain) loss on disposal of property
and equipment........................ (363,928) (362,784) 31,847
Deferred income taxes................. 842,000 211,000 153,000
Changes in non-cash operating items
Accounts receivable--trade............ (175,759) 114,617 (171,182)
Inventory............................. (122,884) (668,672) (658,069)
Accounts payable--trade and other
liabilities.......................... 554,478 (130,275) 1,095,828
----------- --------- -----------
2,295,531 (360,543) 997,836
Cash flows from investing activities
Purchase of property and equipment..... (161,975) (20,188) (90,017)
Proceeds of disposal of property and
equipment............................. 309,604 299,604 189,793
Proceeds on sale of rental equipment... 1,544,982 517,409 303,742
Purchase of rental equipment........... (1,863,221) (689,756) (502,709)
(Increase) decrease in other assets.... 20,956 40,634 (160,314)
----------- --------- -----------
(149,654) 147,703 (259,505)
Cash flows from financing activities
Increase in bank operating line........ -- 877,892 891,005
Repayment of long-term debt............ (2,222,275) (593,973) (1,160,436)
Increase (decrease) in shareholder
loans................................. 122,699 (71,079) (427,220)
Cash dividend.......................... -- -- (87,981)
----------- --------- -----------
(2,099,576) 212,840 (784,632)
----------- --------- -----------
Net cash increase (decrease) during the
period................................. 46,301 -- (46,301)
Cash beginning of period................ -- -- 46,301
----------- --------- -----------
Cash end of period...................... $ 46,301 $ -- $ --
=========== ========= ===========
</TABLE>
See accompanying notes to financial statements.
F-128
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
1.ORGANIZATION AND BASIS OF PRESENTATION
Reitzel Rentals Ltd. (the "Company") was incorporated in January 1987 under
the laws of Ontario, Canada. The Company rents a broad array of equipment to a
diverse customer base that includes construction industry participants,
industrial companies, homeowners and others in Ontario. The Company also
engages in related activities such as selling used rental equipment, acting as
a distributor for certain new equipment and selling related merchandise and
parts. 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
sheet is presented on an unclassified basis.
Comparative financial statements have not been presented as these financial
statements have been prepared solely for inclusion in the offering memorandum
issued by United Rentals Holdings, Inc. and management of United Rental
Holdings, Inc. have advised that comparative information is not required.
The financial statements have been prepared in accordance with United States
Generally Accepted Accounting Principles. All amounts are in Canadian dollars.
2.SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventory consists of equipment, tools, parts, fuel and related supply
items. Inventory is stated at the lower of average weighted cost or market.
Rental equipment
Rental equipment is recorded at cost and depreciated over the estimated
useful lives of the equipment using the straight-line method. The range of
useful lives estimated by management for rental equipment is two to ten years.
Rental equipment is depreciated to a salvage value of zero to ten percent of
cost. Rental equipment having a cost of $500 or less is expensed at the time
of purchase. Maintenance and repair costs are charged to operations as
incurred.
Revenue recognition
Revenue related to the sale of equipment is recognized at the time of sale
which coincides with delivery. Revenue related to rental equipment is
recognized over the contract term on a straight-line basis.
Property and equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. The range of useful
lives estimated by management for property and equipment is two to ten years.
Maintenance and repair costs are charged to operations as incurred.
Fair value of financial instruments
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable, and other liabilities approximate fair value due to the
immediate to short-term maturity of these financial instruments. The fair
value of long-term debt and amounts due to shareholders and related party are
determined using current interest rates for similar instruments as of period
ended.
F-129
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
Income taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial statement and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when 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.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of accounts receivable.
Concentrations of credit risk with respect to accounts receivable are limited
because a large number of customers make up the Company's customer base. The
Company controls credit risk through credit approvals, credit lines, and
monitoring procedures.
Twelve customers represent ten percent of revenues in the year ended
February 28, 1998 (nine customers as of May 31, 1998 and one as of May 31,
1997) and twelve customers represented ten percent of accounts receivable--
trade as of February 28, 1998 (twelve customers as of May 31, 1998 and eleven
as of May 31, 1997).
Impact of recently issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is required to
adopt the provisions of these Statements in fiscal year 1999. The Company is
currently evaluating the reporting formats recommended under both these
Statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employer Disclosure about Pensions and other Post Retirement Benefits" and
SFAS No. 133, "Accounting for Derivatives and Other Hedging Activities." The
Company is currently evaluating the effects of these Statements.
Interim financial statements
The accompanying balance sheet and statement of shareholders' equity at May
31, 1998 and the statement of operations, shareholders' equity and cash flows
for the three months ended May 31, 1997 and 1998 are unaudited and have been
prepared on a basis that is consistent with the audited financial statements
included herein. In the opinion of management, such unaudited 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.
F-130
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
3.RENTAL EQUIPMENT
<TABLE>
<CAPTION>
MAY 31,
FEBRUARY 28, 1998 1998
----------------- -----------
(UNAUDITED)
<S> <C> <C>
Rental equipment.............................. $13,186,212 $13,769,978
Amortization.................................. (2,182,830) (1,863,783)
----------- -----------
Net......................................... $11,003,382 $11,906,195
=========== ===========
</TABLE>
4.PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
FEBRUARY 28, 1998
----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ ----------
<S> <C> <C> <C>
Land..................................... $ 370,717 $ -- $ 370,717
Buildings................................ 2,268,773 1,328,578 940,195
Vehicles................................. 1,277,240 933,579 343,661
Furniture and equipment.................. 1,055,267 784,614 270,653
Radio equipment.......................... 156,124 136,902 19,222
Pavement................................. 122,914 47,687 75,227
Leasehold improvements................... 476,480 240,887 235,593
Electric signs........................... 36,647 27,854 8,793
---------- ---------- ----------
$5,764,162 $3,500,101 $2,264,061
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1998
----------------------------------
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Land..................................... $ 90,892 $ -- $ 90,892
Buildings................................ 1,632,137 1,048,338 583,799
Vehicles................................. 1,208,838 905,959 302,879
Furniture and equipment.................. 988,582 734,813 253,769
Radio equipment.......................... 156,124 138,103 18,021
Pavement................................. 115,414 46,153 69,261
Leasehold improvements................... 477,910 251,813 226,097
Electric signs........................... 31,558 23,613 7,945
---------- ---------- ----------
$4,701,455 $3,148,792 $1,552,663
========== ========== ==========
</TABLE>
5.AVAILABLE LINE OF CREDIT
The Company has available a $1,500,000 line of credit that bears interest of
prime rate plus 3/4% per annum which was 5.65% as of February 28, 1998 and is
secured, together with Bank Loans (Note 6) by a general assignment of accounts
receivable--trade, a general security agreement and a fixed charge debenture
of $4,000,000 over all property and equipment subordinated to the First
Mortgages in the amount of $299,000. No amount was outstanding under the line
of credit at February 28, 1998 and no standby fees apply.
F-131
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
6.LONG-TERM DEBT
<TABLE>
<CAPTION>
FEBRUARY MAY 31,
28, 1998 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
Equipment Loans, secured by the equipment financed,
repayable in monthly instalments of principal and
interest at floating and fixed annual rates ranging
from 4.0% to 10.35%, maturing in 1998 to 2002....... $2,296,720 $2,149,606
Bank Loans, secured by a fixed charge over the
Company's land and buildings, including a general
assignment of accounts receivable and acknowledged
assignment of fire insurance coverage, repayable in
monthly instalments of principal and interest at
floating and fixed annual rates ranging from 7.45%
demand in certain circumstances..................... 1,850,245 2,105,152
First Mortgages, secured by certain of the Company's
real estate, repayable in monthly instalments of
principal and interest at annual rates ranging from
8.25% to 11.875%, maturing 1998 to 1999............. 835,300 378,103
Note Payable, repayable in monthly instalments of
principal and interest of $8,155 per month at annual
interest rate of 7.2%, maturing July 2002........... 375,185 375,608
Promissory Note, repayable in monthly principal
payments of $4,375 plus interest, calculated monthly
at prime plus 1%, maturing in May 1999.............. 65,626 --
---------- ----------
$5,423,076 $5,008,469
========== ==========
</TABLE>
Cash interest paid on long-term debt during the period amounted to $447,326
($159,950 in the three months ended May 31, 1998 and $115,218 in the three
months ended May 31, 1997).
Approximate principal payments as of February 28, 1998 due with the next
five years are as follows:
<TABLE>
<S> <C>
1999.............................................................. $1,806,860
2000.............................................................. 1,599,398
2001.............................................................. 1,090,079
2002.............................................................. 293,154
2003.............................................................. 110,325
</TABLE>
7.DUE TO SHAREHOLDERS AND RELATED PARTY
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Notes payable to shareholders, no specified
repayment terms, with interest calculated monthly
at the Company's average annual cost of borrowing
and paid annually within six months of the year-
end............................................... $699,278 $280,058
Note payable to affiliated company, interest-free
with no specified repayment terms................. 8,000 --
-------- --------
$707,278 $280,058
======== ========
</TABLE>
In the period ended May 31, 1998, obligations to certain shareholders were
satisfied by the transfer of the other assets and certain equipment at fair
market value as determined by independent appraisal.
F-132
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
8.SHARE CAPITAL
The Company is authorized to issue 251 non-voting, Class A shares and no
Class A shares were outstanding (none outstanding as of May 31, 1998). The
Class A shares rank in priority over Class B and common shares. Dividends are
cumulative on the Class A shares and are payable at a rate that will provide
the holder, assuming the holder is in the highest Ontario personal income tax
bracket, with the same after-tax rate of return on the Class A share dividend
as if the holder had received interest from a Canadian Chartered Bank at the
average of that Bank's prime lending rate each month for the twelve months in
the Company's fiscal year minus 20% of that average rate. The dividends paid
on Class A shares in any year may not exceed net earnings of the Company or
ten percent of the retained earnings of the Company as of the preceding fiscal
year-end.
The Class A shares are redeemable and retractable at the price of $470 per
Class A share (the "Redemption Price") subject to certain restrictions. The
number of Class A shares to be redeemed is limited (the "Redemption Limit") in
any one year to one-eighteen of $117,970 or the lesser of one-third of the
After-Tax Net Profits of the Company for the fiscal year previous to the
redemption notice and the After-Tax Net Profits of the Company for the fiscal
year previous to the redemption notice less dividends paid on Class A shares
in that previous fiscal year or an amount that will not contravene any banking
covenants the Company entered into at that particular time. Where the
redemption request exceeds the Redemption Limit, the Company will only redeem
Class A shares such that the total of Class A shares redeemed and the
dividends paid on Class A shares in the year of request falls below the
Redemption Limit. Notwithstanding the foregoing, all Class A shares must be
redeemed before December 31, 2007. Class A shareholders are entitled to the
same redemption amount as Class B shareholders in any one year without regard
to the Redemption Limit. Class A shares are redeemable only at the end of the
fiscal year.
The Company is authorized to issue 2,017 non-voting Class B shares of which
2,017 were outstanding at February 28, 1998 (2,017 outstanding as of May 31,
1998). The Class B shares are subordinate to Class A shares but rank in
priority to common shares. Class B shares are entitled to non-cumulative
dividends at a rate of 10% of the Redemption Amount, being $470 per Class B
share. The Aggregate Redemption Amount of Class A shares is $947,990. The
number of Class B shares redeemable in any one year is limited to an amount
that will not contravene any banking covenants the Company entered into at
that particular time. Class B shares are redeemable only at the end of the
fiscal year.
The Class B shares have been disclosed as a liability of the Company at
their redemption amount of $947,990 as Mandatorily Redeemable Shares with a
corresponding charge at their date of issue.
The Company is authorized to issue 37,000 common shares at no par value of
which 3,250 were outstanding at February 28, 1998 (3,250 were outstanding as
of May 31, 1998).
9.INCOME TAXES
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31, MAY 31,
1998 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Combined federal and provincial income tax
rate........................................ 44.6% 44.6% 44.6%
Reduction by the small business deduction.... (2.0) -- --
Other differences............................ 0.6 -- --
---- ---- ----
Effective income tax rate.................... 43.3% 44.6% 44.6%
==== ==== ====
</TABLE>
The Company is taxable in one jurisdiction.
F-133
<PAGE>
REITZEL RENTALS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998)
The provision for income taxes consists of current tax expense of $76,470
($191,000 as of May 31, 1998 and $174,000 as of May 31, 1997) and deferred tax
expense of $842,000 ($153,000 as of May 31, 1998 and $211,000 as of May 31,
1997).
The deferred tax credit balance of $2,778,000 ($2,931,000 as of May 31, 1998
and $2,147,000 as of May 31, 1997) represents amounts deducted for tax
depreciation in excess of accounting depreciation of $6,229,000 ($6,572,000 as
of May 31, 1998 and $4,814,000 as of May 31, 1997). There are no other
differences in accounting and tax basis.
10.LEASE COMMITMENTS
Minimum rental commitments under operating leases are as follows:
<TABLE>
<S> <C>
1999................................................................ $442,000
2000................................................................ 420,000
2001................................................................ 374,000
2002................................................................ 300,000
2003................................................................ 264,000
</TABLE>
Operating lease expense for the year ended February 28, 1998 was $356,000
($110,000 as of May 31, 1998 and $89,000 as of May 31, 1997).
11.SUPPLEMENTAL CASH DISCLOSURES
<TABLE>
<CAPTION>
FEBRUARY 28, MAY 31,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Supplemental schedule of non-cash activities:
Accounts payable--trade and other liabilities.... $ -- $(430,000)
Proceeds on disposal of property and equipment... 330,000 521,000
Purchase of rental equipment..................... (2,427,400) (745,829)
Increase in other assets......................... (330,000) (91,000)
Proceeds of long-term debt....................... 2,427,400 745,829
</TABLE>
12.SUBSEQUENT EVENT
As of May 31, 1998, all the outstanding shares of the Company were purchased
by United Rentals Inc.
F-134
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Channel Equipment Holding, Inc.
We have audited the accompanying combined balance sheet of Channel Equipment
Holding Inc. (see Note 1) (the "Companies") as of December 31, 1997 and the
related combined statements of operations, stockholders' equity (deficit) and
cash flows for the year then ended. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 Channel
Equipment Holding Inc. at December 31, 1997, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 21, 1998
F-135
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash ............................................................. $ 63,589
Accounts receivable, net of allowance for doubtful accounts of
$244,787......................................................... 1,274,432
Inventory......................................................... 617,793
Rental equipment, net............................................. 8,233,933
Property and equipment, net....................................... 546,798
Prepaid expenses and other assets................................. 27,567
-----------
Total assets.................................................. $10,764,112
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities:
Accounts payable, accrued expenses and other liabilities........ $ 997,055
Due to stockholders............................................. 745,650
Debt............................................................ 9,241,162
Deferred gain................................................... 121,980
-----------
Total liabilities............................................. 11,105,847
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, Channel Equipment, $1.00 par value, 1,000,000
shares authorized, 1,000 issued and outstanding; River City,
$1.00 par value, 100,000 shares authorized, 1,000 issued and
outstanding; and Contractors, $1.00 par value, 1,000,000 shares
authorized, 1,250 issued and outstanding....................... 3,250
Additional paid-in capital...................................... 238,836
Retained earnings (deficit)..................................... (538,821)
-----------
(296,735)
Treasury stock.................................................. (45,000)
-----------
Total stockholders' equity (deficit).......................... (341,735)
-----------
Total liabilities and stockholders' equity (deficit).......... $10,764,112
===========
</TABLE>
See accompanying notes.
F-136
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenue:
Equipment rentals............................................... $ 4,680,867
Rental equipment sales.......................................... 2,265,294
Sales of parts, supplies and new equipment...................... 3,836,954
-----------
Total revenues................................................ 10,783,115
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation................................................... 1,459,268
Depreciation, equipment rentals................................. 2,092,035
Cost of rental equipment sales.................................. 2,016,654
Cost of parts, supplies and new equipment sales................. 3,138,237
-----------
Total cost of revenues........................................ 8,706,194
-----------
Gross profits................................................. 2,076,921
Selling, general and administrative expenses...................... 2,085,283
Non-rental depreciation........................................... 40,067
-----------
Operating loss.................................................... (48,429)
Interest expense.................................................. 714,705
-----------
Loss before provisions for income taxes........................... (763,134)
Provision for income taxes........................................ 3,040
-----------
Net loss.......................................................... $ (766,174)
===========
</TABLE>
See accompanying notes.
F-137
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
-------------- PAID IN EARNINGS TREASURY
SHARES AMOUNTS CAPITAL (DEFICIT) STOCK
------ ------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997...... 3,250 $3,250 $238,836 $ 227,353 $(45,000)
Net loss...................... (766,174)
----- ------ -------- --------- --------
Balance at December 31, 1997.... 3,250 $3,250 $238,836 $(538,821) $(45,000)
===== ====== ======== ========= ========
</TABLE>
See accompanying notes.
F-138
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................... $ (766,174)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................... 2,132,102
Gain on rental equipment sales................................. (248,640)
Changes in assets and liabilities:
Increase in accounts receivable............................... (254,454)
Increase in inventory......................................... (176,462)
Decrease in prepaid expenses and other assets................. 39,219
Increase in accounts payable, accrued expenses and other
liabilities.................................................. 420,460
Increase in deferred gain..................................... 121,980
-----------
Cash provided by operating activities............................ 1,268,031
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment..................................... (846,817)
Proceeds from sale of rental equipment........................... 1,936,072
Purchases of property and equipment.............................. (40,712)
-----------
Cash provided by investing activities............................ 1,048,543
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt....................................... (4,525,576)
Proceeds from stockholders loans................................. 411,600
Borrowings under credit facilities............................... 1,803,455
-----------
Cash used in financing activities................................ (2,310,521)
-----------
Increase in cash................................................. 6,053
Cash balance at beginning of year................................ 57,536
-----------
Cash balance at end of year...................................... $ 63,589
===========
</TABLE>
See accompanying notes.
F-139
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements of Channel Equipment Holding, Inc. include
the accounts of Channel Equipment Holding, Inc. ("Channel"), River City
Machinery Co., Inc. ("River City") and Contractors Sales & Rentals, Inc.
("Contractors") (collectively the "Companies"). The Companies are affiliated
through common ownership. All significant intercompany accounts and
transactions have been eliminated in combination.
These combined financial statements are prepared on a historical cost basis
and do not include any adjustments that may result from the acquisition of the
Companies by United Rentals, Inc. ("United") as more fully described in Note
9.
Business Activity
The Companies rent, sell and repair construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Companies are located in three different cities
(Houston, Austin and Georgetown) and their principal market area is the state
of Texas. The nature of the Companies business is such that short-term
obligations are typically met by cash flow generated from long-term assets.
Consequently, consistent with industry practice, the balance sheet is
presented on an unclassified basis.
Inventory
Inventories consist primarily of general replacement parts, hydraulic tubing
and equipment held for resale and are stated at the lower of cost, determined
under the first-in, first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the combined
statement of operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life. Leasehold improvements are amortized using the straight-line
method over the estimated lives of the improvements or the remaining life of
the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
F-140
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Advertising Costs
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $56,300 in the year ended
December 31, 1997.
Income Taxes
Both Channel and River City have elected, by unanimous consent of its
stockholders, to be taxed under the provisions of Subchapter S of the Internal
Revenue Code, for federal purposes. Under those provisions both Channel and
River City do not have to pay federal income taxes; instead, the stockholders
are liable for individual income taxes on both Channel and River City's
profits. Therefore, no provision for federal income taxes is included in the
accompanying combined financial statements for Channel or River City.
Contractors, a C Corporation for federal tax purposes uses the "liability
method" of accounting for income taxes. Accordingly, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which differences are expected to reverse.
ACCOUNTING ESTIMATES
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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
<TABLE>
<S> <C>
Rental equipment................................................ $12,095,388
Less accumulated depreciation.................................. (3,861,455)
-----------
Rental equipment, net.......................................... $ 8,233,933
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Land............................................................... $218,428
Building........................................................... 213,736
Transportation equipment........................................... 134,443
Leasehold improvements............................................. 9,250
Furniture and fixtures............................................. 28,953
--------
604,810
Less accumulated depreciation...................................... (58,012)
--------
Total.............................................................. $546,798
========
</TABLE>
F-141
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
AEL Leasing Co., Inc.--Various notes dated from February 1997 to
June 1997 with annual interest rates ranging from 8% to 10.2%
due in monthly installments ranging from $933 to $4,616........ $ 213,149
The Associates--Two notes dated October 1997 with an annual
interest rate due in full in June 1998......................... 768,589
CIT Group--Various notes dated from April 1995 to August 1997
with annual interest rates ranging from 7.5% to 10.0% due in
monthly installments ranging from $533 to $6,007............... 1,626,743
CAT Financial--Various notes dated from April 1995 to July 1997
with annual interest rates ranging from 5.1% to 8.1% due in
monthly installments ranging from $912 to $6,180............... 619,776
Deutsche Financial--Various notes dated from April 1996 to April
1997 with annual interest rates ranging from 9.6% to 9.9% due
in monthly installments ranging from $930 to $2,893............ 564,160
NICE International Corporation--Various notes dated November
1997 with annual interest rates ranging from 9.4% to 10.9% due
in monthly installments ranging from $634 to $5,199............ 665,255
Chicago Pneumatic--Various notes dated from March 1997 to July
1997 with annual interest rates ranging from 7.5% to 9.5% due
in monthly installments ranging from $427 to $1,827............ 39,095
debis Financial Services, Inc.--Non-interest bearing line-of-
credit......................................................... 89,481
Newcourt Financial USA, Inc.--Various notes dated from June 1997
to September 1997 with an annual interest rate of 9.3% due in
monthly installments ranging from $1,751 to $20,107............ 549,994
First Prosperity--Various notes dated from April 1995 to
September 1997 with annual interest rates ranging from 7.8% to
10.0% due in monthly installments ranging from $415 to $1,178.. 144,631
Financial Federal--Various notes dated from January 1996 to
November 1997 with an annual interest rate of 11% due in
monthly installments ranging from $430 to $21,465.............. 2,984,398
Norwest Bank--Various notes dated November 1996 with an annual
interest rate of 9% due in monthly installments ranging from
$277 to $380................................................... 20,998
Case Credit--Various notes dated from August 1995 to November
1996 with annual interest rates ranging from 7.9% to 9.0% due
in monthly installments ranging from $481 to $6,935............ 207,007
KDC Financial--Various notes dated from March 1995 to May 1997
with annual interest rates ranging from 7.5% to 10.0% due in
monthly installments ranging from $722 to $4,576............... 571,885
JCB Financial--Various notes dated from June 1995 to October
1997 with annual interest rates ranging from 7.0% to 9.5% due
in monthly installments ranging from $782 to $1,554............ 134,272
PACCAR--Note dated June 1997 with an annual interest rate of
8.0% due in monthly installments of $1,540..................... 41,729
----------
$9,241,162
==========
</TABLE>
Substantially all rental equipment and fixed assets collateralize the above
notes.
All debt at December 31, 1997 was paid off in connection with the
acquisition discussed in Note 9.
F-142
<PAGE>
CHANNEL EQUIPMENT HOLDING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS
River City leases its Georgetown operating facility and Channel leases its
operating facilities from its stockholders on a month to month basis. Both
Channel and River City are responsible for all operating expenses of the
facilities including property taxes, assessments, insurance, repairs and
maintenance. Total rent expense for 1997 was approximately $160,100.
In connection with the acquisition discussed in Note 9, the lease terms have
been renegotiated.
The Companies also had a non-interest bearing note payable from its
stockholders totaling $745,650 at December 31, 1997. No repayment schedule has
been established.
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest and income taxes paid
were $705,700 and $3,040, respectively.
During 1997 the Companies purchased $4,240,540 of equipment which was
financed.
8. EMPLOYEE BENEFIT PLAN
The Companies have a defined contribution 401(k) pension plan which covers
substantially all employees. The Companies match 100% up to the first six
percent of the employees contribution. The Companies contributions to the plan
were $8,850 for the year ended December 31, 1997.
9. SUBSEQUENT EVENT
On January 23, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Channel and
River City. On January 23, 1998, under the terms of the asset purchase
agreement, United purchased certain assets of Contractors.
F-143
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company)
Roseville, Minnesota
We have audited the accompanying balance sheet of Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company) as of February 28, 1998, and the related
statements of operations, stockholders' equity, and cash flow for the year
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 audit.
We conducted our audit 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 audit provides 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 Paul E. Carlson, Inc.
(d/b/a Carlson Equipment Company) as of February 28, 1998, and the results of
its operations and its cash flow for the year then ended in conformity with
generally accepted accounting principles.
McGladrey & Pullen, LLP
St. Paul, Minnesota
April 21, 1998
F-144
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
BALANCE SHEETS
FEBRUARY 28, 1998 AND JUNE 30, 1998
<TABLE>
<CAPTION>
FEBRUARY JUNE 30,
28, 1998 1998
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS (NOTES 3 AND 4)
Current Assets
Cash.................................................. $ 168,100 $ 492,186
Receivables:
Trade accounts, less allowance for doubtful accounts
of $125,000 and $176,000 at February 28 and June 30,
1998, respectively.................................. 848,365 1,326,603
Due from stockholder................................. 43,000 43,000
Inventories (Note 2).................................. 1,615,701 2,263,715
Prepaid expenses...................................... 34,330 37,148
Deferred income taxes (Note 6)........................ 146,000 146,000
---------- ----------
Total current assets.............................. 2,855,496 4,308,652
---------- ----------
Rental Equipment, at cost (Note 5)...................... 7,137,174 7,556,112
Less accumulated depreciation......................... 2,922,730 3,050,438
---------- ----------
4,214,444 4,505,674
---------- ----------
Property and Equipment, at cost (Note 5)
Computer equipment.................................... 153,373 153,373
Transportation equipment.............................. 378,472 380,472
Furniture and equipment............................... 217,838 227,475
Leasehold improvements................................ 115,484 115,484
---------- ----------
865,167 876,804
Less accumulated depreciation......................... 426,798 468,798
---------- ----------
438,369 408,006
---------- ----------
$7,508,309 $9,222,332
========== ==========
</TABLE>
See Notes to Financial Statements.
F-145
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
BALANCE SHEETS (CONTINUED)
FEBRUARY 28, 1998 AND JUNE 30, 1998
<TABLE>
<CAPTION>
FEBRUARY 28, JUNE 30,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank line of credit (Notes 3 and 10)................ $ -- $4,500,000
Current maturities of long-term debt................ 273,914 468,708
Accounts payable.................................... 257,289 612,160
Accrued expenses:
Compensation, vacation, and related taxes......... 160,940 64,969
Profit sharing (Note 7)........................... 150,000 --
Real estate taxes................................. 45,660 41,586
Interest.......................................... 32,067 33,542
Other............................................. 30,894 --
Income taxes payable................................ 155,861 148,861
---------- ----------
Total current liabilities....................... 1,106,625 5,869,826
---------- ----------
Deferred Income Taxes (Note 6)........................ 380,000 380,000
---------- ----------
Long-Term Debt, less current maturities (Notes 3, 4, 5
and 10)
Bank line of credit................................. 3,700,000 --
Finance companies and capital lease obligations..... 338,925 715,103
Subordinated note to former stockholder............. 735,448 726,249
---------- ----------
4,774,373 1,441,352
---------- ----------
Commitments (Notes 5, 7 and 8)
Stockholders' Equity (Notes 8 and 10)
Common stock, par value $1 per share; authorized
100,000 shares; issued and outstanding 2,550
shares............................................. 2,550 2,550
Retained earnings................................... 1,244,761 1,528,604
---------- ----------
1,247,311 1,531,154
---------- ----------
$7,508,309 $9,222,332
========== ==========
</TABLE>
See Notes to Financial Statements.
F-146
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR
MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
FOUR MONTHS ENDED JUNE
YEAR ENDED 30,
FEBRUARY 28, ------------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales and rental income................ $10,695,366 $4,173,049 $4,023,720
Cost of sales.......................... 6,085,129 2,477,742 2,400,219
----------- ---------- ----------
Gross profit....................... 4,610,237 1,695,307 1,623,501
Operating expenses..................... 3,550,240 1,119,606 970,324
----------- ---------- ----------
Operating income................... 1,059,997 575,701 653,177
----------- ---------- ----------
Nonoperating:
Interest expense..................... (528,266) (176,025) (176,334)
Gain on sale of other equipment...... 19,270 -- --
----------- ---------- ----------
(508,996) (176,025) (176,334)
----------- ---------- ----------
Income before income taxes......... 551,001 399,676 476,843
Federal and state income taxes (Note
6).................................... 244,000 162,000 193,000
----------- ---------- ----------
Net income $ 307,001 $ 237,676 $ 283,843
=========== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-147
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR
MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
COMMON STOCK
------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance, February 28, 1997................. 2,550 $2,550 $ 937,760 $ 940,310
Net income............................... -- -- 307,001 307,001
----- ------ ---------- ----------
Balance, February 28, 1998................. 2,550 2,550 1,244,761 1,247,311
Net income (unaudited)................... -- -- 283,843 283,843
----- ------ ---------- ----------
Balance, June 30, 1998 (unaudited)......... 2,550 $2,550 $1,528,604 $1,531,154
===== ====== ========== ==========
</TABLE>
See Notes to Financial Statements.
F-148
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
STATEMENTS OF CASH FLOW
YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR MONTHS ENDED JUNE 30, 1997 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED FOUR MONTHS ENDED JUNE 30,
FEBRUARY 28, -----------------------------
1998 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net Income........................ $ 307,001 $ 237,676 $ 283,843
Adjustments to reconcile net in-
come to net cash provided by
(used in) operating activities:
Depreciation.................... 1,482,371 455,303 515,329
Gross margin contribution from
rental equipment sales......... (592,674) (225,377) (291,460)
Gain on sale of other equip-
ment........................... (19,270) -- --
Net increase in deferred income
taxes.......................... 82,000 -- --
Changes in current assets and
liabilities:
Trade accounts receivable..... (26,690) (743,676) (478,238)
Inventories................... (133,318) (342,995) (648,014)
Prepaid expenses.............. (8,579) (14,634) (2,818)
Accounts payable.............. 182,051 662,178 354,871
Accrued expenses.............. 194,834 (23,145) (279,464)
Income taxes payable.......... 89,926 94,789 (7,000)
---------- ------------- -------------
Net cash provided by (used
in) operating
activities.................. 1,557,652 100,119 (552,951)
---------- ------------- -------------
Cash Flows From Investing Activities
Proceeds from sales of rental
equipment........................ 1,578,609 618,710 748,027
Purchases of rental equipment..... (2,473,274) (1,013,823) (1,221,126)
Purchases of property and equip-
ment............................. (144,253) (26,678) (11,637)
Proceeds from sales of other
equipment........................ 21,778 -- --
Increase in receivable from stock-
holder........................... (43,000) (12,000) --
---------- ------------- -------------
Net cash used in investing
activities................. (1,060,140) (433,791) (484,736)
---------- ------------- -------------
Cash Flows From Financing Activities
Proceeds from long-term borrow-
ing.............................. -- -- 659,707
Payments of long-term debt........ (1,576,236) (398,975) (97,934)
Net increase in bank line of
credit debt...................... 1,100,000 900,000 800,000
---------- ------------- -------------
Net cash provided by (used
in) financing activities... (476,236) 501,025 1,361,773
---------- ------------- -------------
Net increase in cash........ 21,276 167,353 324,086
Cash
Beginning......................... 146,824 146,824 168,100
---------- ------------- -------------
Ending............................ $ 168,100 $ 314,177 $ 492,186
========== ============= =============
</TABLE>
See Notes to Financial Statements (Additional Cash Flow Information -- Note 9).
F-149
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: Carlson Equipment Co. is engaged in the short-term
rental and sales of construction equipment to contractor, industrial, and
municipal clients in the St. Paul/Minneapolis metropolitan area, primarily on
credit terms established on an individual customer basis.
Revenue recognition: The Company recognizes revenue upon delivery of the
rental equipment to customers. The Company recognizes revenue from the rental
agreements as earned and related expenses as incurred.
Cash: The Company maintains cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any
losses in such accounts.
Fair value of financial instruments: The financial statements include the
following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying
amount is fair value; for trade accounts receivable and accounts payable, the
carrying amounts approximate their fair values due to the short term nature of
these instruments, and for the notes payable and long-term debt, fair value
has been estimated based on discounted cash flows using interest rates being
offered for similar borrowings. No separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments
since their fair values are not significantly different than their balance
sheet carrying amounts. In addition, the aggregate fair values of the
financial instruments would not represent the underlying value of the Company.
Inventories: Inventories consisting of parts, supplies, and new machinery
and equipment are stated at the lower of cost or market. The cost of
serialized machinery and equipment is determined on a specific-identification
basis. All other inventory is valued using an average-cost method which
approximates the first-in, first-out method.
Accounting for long-lived assets: Management has and will continue, on a
periodic basis, to closely evaluate its equipment to determine potential
impairment by comparing its carrying value with the estimated future net
undiscounted cash flows expected to result from the use of the assets,
including cash flows from disposition. Should the sum of the expected future
net cash flows be less than the carrying value, the Company would recognize an
impairment loss at that date. An impairment loss would be measured by
comparing the amount by which the carrying value exceeds the fair value
(estimated discounted future cash flows or appraisal of assets) of the long-
lived assets. To date, management has determined that no impairment of long-
lived assets exists.
Property and equipment depreciation methods: Depreciation is provided using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Computer equipment............................... 5
Transportation equipment......................... 5
Furniture and equipment.......................... 5-10
Leasehold improvements........................... 5-31
</TABLE>
F-150
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Rental equipment and related depreciation methods: Rental units are created
by the transfer of new equipment, valued at acquisition cost, from inventories
to rental equipment. Rental equipment depreciation begins at the point of
transfer. Depreciation is provided using the straight-line method over five
years, the estimated useful life of the equipment. Sales of rental equipment
are accounted for by including the proceeds in sales and by transferring the
net book value of the equipment sold to cost of sales.
Reclassification of rental equipment depreciation expense: In prior years
and in previous February 28, 1998, financial statements, the Company included
rental equipment depreciation expense in operating expenses. Rental equipment
depreciation expense of $1,359,467 has been reclassified to cost of goods sold
for the year ended February 28, 1998.
The proceeds and related net book value of rental equipment sold during the
year ended February 28, 1998, and for the four months ended June 30, 1997 and
1998, were as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED JUNE 30,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Proceeds of rental equipment
sales............................. $1,578,609 $618,710 $ 748,027
Net book value..................... 985,935 393,333 456,567
---------- -------- ---------
Gross margin from rental equipment
sales............................. $ 592,674 $225,377 $ 291,460
========== ======== =========
</TABLE>
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary
differences and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their
tax basis. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.
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 revenues and expenses during the
reporting period. Actual results may differ from those estimates.
New accounting pronouncements: In June 1997, SFAS No. 130, Reporting
Comprehensive income, and SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, were issued. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components. SFAS No. 131 redefines how operating segments are determined and
requires disclosures of certain financial and descriptive information about
the Company's operating segments. SFAS Nos. 130 and 131 are effective for
fiscal years beginning after December 15, 1997. The Company believes that
adoption of SFAS Nos. 130 and 131 will not have any significant effect on its
financial statements.
F-151
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Interim financial information (unaudited): The financial statements and
notes related thereto as of June 30, 1998, and for the four months ended June
30, 1997 and 1998, are unaudited but, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the financial position and results of operations.
The operating results for the interim periods are not indicative of the
operating results to be expected for a full year or for other interim periods.
NOTE 2. INVENTORIES
The composition of inventories at February 28, 1998, and June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
FEBRUARY 28, JUNE 30,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Equipment........................................ $ 937,879 $1,508,695
Supplies......................................... 516,552 613,421
Parts............................................ 161,270 141,599
---------- ----------
$1,615,701 $2,263,715
========== ==========
</TABLE>
NOTE 3. REVOLVING LINE OF CREDIT AGREEMENT
The Company had a revolving credit agreement with a bank which provided a
$4,500,000 line of credit. The availability of credit was determined by a
borrowing base formula consisting of eligible receivables, inventories, and
rental equipment. Advances under the line of credit accrued interest at 0.25
percent above the prime interest rate (8.5 percent as of February 28, 1998).
The line was due on March 31, 1999, and was secured by substantially all of
the Company's assets and the personal guarantees of the Company's
stockholders. Since the Company did not intend to reduce the $3,700,000
outstanding balance under this line of credit prior to February 28, 1999, nor
did it anticipate a reduction in the borrowing base during this same period,
the revolving credit agreement was reflected as long-term debt as of February
28, 1998. At June 30, 1998, the outstanding balance has been reflected as a
current liability since it was due within the subsequent 12 months. On July 9,
1998, the revolving credit agreement was paid in full and terminated (see Note
10).
The agreement contained certain restrictive financial covenants relative to
maintaining a minimum amount of net worth and maintaining a certain debt to
net worth ratio.
F-152
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 4. LONG-TERM DEBT
Capital lease obligations and long-term debt with finance companies and a
former stockholder at February 28, 1998 and June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
FEBRUARY 28, JUNE 30,
1998 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Capitalized lease obligations, due in monthly
installments varying from $521 to $9,704, including
interest at 9.2% to 12.3%, through May 2001, secured
by related equipment, personally guaranteed by the
Company's stockholders (Note 5)..................... $416,739 $ 376,637
Notes payable, due in monthly installments varying
from $5,259 to $10,016, plus interest at 8.75% to
10.75%, through March 2003, secured by related
equipment........................................... 170,265 780,468
-------- ---------
587,004 1,157,105
Less current maturities.............................. 248,079 442,002
-------- ---------
$338,925 $ 715,103
======== =========
Note payable to former stockholder, due in monthly
installments of $8,400 to March 2000, when monthly
payments become $13,662 to February 2005, when the
remaining principal balance is due, plus interest at
1.0% over prime, secured by accounts receivable,
inventories, equipment, and stock, personally
guaranteed by the Company's stockholders,
subordinated to bank line of credit (1)............. $761,283 $ 752,955
Less current maturities.............................. 25,835 26,706
-------- ---------
$735,448 $ 726,249
======== =========
</TABLE>
- --------
(1) On July 9, 1998, the remaining debt balance was paid in full (see Note 10).
The approximate aggregate annual future maturities of all long-term debt as
of February 28, 1998, including the line of credit and capital leases, were as
follows:
<TABLE>
<S> <C>
Years ending February:
1999............................ $ 274,000
2000............................ 3,907,000
2001............................ 229,000
2002............................ 137,000
2003............................ 119,000
Thereafter...................... 382,000
----------
$5,048,000
==========
</TABLE>
F-153
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 5. LEASE COMMITMENTS
Capitalized leases: The Company leases certain rental and other equipment
under capitalized leases as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1998
------------
<S> <C>
Rental and other equipment................................. $641,448
Less accumulated amortization.............................. 221,066
--------
$420,382
========
The following is a schedule by year of the future minimum lease payments
under capital leases together with the present value of the net minimum lease
payments as of February 28, 1998:
Years ending February:
1999..................................................... $171,094
2000..................................................... 139,677
2001..................................................... 140,473
2002..................................................... 29,113
--------
Total minimum payments..................................... 480,357
Less amount representing interest.......................... 63,618
--------
Present value of net minimum payments, included in long-
term debt................................................. $416,739
========
Operating leases: The Company leases its operating facilities under
arrangements which are classified as operating leases. The New Hope facility
is leased pursuant to an agreement which expires November 1999 and requires
monthly lease payments of $6,096. The Roseville facility, which is leased on a
month-to-month basis from the Company's former majority stockholder, requires
monthly lease payments of $9,624 (see Note 10 relative to a new lease on the
Roseville facility). The Bloomington facility is leased under an agreement
which expires December 1999 and requires monthly lease payments of $4,463.
Future aggregate minimum payments as of February 28, 1998 under operating
leases are as follows:
Years ending February:
1999..................................................... $133,000
2000..................................................... 102,000
--------
$235,000
========
</TABLE>
Total rent expense for fiscal year 1998 was approximately $233,000. During
fiscal year 1998, approximately $115,000 of total rent expense was paid to the
Company's former majority stockholder, whose shares were redeemed in 1995.
F-154
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 6. INCOME TAX MATTERS
Net deferred tax liabilities consist of the following components as of
February 28, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Inventory reserve.......................................... $ 51,000
Receivable allowance....................................... 51,000
Accrued compensation....................................... 44,000
AMT credit carryforward.................................... 18,000
----------
164,000
Deferred tax liabilities:
Property and equipment..................................... (398,000)
----------
Net deferred tax liabilities................................. $ (234,000)
==========
Alternative minimum tax credits may be carried forward indefinitely to
reduce future tax liabilities.
The deferred tax amounts mentioned above have been classified on the
accompanying balance sheet as of February 28, 1998, as follows:
Current assets............................................... $ 146,000
Noncurrent liabilities....................................... (380,000)
----------
$ (234,000)
==========
The provision for income taxes for the year ended February 28, 1998, is
comprised of the following:
Currently payable............................................ $ 162,000
Deferred..................................................... 82,000
----------
Federal and state income taxes............................... $ 244,000
==========
The Company's income tax expense for the year ended February 28, 1998,
differed from the statutory federal rate as follows:
Statutory rate applied to income before income taxes......... $ 187,000
State income tax expense net of federal tax effect........... 34,000
Nondeductible expense........................................ 11,000
Other........................................................ 12,000
----------
$ 244,000
==========
</TABLE>
F-155
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 7. PROFIT SHARING AND 401(K) PLAN
The Company had a profit sharing and 401(k) plan for all employees who met
the eligibility requirements set forth in the plan. The plan incorporated the
provisions of Internal Revenue Code Section 401(k) under which the employees
could contribute up to 20 percent of their salary to the plan. The Company
matched up to 50 percent of the participant's voluntary contribution up to 5
percent of the participant's salary. In addition, the plan allowed for
additional discretionary contributions. The Company communicated its intention
and historically distributed 20 percent of pretax, preprofit sharing income as
an annual discretionary profit sharing contribution (see Note 10 relative to
the subsequent termination of the profit sharing and 401(k) plan).
Company contributions for the year ended February 28, 1998, and for the four
months ended June 30, 1997 and 1998, were as follows:
<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED JUNE 30,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Discretionary...................... $150,000 $109,000 $ --
Matching........................... 37,400 10,953 8,438
-------- -------- --------
$187,400 $119,953 $ 8,438
======== ======== ========
NOTE 8. STOCK REDEMPTION AGREEMENT
In the event of the death or disability of a stockholder prior to July 9,
1998, the Company was obligated to purchase the outstanding stock of the
affected stockholder, should the other stockholder not exercise the right of
first purchase. The purchase price of the stock was based on the value of the
Company, as defined per the shareholder agreement. The purchase price was to
be paid in 120 equal monthly installments (see Note 10 relative to the
subsequent termination of the stock redemption agreement).
NOTE 9. ADDITIONAL CASH FLOW INFORMATION
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED JUNE 30,
FEBRUARY 28, -----------------------
1998 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Supplemental disclosures of cash
flow information:
Cash payments for interest....... $519,265 $173,072 $174,859
Cash payments for income taxes... 72,074 72,000 200,000
======== ======== ========
Supplemental schedule of noncash
investing and financing
activities:
Capital lease obligations
incurred for use of equipment... $ 81,124 $ -- $ --
======== ======== ========
</TABLE>
F-156
<PAGE>
PAUL E. CARLSON, INC.
(D/B/A CARLSON EQUIPMENT COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS
ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED)
NOTE 10. EVENTS SUBSEQUENT TO JUNE 30, 1998 (UNAUDITED)
On July 9, 1998, the Company's stockholders entered into an agreement,
effective July 1, 1998, whereby United Rentals Inc. purchased all of the
Company's outstanding common stock.
In conjunction with the aforementioned agreement, the note payable to former
stockholder and the outstan~ding balance on the revolving line of cre~dit were
paid in full on July 9, 1998. In addition, the revolving credit agreement was
terminated at that time. The stock redemption agreement (Note 8) a~nd the
profit sharing and 401(k) p~lan (Note 7) were also terminated effective June
30,1998.
On July 9, 1998, the Company entered into a ten-year lease for its Roseville
facility with a former stockholder. The lease requires monthly lease payments
of $9,624 and has a five-year option to renew.
F-157
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
West Main Rentals and Sales, Incorporated
We have audited the accompanying balance sheet of West Main Rentals and
Sales, Incorporated (an S corporation) as of December 31, 1997, and the
related statements of income, stockholders' equity, and cash flows for the
year 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 audit.
We conducted our audit 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 audit provides 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 West Main Rentals and
Sales, Incorporated as of December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally
accepted accounting principles.
Moss Adams LLP
Eugene, Oregon
April 22, 1998
F-158
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash................................................. $ 134,924 $ 155,238
Accounts receivable.................................. 1,014,677 936,423
Inventory for resale................................. 634,249 630,729
Rental fleet expected to be sold..................... 402,000 402,000
Prepaid expenses..................................... 57,920 15,271
Current portion of notes receivable.................. 2,432 6,753
---------- ----------
Total current assets............................... 2,246,202 2,146,414
---------- ----------
NOTES RECEIVABLE, less current portion................. 55,954 69,160
---------- ----------
PROPERTY AND EQUIPMENT
Rental fleet......................................... 6,121,168 6,246,646
Leasehold improvements............................... 513,278 528,353
Equipment............................................ 1,246,218 1,344,013
Equipment held under capital leases.................. 1,067,217 1,067,217
---------- ----------
8,947,881 9,186,229
Less accumulated depreciation and amortization....... 3,554,875 3,739,962
---------- ----------
5,393,006 5,446,267
---------- ----------
$7,695,162 $7,661,841
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable....................................... $ 137,446 $ 414,808
Accrued liabilities.................................... 198,517 198,162
Notes payable.......................................... 478,616 428,198
Current portion:
Long-term debt....................................... 1,145,640 1,210,636
Obligations under capital leases..................... 206,000 214,000
---------- ----------
Total current liabilities.......................... 2,166,219 2,465,804
---------- ----------
LONG-TERM DEBT, less current portion..................... 3,184,201 3,539,421
---------- ----------
OBLIGATIONS UNDER CAPITAL LEASES, less current portion... 648,146 619,353
---------- ----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000 shares authorized,
100 shares issued and outstanding..................... 130,841 130,841
Retained earnings...................................... 1,565,755 906,422
---------- ----------
1,696,596 1,037,263
---------- ----------
$7,695,162 $7,661,841
========== ==========
</TABLE>
See accompanying notes.
F-159
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ----------------------
1997 1998 1997
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES
Rental................................. $7,167,252 $1,067,808 $1,208,955
Retail sales........................... 1,286,872 366,341 303,444
Other sales............................ 1,061,874 202,658 180,800
Gain on sale of rental equipment....... 238,793 47,209 82,399
---------- ---------- ----------
9,754,791 1,684,016 1,775,598
---------- ---------- ----------
COST OF OPERATIONS
Rental................................. 5,064,324 1,267,400 848,479
Retail cost of sales................... 916,670 279,002 212,656
Other cost of sales.................... 252,472 45,276 46,242
---------- ---------- ----------
6,233,466 1,591,678 1,107,377
---------- ---------- ----------
GROSS PROFIT............................. 3,521,325 92,338 668,221
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 2,515,654 564,480 589,522
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............ 1,005,671 (472,142) 78,699
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income........................ 6,094 1,576 1,952
Gain on sale of equipment.............. 9,067 -- 1,117
Interest expense....................... (540,064) (141,267) (114,070)
---------- ---------- ----------
(524,903) (139,691) (111,001)
---------- ---------- ----------
NET INCOME (LOSS)........................ $ 480,768 $ (611,833) $ (32,302)
========== ========== ==========
</TABLE>
See accompanying notes.
F-160
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1996..................... $130,841 $1,404,987 $1,535,828
Net income..................................... -- 480,768 480,768
Dividends...................................... -- (320,000) (320,000)
-------- ---------- ----------
BALANCE, December 31, 1997..................... 130,841 1,565,755 1,696,596
Net loss (unaudited)........................... -- (611,833) (611,833)
Dividends (unaudited).......................... -- (47,500) (47,500)
-------- ---------- ----------
BALANCE, March 31, 1998 (unaudited)............ $130,841 $ 906,422 $1,037,263
======== ========== ==========
</TABLE>
See accompanying notes.
F-161
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER MARCH 31,
31, -------------------
1997 1998 1997
----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 480,768 $(611,833) $(32,302)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization............ 1,129,015 307,895 244,383
Net gain from sale of property........... (247,860) (47,209) (83,516)
Changes in:
Accounts receivable.................... (329,061) 78,254 5,396
Inventory for resale................... 32,228 3,520 (144,037)
Prepaid expenses....................... (17,756) 42,649 (12,866)
Accounts payable....................... (286,115) 277,362 (160,215)
Accrued liabilities.................... 27,723 (355) 7,708
----------- --------- --------
Net cash from operating activities......... 788,942 50,283 (175,449)
----------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment......... (2,261,854) (492,384) (608,559)
Proceeds from sale of equipment............ 625,362 178,437 620,775
Net principal repayments (advances) on
notes receivable.......................... 480 (17,527) 325
----------- --------- --------
Net cash from investing activities......... (1,636,012) (331,474) 12,541
----------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on notes
payable................................... 478,616 (50,418) 190,000
Proceeds from long-term borrowings and
capital lease obligations................. 1,818,217 670,403 142,412
Principal payments on long-term debt and
capital lease obligations................. (1,078,345) (270,980) (96,132)
Dividends paid............................. (320,000) (47,500) --
----------- --------- --------
Net cash from financing activities......... 898,488 301,505 236,280
----------- --------- --------
NET INCREASE IN CASH......................... 51,418 20,314 73,372
CASH, beginning of period.................... 83,506 134,924 83,506
----------- --------- --------
CASH, end of period.......................... $ 134,924 $ 155,238 $156,878
=========== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for interest... $ 532,245 $ 135,866 $110,846
=========== ========= ========
</TABLE>
See accompanying notes.
F-162
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS--The Company primarily rents heavy equipment to
contractors. The Company provides wholesale and retail rental services and
sales from four Oregon locations and two in California. The second California
location was opened in May 1997. The Company extends credit to all customer
types once a credit contract has been completed by the customer. This credit
contract includes trade references, which are consulted, and personal
guarantees, when deemed necessary. All charges are due in full 30 days from
the transaction date. Past due items are assessed a carrying charge. Cash
transactions require a deposit for a portion of the rental charge. A minimum
of one day's rent is required.
RESTATEMENT OF FINANCIAL INFORMATION--The Company has restated its 1997
financial statements primarily to capitalize certain equipment leases entered
into during 1996 and 1997. In the opinion of management, all material
adjustments necessary to correct the financial statements have been recorded.
The impact of these adjustments did not have a material effect on beginning
retained earnings.
INTERIM FINANCIAL STATEMENTS--The accompanying financial statements as of
March 31, 1998, and for the three months ended March 31, 1997 and 1998 are
unaudited and have been prepared on the same basis as the audited financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consists solely of normal recurring
adjustments. The results of operations for such interim periods are not
necessarily indicative of results for the full year.
REVENUE RECOGNITION--Revenues from the daily and monthly rental of equipment
are accounted for as operating leases. Credit risk associated with accounts
receivable is periodically reviewed by management and an allowance for
doubtful accounts, if required, is established. The allowance was $20,000 at
December 31, 1997 and March 31, 1998 (unaudited).
INVENTORY FOR RESALE--The inventory for resale consists of equipment parts
and supplies and is stated at the lower of cost or market. Cost is determined
on the first-in, first-out (FIFO) method.
RENTAL FLEET EXPECTED TO BE SOLD--An estimate of rental fleet equipment
expected to be sold in the next year is presented as a current asset.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Depreciation and amortization is computed using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Rental fleet............................................... 5 to 10 years
Leasehold improvements..................................... 5 to 31 years
Equipment.................................................. 3 to 10 years
Equipment held under capital leases........................ 3 to 5 years
</TABLE>
ADVERTISING AND PROMOTION--All costs associated with advertising and
promotion are expensed as incurred. Advertising and promotion expense totaled
$141,200 in 1997, and was $59,100 (unaudited) and $32,400 (unaudited) for the
three month periods ended March 31, 1998 and 1997, respectively.
INCOME TAXES--The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code, whereby income of the Company is
taxable directly to the individual stockholders. Accordingly, no provision for
income taxes is included in these financial statements.
F-163
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial
instruments, consisting of cash, receivables, accounts payable, and debt
instruments, is based on interest rates available to the Company and
discounted cash flow analysis. The fair value of these financial instruments
approximates carrying value.
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 amounts reported in the financial statements
and accompanying notes. Actual results will differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS--In 1997, the Company implemented
Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of
Information about Capital Structure," that continues the existing requirements
to disclose pertinent rights and privileges of all securities other than
common stock, but expands the number of companies subject to portions of its
requirements. The Company's current capital structure does not require any
additional disclosures as a result of this pronouncement.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130 "Reporting Comprehensive Income" which the Company is required to
adopt for years beginning after December 15, 1997. This statement establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of financial statements.
This statement will require that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
Other issued but not yet required FASB statements are not currently
applicable to the Company's operations.
NOTE 2--NOTES RECEIVABLE
The Company has two unsecured notes receivable from stockholders. These
notes require interest only payments with the balance due in 2000. The
interest rate is fixed at 8%, requiring monthly payments of $361.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Stockholder notes receivable........................... $54,255 $54,255
Other notes receivable................................. 4,131 21,658
------- -------
58,386 75,913
Less current portion................................... 2,432 6,753
------- -------
Long-term portion...................................... $55,954 $69,160
======= =======
</TABLE>
NOTE 3--NOTES PAYABLE
The Company has a revolving credit line available totaling $600,000 at prime
plus 1% (9.5% at December 31, 1997 and March 31, 1998). Outstanding borrowings
under the line of credit are subject to the same collateral and restrictive
covenant provisions as the term notes described in Note 4, and totaled
$430,000 at December 31, 1997 and $390,000 (unaudited) at March 31, 1998.
The Company also has a short term note payable to a finance company. The
outstanding balance on this note was $48,616 at December 31, 1997 and $38,198
(unaudited) at March 31, 1998.
F-164
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, payable in monthly (excepting
January and February) installments of $33,334 plus
interest at prime plus 1.25% (9.75% at December 31,
1997 and March 31, 1998), due December 1999......... $ 666,640 $ 633,306
Note payable to bank, payable in monthly installments
of $20,934 including interest at 9.36%, due March
2001................................................ 704,108 657,444
Note payable to bank, payable in monthly (excepting
January and February) installments of $7,000 plus
interest at prime plus 1.25% (9.75% at December 31,
1997 and March 31, 1998), due December 1999......... 126,000 105,000
Unsecured notes payable to stockholders, payable in
monthly interest only installments at 12%, due
October 2000. Subordinated to the bank debt......... 591,162 591,162
Note payable to bank, payable in monthly installments
of $5,334 plus interest at 10.7%, due November
1999................................................ 122,642 106,640
Unsecured notes payable to stockholders, all with
interest at 10% payable annually, due October 2000.
Subordinated to the bank debt....................... 114,545 114,545
Note payable to bank, payable in monthly installments
of $16,667 beginning November 1997 plus interest at
prime plus 1.25% (9.75% at December 31, 1997 and
March 31, 1998), due October 2002................... 966,667 916,667
Note payable to bank, payable in monthly payments of
$10,348 plus interest at 8.87%, due April 2002...... 427,566 396,523
Note payable to bank, payable in monthly interest
only payments through March 1998, then in monthly
installments of $11,231 including interest at prime
plus 2.00% (10.50% at March 31, 1998), due March
2006................................................ -- 600,000
Other notes payable, due in varying installments
including interest at various rates, collateral
provided by equipment and vehicles.................. 610,511 628,770
---------- ----------
4,329,841 4,750,057
Less current portion................................. 1,145,640 1,210,636
---------- ----------
$3,184,201 $3,539,421
========== ==========
</TABLE>
Substantially all cash, accounts receivable, inventories, property and
equipment, and general intangibles are pledged as collateral for the Company's
short and long-term borrowing arrangements. The stockholders have also
personally guaranteed outstanding bank borrowings. In addition, the Company's
bank loan agreements contain provisions which, among other things, require
maintenance of certain financial ratios, restrict dividend payments and
property and equipment purchases, and provide for prepayment penalties.
Annual payments of long-term debt for the years subsequent to December 31,
1997 are due as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998............................................................ $1,145,640
1999............................................................ 1,097,900
2000............................................................ 1,326,200
2001............................................................ 552,500
2002............................................................ 202,600
2003 and thereafter............................................. 5,001
----------
$4,329,841
==========
</TABLE>
F-165
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
Interest expense to stockholders on notes payable and long-term debt totaled
approximately $81,920 during 1997 and $20,600 (unaudited) and $20,500
(unaudited) for the three month periods ended March 31, 1998 and 1997,
respectively.
NOTE 5--OBLIGATIONS UNDER CAPITAL LEASES
The Company leases equipment under long-term leases and has the option to
purchase the equipment at the termination of the lease. Included in property
and equipment are the following assets held under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Equipment held under capital leases.................... $1,067,217 $1,067,217
Less accumulated amortization.......................... 222,011 282,320
---------- ----------
$ 845,206 $ 784,897
========== ==========
</TABLE>
Future minimum lease payments for assets under capital leases at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998........................................................... $ 283,500
1999........................................................... 256,900
2000........................................................... 205,000
2001........................................................... 197,600
2002........................................................... 103,016
----------
Total minimum lease payments..................................... 1,046,016
Less amount representing interest................................ 191,870
----------
Present value of net minimum lease payments...................... 854,146
Less current maturities.......................................... 206,000
----------
$ 648,146
==========
</TABLE>
NOTE 6--COMMITMENTS
RELATED PARTY LEASES--The Company leases facilities under five separate
agreements from a partnership owned by the Company stockholders. These
agreements expire between 1999 and 2011. The lease agreements provide for
payment of a minimum amount plus taxes, insurance and other costs. The monthly
rental payments can be adjusted annually. Total rents paid for the year ended
December 31, 1997 were $220,350, and were $87,600 (unaudited) and $48,450
(unaudited) for the three month periods ended March 31, 1998 and 1997,
respectively.
GRANTS PASS, OREGON LEASE--The Company leased facilities in Grants Pass,
Oregon under an agreement which expired in 1997. Rental expense on this lease
was $34,930 in 1997, and was $8,700 (unaudited) for the three month period
ended March 31, 1997.
EUREKA, CALIFORNIA LEASE--During 1997, the Company began leasing facilities
in Eureka, California under a month-to-month agreement. Monthly rent is
$3,850. A long-term agreement at the current location is expected in 1998.
F-166
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--COMMITMENTS (CONTINUED)
Aggregate future minimum lease commitments for real property, substantially
all of which are with related parties, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998............................................................ $ 350,400
1999............................................................ 283,100
2000............................................................ 174,000
2001............................................................ 54,000
2002............................................................ 54,000
Thereafter........................................................ 459,000
----------
$1,374,500
==========
</TABLE>
EQUIPMENT LEASES--The Company leases equipment under several operating lease
arrangements. Monthly payments on these leases total approximately $130,300,
with maturities extending to 2002. Rental expense totaled $982,500 for the
year ended December 31, 1997, and was $177,000 (unaudited) and $95,200
(unaudited) for the three months ended March 31, 1998 and 1997, respectively.
A significant portion of the leased equipment is returnable to the vendor with
thirty days notice without penalty from the lessor. Additionally, the
shareholders have guaranteed these lease commitments.
Aggregate future minimum lease commitments for equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1998............................................................ $1,303,000
1999............................................................ 1,274,100
2000............................................................ 1,256,400
2001............................................................ 942,600
2002............................................................ 293,600
----------
$5,069,700
==========
</TABLE>
STOCK REPURCHASE AGREEMENT--The Company and the stockholders have entered
into an agreement whereby the Company will purchase the shares of a deceased
stockholder at a value to be determined as set forth in the agreement.
NOTE 7--RETIREMENT PLAN
A defined contribution plan covers all employees who meet age and service
requirements. The defined contribution plan is a 401(k) profit-sharing plan.
The plan allows employee contributions. The Company, at its discretion, may
also contribute to the plan. In 1997, the Company contributed $40,000; $24,400
was allocated to the profit-share portion of the plan and $15,600 was
allocated to match employee contributions at 50%. There were no Company
contributions for the three month periods ended March 31, 1998 and 1997.
NOTE 8--SUBSEQUENT EVENTS
DIVIDENDS--On January 2, 1998 the Board of Directors declared a dividend of
$475 per share of outstanding common stock, payable to shareholders of record
as of January 2, 1998.
Also, on April 10, 1998 an additional dividend was declared of $750 per
share, to shareholders of record on that date.
F-167
<PAGE>
WEST MAIN RENTALS AND SALES, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--SUBSEQUENT EVENTS (CONTINUED)
NEW DEBT--On March 4, 1998 the Company obtained additional financing from
its bank. This debt is in addition to existing bank liabilities. The new
agreement provides for an aggregate commitment of $1,000,000 and expires in
2006. This note has been guaranteed by the stockholders.
SALE OF COMPANY STOCK--On March 20, 1998 a Letter of Intent was received
from United Rentals, Inc. to acquire all outstanding stock of the Company.
Under the terms of the agreement, all indebtedness of the Company, including
long-term debt and notes payable, but excluding leases, is to be paid in full
at closing. The agreement also provided for real estate leases described in
Note 6 to be extended for an additional ten years. This transaction was closed
on April 22, 1998.
Acquisition of the Company stock by United Rentals, Inc. resulted in the
termination of the Company's election to be taxed under Subchapter S of the
Internal Revenue Code.
F-168
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Pro Rentals, Inc.
We have audited the accompanying balance sheet of Pro Rentals, Inc. as of
December 31, 1997 and the related statements of income, stockholders' equity
and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Pro Rentals, Inc. at
December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 22, 1998
F-169
<PAGE>
PRO RENTALS, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................... $ 2,700
Accounts receivable, net of allowance for doubtful accounts of
$38,000........................................................... 582,034
Inventory.......................................................... 499,826
Rental equipment, net.............................................. 4,308,589
Property and equipment, net........................................ 210,889
Prepaid expenses and other assets.................................. 5,315
Due from stockholder............................................... 60,643
----------
Total assets................................................... $5,669,996
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable................................................. 334,829
Accrued expenses and other liabilities........................... 182,281
Debt............................................................. 3,456,278
----------
Total liabilities.............................................. 3,973,388
Commitments and contingencies
Stockholders' equity:
Common stock, $4.00 par value, 50,000 shares authorized,
1,000 shares issued and outstanding............................. 4,000
Retained earnings................................................ 1,692,608
----------
Total stockholders' equity..................................... 1,696,608
----------
Total liabilities and stockholders' equity..................... $5,669,996
==========
</TABLE>
See accompanying notes.
F-170
<PAGE>
PRO RENTALS, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
Equipment rentals................................................. $3,980,013
Sales of rental equipment......................................... 581,820
Sales of parts, supplies and new equipment........................ 1,309,778
----------
Total revenues.................................................. 5,871,611
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation..................................................... 889,536
Depreciation, equipment rentals................................... 578,897
Cost of rental equipment sales.................................... 403,475
Cost of parts, supplies and new equipment sales................... 1,147,579
----------
Total cost of revenues.......................................... 3,019,487
----------
Gross profit.................................................... 2,852,124
Selling, general and administrative expenses........................ 2,137,103
Non-rental depreciation............................................. 58,327
----------
Operating income.................................................... 656,694
Interest expense.................................................... 440,998
----------
Net income...................................................... $ 215,696
==========
</TABLE>
See accompanying notes.
F-171
<PAGE>
PRO RENTALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------- RETAINED
SHARES AMOUNT EARNINGS
------ ------ ----------
<S> <C> <C> <C>
Balance at January 1, 1997............................. 1,000 $4,000 $1,476,912
Net income........................................... 215,696
----- ------ ----------
Balance at December 31, 1997........................... 1,000 $4,000 $1,692,608
===== ====== ==========
</TABLE>
See accompanying notes.
F-172
<PAGE>
PRO RENTALS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $ 215,696
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 637,224
Gain on rental equipment sales................................. (178,345)
Changes in assets and liabilities:
Increase in accounts receivable.............................. (189,727)
Decrease in inventory........................................ 676,854
Decrease in prepaid expenses and other assets................ 157,506
Decrease in accounts payable................................. (4,745)
Increase in accrued expenses and other liabilities........... 69,357
-----------
Cash provided by operating activities............................ 1,383,820
Cash flows from investing activities
Proceeds from sale of rental equipment........................... 581,820
Purchase of property and equipment............................... (2,399)
-----------
Cash provided by investing activities............................ 579,421
Cash flows from financing activities
Principal payments on debt....................................... (2,553,206)
Borrowings under credit facility................................. 589,965
-----------
Cash used in financing activities................................ (1,963,241)
-----------
Increase in cash................................................. --
Cash at beginning of year........................................ 2,700
-----------
Cash at end of year.............................................. $ 2,700
===========
</TABLE>
See accompanying notes.
F-173
<PAGE>
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
The Company rents, sells and repairs construction equipment for use by
contractor, industrial and homeowners markets. The rentals are on a daily,
weekly or monthly basis. The Company has six locations (East Bremerton, West
Bremerton, Port Angeles, Gig Harbor, Port Orchard and Lakewood) and the
principal market area is Northern Washington. 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 balance sheet is presented on an unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 9.
INVENTORY
Inventories consists primarily of equipment, general replacement parts and
fuel for the equipment and are stated at the lower of cost, determined under
the first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Rental equipment costing less than
$1,000 is immediately expensed at the date of purchase. Depreciation for
rental equipment is computed using the straight-line method over an estimated
seven-year useful life with a 35% salvage value. Ordinary maintenance and
repair costs are charged to operations as incurred. Proceeds from the disposal
and the related net book value of the equipment are recognized in the period
of disposal and reported as revenue from the sales of rental equipment and
cost of sales of rental equipment, respectively, in the statement of income.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The company capitalizes all
property and equipment purchases greater than $1,000. Depreciation of property
and equipment is computed on the straight-line method over estimated useful
lives of 5 to 10 years with no salvage value. Leasehold improvements are
amortized using the straight-line method over the estimated lives of the
improvements or the remaining life of the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to $61,405 in the year ended December 31, 1997.
INCOME TAXES
Pro Rentals has elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal purposes. Under those provisions, the Company does not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Company's profits.
F-174
<PAGE>
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTING ESTIMATES
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.
2. CONCENTRATIONS OF CREDIT RISK
The Companies maintain cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Companies' customer base
and their credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
<TABLE>
<S> <C>
Rental equipment................................................. $6,326,420
Less accumulated depreciation.................................... 2,017,831
----------
Rental equipment, net............................................ $4,308,589
==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Furniture and fixtures............................................. $ 30,363
Office equipment................................................... 237,868
Vehicles........................................................... 336,457
Leasehold improvements............................................. 11,218
--------
615,906
Less accumulated depreciation ..................................... 405,017
--------
Total.............................................................. $210,889
========
</TABLE>
5. DEBT
Debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Deutsche Financial Services--Various notes with combined monthly
payments of $37,489 including interest from 7.9% to 10.25%..... $1,116,338
John Deere--Various notes with combined monthly payments of
$10,699 including interest from 6.9% to 10.24%................. 558,677
American Equipment Leasing (AEL)--Various notes with combined
monthly payments of $34,763 including interest from 8% to
12.25%......................................................... 648,835
Financial Federal Credit, Inc.--Various notes with combined
monthly payments of $7,291 including interest of 10.25%........ 183,757
Associates Commercial Corporation--Various notes with combined
monthly payments of $6,436 including interest from 8.3% to
10.25%......................................................... 166,780
AEL--$150,000 revolving line of credit due October 14, 1998 with
monthly interest payments at prime plus 2.17%.................. 150,000
Kitsap Bank--$150,000 revolving line of credit due July 7, 1998
with monthly interest payments at prime plus 2%. This line is
personally guaranteed by the Company's shareholders............ 75,000
Other........................................................... 556,891
----------
Total....................................................... $3,456,278
==========
</TABLE>
F-175
<PAGE>
PRO RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Substantially all rental equipment and inventory collateralized the above
notes. All debt at December 31, 1997 was paid off in connection with the
acquisition discussed in Note 9.
6. OPERATING LEASES
The Company leases six store locations. Three of the locations are on long
term leases, while the other three are on a month-to-month basis. The Company
is responsible for all operating expenses of the facilities including property
taxes, assessments, insurance, repairs and maintenance. These leases have
various terms and extend through December 2007 and include scheduled base rent
increases over the term of the leases. The total amount of the base rent
payments is being charged to expense on the straight-line method over the
terms of the leases.
Total rent expense for 1997 was approximately $294,893.
At December 31, 1997, minimum lease commitments under all operating leases,
with initial or remaining lease terms of more than one year are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 318,360
1999.............................................................. 299,037
2000.............................................................. 273,144
2001.............................................................. 223,364
Thereafter........................................................ 1,432,800
----------
Total............................................................. $2,546,705
==========
</TABLE>
7. RELATED PARTIES
Three of the Company's locations are leased from the Company's shareholders.
Total rent paid to the shareholders under these leases amounted to $177,412 in
1997. At December 31, 1997 Pro Rentals has a non-interest bearing amount due
from one of the Company's shareholders of $60,643.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest paid was $440,998.
During 1997 the Companies purchased $607,902 of rental equipment and
$524,333 of inventory which was financed.
9. SUBSEQUENT EVENT
On January 22, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-176
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
ASC Equipment Company, Inc.
We have audited the accompanying balance sheet of ASC Equipment Company,
Inc. as of December 31, 1997 and the related statements of income,
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 ASC Equipment Company,
Inc. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
April 22, 1998
F-177
<PAGE>
ASC EQUIPMENT COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash............................................................... $ 13,365
Accounts receivable, net of allowance for doubtful accounts of
$51,217........................................................... 623,370
Inventory.......................................................... 619,187
Rental equipment, net.............................................. 2,721,279
Property and equipment, net........................................ 313,827
Prepaid expenses and other assets.................................. 33,883
----------
Total assets................................................... $4,324,911
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities......... $ 490,454
Debt............................................................. 2,436,503
Deferred compensation............................................ 52,615
Deferred income taxes............................................ 206,109
----------
Total liabilities.............................................. 3,185,681
Commitments and contingencies
Stockholders' equity:
Common stock, $1.00 par value, 100,000 shares authorized, 3,210
shares issued and outstanding................................... 3,210
Preferred stock, $1.00 par value, 1,000 shares authorized, 55
shares issued and outstanding................................... 55
Additional paid-in capital....................................... 19,595
Retained earnings................................................ 1,188,370
----------
1,211,230
Treasury stock................................................... (72,000)
----------
Total stockholders' equity..................................... 1,139,230
----------
Total liabilities and stockholders' equity..................... $4,324,911
==========
</TABLE>
See accompanying notes.
F-178
<PAGE>
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues:
Equipment rentals................................................ $3,209,936
Rental equipment sales........................................... 291,618
Sales of parts, supplies and new equipment....................... 1,963,901
----------
Total revenues................................................. 5,465,455
Cost of revenues:
Cost of equipment rentals, excluding equipment rental
depreciation.................................................... 1,248,757
Depreciation, equipment rentals.................................. 949,526
Cost of rental equipment sales................................... 136,712
Cost of parts, supplies and new equipment sales.................. 1,480,339
----------
Total cost of revenues......................................... 3,815,334
----------
Gross profit................................................... 1,650,121
Selling, general and administrative expenses....................... 1,328,977
Non-rental depreciation............................................ 105,503
----------
Operating income................................................... 215,641
Interest expense................................................... 214,983
Other (income)..................................................... (116,188)
----------
Income before provision for income taxes........................... 116,846
Provision for income taxes......................................... 87,861
----------
Net income......................................................... $ 28,985
==========
</TABLE>
See accompanying notes.
F-179
<PAGE>
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK ADDITIONAL
------------- ------------- PAID IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK
------ ------ ------ ------ ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 3,210 $3,210 55 $55 $19,595 $1,159,385 $(72,000)
Net income............ 28,985
----- ------ --- --- ------- ---------- --------
Balance at December 31,
1997................... 3,210 $3,210 55 $55 $19,595 $1,188,370 $(72,000)
===== ====== === === ======= ========== ========
</TABLE>
See accompanying notes.
F-180
<PAGE>
ASC EQUIPMENT COMPANY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 28,985
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation................................................... 1,055,029
Gain on rental equipment sales................................. (26,631)
Deferred taxes................................................. 75,333
Changes in assets and liabilities:
Increase in accounts receivable.............................. (123,786)
Increase in inventory........................................ (57,506)
Decrease in prepaid expenses and other assets................ 47,521
Increase in accounts payable accrued expenses and other
liabilities................................................. 141,880
Increase in deferred compensation............................ 3,895
-----------
Cash provided by operating activities............................ 1,144,720
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment..................................... (1,597,801)
Proceeds from sale of rental equipment........................... 262,130
Purchases of property and equipment.............................. (190,245)
-----------
Cash used in investing activities................................ (1,525,916)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt....................................... (2,933,065)
Borrowings under credit facilities............................... 3,325,064
-----------
Cash provided by financing activities............................ 391,999
-----------
Increase in cash................................................. 10,803
Cash balance at beginning of year................................ 2,562
-----------
Cash balance at end of year...................................... $ 13,365
===========
</TABLE>
See accompanying notes.
F-181
<PAGE>
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
ASC Equipment Company, Inc. (the "Company") rents, sells and repairs
construction equipment for use by contractor, industrial and homeowners
markets. The rentals are on a daily, weekly or monthly basis. The Company has
three locations (Fayetteville, Goldsboro and Jacksonville) and their principal
market area is eastern North Carolina. The nature of the Company's business is
such that short-term obligations are typically met by cash flow generated from
long-term assets. Consequently, consistent with industry practice, the balance
sheet is presented on an unclassified basis.
These financial statements are prepared on a historical cost basis and do
not include any adjustments that may result from the acquisition of the
Company by United Rentals, Inc. ("United") as more fully described in Note 10.
INVENTORY
Inventories consists primarily of general replacement parts and equipment
held for resale and are stated at the lower of cost, determined under the
first-in, first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statement of
income.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over an estimated five-year
useful life. Leasehold improvements are amortized using the straight-line
method over the estimated lives of the improvements or the remaining life of
the lease, whichever is shorter.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
RENTAL REVENUE
Rental revenue is recorded as earned under the operating method.
ADVERTISING COSTS
The Companies advertise primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expense amounted to approximately $34,900 in the year ended
December 31, 1997.
F-182
<PAGE>
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
differences are expected to reverse.
ACCOUNTING ESTIMATES
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.
2. CONCENTRATIONS OF CREDIT RISK
The company maintains cash balances with a quality financial institution
and, consequently, management believes funds maintained there are secure.
Concentrations of credit risk with respect to customer receivables are limited
due to the large number of customers comprising the Company's customer base
and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following at December 31, 1997:
<TABLE>
<S> <C>
Rental equipment............................................... $ 5,640,041
Less accumulated depreciation.................................. (2,918,762)
-----------
Rental equipment, net.......................................... $ 2,721,279
===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Transportation equipment.......................................... $ 571,054
Furniture and fixtures............................................ 36,317
Leasehold improvements............................................ 32,622
---------
639,993
Less accumulated depreciation..................................... (326,166)
---------
Total............................................................. $ 313,827
=========
</TABLE>
5. DEBT
Debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
First Citizens Bank; three notes; payable in monthly
installments of $37,770 including interest at prime 8.5% at
December 31, 1997, collateralized by equipment and real
estate........................................................ $ 936,404
First Citizens Bank; line of credit of $1,550,000; payable in
monthly installments of interest only at prime, collateralized
by equipment and inventory.................................... 1,446,292
Financial Federal; payable in monthly installments of $2,230
including interest at 6.75%; collateralized by equipment...... 53,807
----------
$2,436,503
==========
</TABLE>
All debt at December 31, 1997 was paid off in connection with the
acquisition discussed in Note 10.
F-183
<PAGE>
ASC EQUIPMENT COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
The provision for income taxes consists of the following for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal............................................................ $10,270
State.............................................................. 2,258
-------
12,528
Deferred:
Federal............................................................ 61,773
State.............................................................. 13,560
-------
75,333
-------
$87,861
=======
</TABLE>
Significant components of the Company's deferred tax liability at December
31, 1997 are as follows:
<TABLE>
<S> <C>
Difference in basis of accounting................................. $(20,487)
Cumulative tax depreciation in excess of book..................... 226,596
--------
Deferred tax liability, net..................................... $206,109
========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company leases its three operating facilities from the president and a
stockholder of the Company on a month to month basis. The Company is
responsible for all operating expenses of the facilities including property
taxes, assessments, insurance, repairs and maintenance. Total rent expense for
1997 was approximately $99,100.
In connection with the acquisition discussed in Note 10, the lease terms
have been renegotiated.
The Company also had a non-interest bearing note receivable from its
stockholders totaling $14,971 at December 31, 1997 and is included in prepaid
expenses and other assets on the accompanying balance sheet. No repayment
schedule has been established.
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the year ended December 31, 1997 total interest and income taxes paid
were $200,457 and $29,000, respectively.
During 1997, the Company purchased $72,500 of equipment which was financed.
9. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(k) pension plan which covers
substantially all employees. The Company matches 100% up to the first five
percent of the employees contribution. Company contributions to the plan were
$33,980 for the year ended December 31, 1997.
10. SUBSEQUENT EVENT
On January 27, 1998, under the terms of the stock purchase agreement, United
purchased all of the issued and outstanding capital stock of the Company.
F-184
<PAGE>
INDEPENDENT AUDITOR'S REPORT
MERCER Equipment Company:
We have audited the accompanying balance sheets of MERCER Equipment Company
as of December 31, 1996 and October 24, 1997 and the related statements of
income and retained earnings and of cash flows for each of the two years in
the period ended December 31, 1996, and for the period from January 1, 1997 to
October 24, 1997. 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 MERCER Equipment Company
as of December 31, 1996, and October 24, 1997 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996 and for the period from January 1, 1997 to October 24, 1997
in conformity with generally accepted accounting principles.
/s/ Webster, Duke & Co. PA
Charlotte, North Carolina
January 21, 1998
F-185
<PAGE>
MERCER EQUIPMENT COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 24,
------------ -----------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................ $ 276,639 $ 85,384
Accounts receivable (less allowance for doubtful
accounts: 1996-$182,425, 1997-$254,073)............ 1,819,581 2,398,926
Inventory (Notes 2, 5 and 8)........................ 2,417,425 2,299,512
Miscellaneous receivables........................... 16,604 29,508
Prepaid expenses.................................... -- 17,965
----------- -----------
Total current assets.............................. 4,530,249 4,831,295
----------- -----------
RENTAL EQUIPMENT (Notes 2, 5, 8, 9, 10 and 15):
Rental equipment.................................... 14,030,584 15,392,093
Less accumulated depreciation....................... 3,717,218 4,322,744
----------- -----------
Rental equipment, net............................. 10,313,366 11,069,349
----------- -----------
OTHER PROPERTY (Notes 2, 8 and 11):
Other property...................................... 1,003,079 1,091,365
Less accumulated depreciation....................... 395,658 498,962
----------- -----------
Other property, net............................... 607,421 592,403
----------- -----------
OTHER ASSETS (Note 13):
Deposits and other assets........................... 68,639 42,889
Notes receivable-officers........................... 69,980 67,453
----------- -----------
Total other assets................................ 138,619 110,342
----------- -----------
TOTAL............................................. $15,589,655 $16,603,389
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4)............................. -- --
Note payable-Bank (Note 4).......................... $ 494,245 $ 5,017,953
Short-term equipment notes (Note 5)................. 189,528 3,619,830
Notes payable-individuals (Notes 6 and 13).......... 609,000 142,000
Current portion of long-term debt................... 2,253,562 56,411
Current portion of capital leases................... 167,445 86,597
Accounts payable.................................... 2,161,340 3,174,282
Accrued expenses.................................... 140,361 254,444
----------- -----------
Total current liabilities......................... 6,015,481 12,351,517
----------- -----------
LONG-TERM DEBT (Non-current Portion):
Revolving credit note (Note 7)...................... 2,430,000 --
Notes payable to bank (Note 8)...................... 1,513,000 --
Notes payable on rental equipment (Note 9).......... 2,195,238 --
Capital leases on rental equipment (Note 10)........ 119,183 176,047
Notes payable on other property..................... 138,543 82,208
----------- -----------
Total long-term debt.............................. 6,395,964 258,255
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock (Notes 2 and 12)....................... 500,001 500,001
Retained earnings (Note 8).......................... 2,678,209 3,493,616
----------- -----------
Total stockholders' equity........................ 3,178,210 3,993,617
----------- -----------
TOTAL............................................. $15,589,655 $16,603,389
=========== ===========
</TABLE>
See notes to financial statements.
F-186
<PAGE>
MERCER EQUIPMENT COMPANY
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Sales of new equipment................. $ 2,479,358 $ 3,415,523 $3,709,356
Sales of supplies and parts............ 1,558,273 2,067,403 1,831,345
----------- ----------- ----------
Total goods sold..................... 4,037,631 5,482,926 5,540,701
Sales of rental equipment.............. 872,621 1,102,621 1,876,001
Rental revenues........................ 4,950,614 7,380,137 6,891,972
Service department revenues............ 357,039 488,216 764,738
----------- ----------- ----------
Total revenues....................... 10,217,905 14,453,900 15,073,412
----------- ----------- ----------
DIRECT COSTS OF REVENUE:
Cost of goods sold..................... 3,171,168 4,469,790 4,677,328
Cost of rental equipment sold, net..... 530,102 702,254 1,218,507
Rental department expenses (including
depreciation of $1,035,352, $1,492,131
and $1,428,312)....................... 2,226,420 3,589,936 3,728,374
Service department expenses............ 460,382 648,882 706,958
----------- ----------- ----------
Total direct costs of revenue........ 6,388,072 9,410,862 10,331,167
----------- ----------- ----------
GROSS MARGIN............................. 3,829,833 5,043,038 4,742,245
----------- ----------- ----------
OPERATING EXPENSES:
Sales expenses......................... 752,722 1,386,812 1,345,705
Administrative and general expenses.... 1,930,124 2,247,556 2,014,205
----------- ----------- ----------
Total operating expenses............. 2,682,846 3,634,368 3,359,910
----------- ----------- ----------
MARGIN FROM OPERATIONS................... 1,146,987 1,408,670 1,382,335
----------- ----------- ----------
OTHER INCOME (EXPENSE):
Miscellaneous income................... 78,258 110,340 147,362
Interest expense....................... (486,976) (813,339) (686,512)
----------- ----------- ----------
Total other income (expense)......... (408,718) (702,999) (539,150)
----------- ----------- ----------
NET INCOME............................... 738,269 705,671 843,185
BEGINNING RETAINED EARNINGS.............. 1,450,936 2,045,871 2,678,209
----------- ----------- ----------
Total................................ 2,189,205 2,751,542 3,521,394
LESS DIVIDENDS PAID...................... 143,334 73,333 27,778
----------- ----------- ----------
ENDING RETAINED EARNINGS................. $ 2,045,871 $ 2,678,209 $3,493,616
=========== =========== ==========
</TABLE>
See notes to financial statements.
F-187
<PAGE>
MERCER EQUIPMENT COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31, 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 738,269 $ 705,671 $ 843,185
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 1,117,783 1,610,918 1,542,966
Cost of rental equipment sold, net... 530,102 702,254 1,218,507
Cost of other property sold, net..... 14,800
Changes in assets and liabilities:
Accounts receivable, net........... (418,132) (398,900) (579,345)
Inventory.......................... (900,532) (325,339) 117,913
Miscellaneous receivables.......... (5,437) (4,065) (12,904)
Prepaid expenses................... (17,965)
Other assets....................... (16,000) (24,239) 14,400
Accounts payable................... 651,668 558,903 944,210
Accrued expenses................... 29,098 24,329 114,083
----------- ----------- ----------
Net cash provided by operating
activities...................... 1,726,819 2,864,332 4,185,050
----------- ----------- ----------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Purchase of rental equipment........... (2,466,039) (2,001,083) (1,601,703)
Purchase of other property............. (131,695) (171,319) (81,117)
Increase in other asset................ (1,650)
----------- ----------- ----------
Net cash (to) investing
activities...................... (2,599,384) (2,172,402) (1,682,820)
----------- ----------- ----------
CASH FLOWS FROM (TO) FINANCING
ACTIVITIES:
Repayments of notes receivable--
officers.............................. 2,264 3,019 2,527
Repayments by stockholders............. 220,602
Loans to stockholders.................. (247,729)
Repayments under line of credit........ (125,000) (8,792)
Borrowings under line of credit........ --
Repayments of short-term equipment
notes................................. (130,301) (618,854) (597,500)
Repayments of notes payable--
individuals........................... (52,500) (491,000)
Repayments of long term debt........... (1,051,070) (1,950,688) (1,794,942)
Repayments of capital leases........... (22,009) (150,279)
Net borrowings under note payable--
bank.................................. 465,200 29,045 --
Borrowings under revolving credit
note.................................. 1,000,000 1,700,000 200,000
Proceeds from bank loans............... 1,120,588
Proceeds from notes payable
individuals........................... 305,000 23,000 24,000
Dividends paid......................... (143,334 ) (73,333) (27,778)
----------- ----------- ----------
Net cash from (to) financing
activities...................... 1,173,609 (869,988) (2,693,485)
----------- ----------- ----------
NET INCREASE (DECREASE) IN CASH.......... 301,044 (178,058) (191,255)
BEGINNING CASH BALANCE................... 153,653 454,697 276,639
----------- ----------- ----------
ENDING CASH BALANCE...................... $ 454,697 $ 276,639 $ 85,384
=========== =========== ==========
</TABLE>
See notes to financial statements
F-188
<PAGE>
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND OCTOBER 24, 1997
1. ORGANIZATION AND BUSINESS
Organization--MERCER Equipment Company (MERCER) is a North Carolina
corporation. For income tax purposes, it has elected treatment under
Subchapter S of the Internal Revenue Code of 1986.
Business--MERCER sells, rents, and repairs construction equipment, primarily
to contractors, industry, utilities, and municipalities. MERCER operates two
branches in the Charlotte, North Carolina area and one branch in Greensboro,
North Carolina.
2. ACCOUNTING PRINCIPLES
Basis of Accounting--MERCER prepares its financial statements on the accrual
basis of accounting.
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 revenues and expenses during the
reported period. Actual results could differ from those estimates.
Inventory--Inventory consists of new equipment and merchandise for resale
and of parts for resale or repair of equipment.
MERCER records inventory using the last-in, first-out (LIFO) cost
assumptions. MERCER maintains separate LIFO pools for new equipment,
merchandise, and parts; and uses government indices to determine the cost of
LIFO layers.
At December 31, 1996 and October 24, 1997, the difference between LIFO and
first-in, first-out cost was $310,346 and $347,936 respectively.
Rental Equipment--MERCER records rental equipment at cost and depreciates
that cost using the straight-line method over 60 months (50 months for rental
equipment purchased after December 31, 1995). MERCER estimates the salvage
value on rental equipment to be 28% (50% for rental equipment purchased after
December 31, 1995). (See Note 15).
Other Property--MERCER records other property at cost and depreciates that
cost using the straight-line method over lives of 5 or 7 years.
Notes Receivable--Officers--At December 31, 1996, and October 24, 1997 the
notes receivable from officers are due in monthly payments of $600, including
principal and interest, for 15 years. At December 31, 1995, the notes
receivable from officers were due in quarterly installments of $1,264,
including principal and interest, for 14 years.
Common Stock--MERCER has two classes of common stock: Class A common stock
which has voting rights and Class B common stock which has no voting rights.
The preferences, limitations, and relative rights of classes are the same
except the nonvoting stock has no voting rights other than in those cases in
which nonvoting stock is expressly granted voting rights under North Carolina
law.
F-189
<PAGE>
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and October 24, 1997, the number of shares authorized
and outstanding of each class of stock was as follows:
<TABLE>
<CAPTION>
AUTHORIZED OUTSTANDING
---------- -----------
<S> <C> <C>
Class A, voting....................................... 25,000 16,667
Class B, nonvoting.................................... 175,000 150,000
</TABLE>
Rental Revenue--MERCER generally rents equipment under short-term agreements
of one month or less and accounts for these agreements as operating leases.
Lease Expense--MERCER leases its facilities and certain delivery vehicles
under leases classified as operating leases. MERCER leases certain rental
equipment and new equipment inventory under leases classified as capital
leases.
Income Taxes--MERCER has elected taxation under Subchapter S of the Internal
Revenue Code of 1986 and its stockholders report the taxable income or loss of
the company on their individual income tax returns. For income tax purposes,
MERCER generally uses accelerated depreciation methods (without salvage value)
and deducts bad debts as they are written off.
Statement of Cash Flows--MERCER considers all instruments with a maturity of
three months or less to be cash equivalents. MERCER paid interest expense and
purchase various assets through incurrence of notes payable as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 1997 TO
31 OCTOBER 24,
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
Interest paid................................ $ 464,090 $ 807,169 $ 683,596
Debt incurred to purchase:
Inventory.................................. 357,306 88,509
Rental equipment........................... 2,300,291 2,530,234 1,801,029
Fixed assets............................... 142,174 163,756 7,169
</TABLE>
3. PURCHASE OF BUSINESS
On September 29, 1995, MERCER acquired the branch retail operations of
Builders Equipment & Tool Co., Inc. (BETCO) in a transaction accounted for as
a purchase. The accompanying financial statements include the results of the
Greensboro operation from that date. MERCER purchased substantially all of the
resale and rental inventory and the fixed assets at the branch. The purchase
price was $600,000. There were no intangible assets purchased nor are there
any contingent payments or commitments.
4. NOTE PAYABLE--BANK
At December 31, 1996, MERCER had a note payable to a bank that is due May
31, 1997. The note provides for monthly payment of interest at the bank's
prime rate plus 1/2%. The original amount of the note was $500,000.
In connection with the purchase of MERCER's common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
5. SHORT-TERM EQUIPMENT NOTES
MERCER has purchased rental equipment and inventory with short-term (less
than 12 months) notes payable with a nominal interest charge. At December 31,
1996, rental equipment and inventory with a cost of $434,972 and $135,522,
respectively, is pledged as collateral.
F-190
<PAGE>
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
6. NOTES PAYABLE--INDIVIDUALS
Notes payable--individuals provide for quarterly interest payments at the
Wall Street prime rate plus one percent and allows MERCER to delay payment of
principal for up to one year and a day after request. At December 31, 1996 and
October 24, 1997, $178,000 and $ -- , respectively, of this amount was due
stockholders.
7. REVOLVING CREDIT NOTES
MERCER has a $3,000,000 revolving credit note with a bank. At December 31,
1996 MERCER had termed the revolver's outstanding balance and will repay the
principal over 36 months beginning in June 1997. The repayment provides for
monthly payment of $45,000 principal plus interest at the bank's prime rate
plus 1/4%. At December 31, 1995 and during 1996, only interest payments were
due on the note (see Note 9 for collateral).
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
8. NOTES PAYABLE TO BANK
MERCER's note payable to bank consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Bank note--8.25%, principal of $49,750 plus interest paid
monthly through November 1998; balance of $635,750 due December
1998........................................................... $1,780,000
Bank note--interest at prime plus 1/2%, principal of $10,000
plus interest paid monthly through August 1998; $250,000 due
September 30, 1998............................................. 450,000
----------
Total........................................................... 2,230,000
Less current portion............................................ 717,000
----------
Noncurrent portion.............................................. $1,513,000
==========
</TABLE>
All accounts receivable and inventory and rental equipment, unless otherwise
encumbered, are given as security for the notes payable to bank.
The loan agreement with the bank provides for maintenance of certain
absolute and ratio amounts relating to working capital, net worth, cash flow
coverage, and debt/equity and limits amounts that can be paid in dividends. At
December 31, 1996, MERCER had obtained a waiver on the cash flow coverage
ratio.
In connection with the purchase of MERCERs common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
9. NOTES PAYABLE ON RENTAL EQUIPMENT
MERCER finances purchases of rental equipment and inventory through various
arrangements with vendors, their related finance entities, and other lenders.
These notes provide for monthly payments of either a fixed principal plus
interest or a level payment of principal and interest.
These note have terms of 36 to 60 months and generally provide for
accelerated repayment if the underlying equipment is sold. At December 31,
1995 and 1996, the weighted interest rates were 10.1%, and 8.6%, respectively.
F-191
<PAGE>
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, $480,801 of floor plan notes, which have not yet begun
to require payments of principal or interest, are included in notes payable on
rental equipment. The financial statements assume their conversion upon
expiration of the floor plan period.
At December 31, 1996, rental equipment and inventory of $4,637,033 and
$88,509, respectively, were collateral for all of the above notes.
In connection with the purchase of MERCER's common stock (see Note 16),
substantially all of the outstanding debt at October 24, 1997 was paid off.
10. CAPITAL LEASES
MERCER leases certain rental equipment under leases accounted for as capital
leases. The following is an analysis of the leased property:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 24,
------------ -----------
1996 1997
------------ -----------
<S> <C> <C>
Rental equipment.................................... $408,081 $386,153
Less accumulated amortization....................... 78,561 138,706
-------- --------
Net............................................... $329,520 $247,447
======== ========
</TABLE>
The following is a schedule by years of future lease payments under capital
leases together with the present value of the net minimum lease payments as of
October 24, 1997:
<TABLE>
<S> <C>
Year ended December 31, 1997....................................... $106,795
1998............................................................. 98,730
1999............................................................. 74,158
2000............................................................. 23,177
--------
Net minimum lease payments......................................... 302,860
Less amount representing interest.................................. 40,216
--------
Present value of net minimum lease payments........................ 262,644
Less current portion............................................... 86,597
--------
Long-term portion.................................................. $176,047
========
</TABLE>
11. NOTES PAYABLE ON OTHER PROPERTY
The notes payable on other property provide for monthly payment of principal
and interest at rates from 9.0% to 10.8%. At December 31, 1996 and October 24,
1997, related assets with a cost of $287,430 and $232,599 are collateral for
the notes.
The annual amounts of principal due for the next five years is as follows:
1997--$56,411; 1998--$50,318; 1999--$25,082; and 2000--$6,808.
12. COMMITMENTS AND CONTINGENCIES
As of December 31, 1996 and October 24, 1997, MERCER's cash balance had
$100,000 of FDIC insurance and is at one bank.
F-192
<PAGE>
MERCER EQUIPMENT COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of October 24, 1997, MERCER leased all of its facilities from a limited
liability company (LLC) whose members own 72% of MERCER's outstanding stock.
The leases provided for initial terms of five to seven years; two of the
leases provide for annual cost of living increases and have renewal options of
five years. MERCER is also responsible for the property taxes, insurance, and
repairs (see Note 13). In connection with the sale of MERCER's common stock
(see Note 16), the leases were rewritten to provide for an initial term of ten
years with two five-year options. The leases provide for minimum rentals of
$28,000 per month, after five years, minimum rents will be adjusted for
changes in the Consumer Price Index. MERCER has also guaranteed debt of
approximately $2,000,000 that the LLC has borrowed against the buildings.
MERCER had a stock repurchase agreement with two stockholders, each owning
30,000 shares of the outstanding Class B common stock. Among other provisions,
the stock repurchase agreement allows MERCER first refusal on a sale of such
shares at no less than the book value per share of the stock. At December 31,
1996 the minimum purchase price under this plan was $1,121,950. MERCER had a
salary continuation agreement with the same two stockholders. MERCER has
agreed to pay these stockholders' beneficiaries an amount equal to twice the
prior year's wages. This amount is payable over 24 months, and at December 31,
1996, the potential obligation under the salary continuation plan was
$672,672. In connection with the Purchase of MERCER's common stock both of
these agreements were canceled. (See Note 16)
13. RELATED PARTIES
At December 31, 1996 and October 24, 1997, other assets includes rental
deposits of $42,889 and $42,889, respectively, with the LLC described in Note
12. For the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997, MERCER paid building rentals to the LLC
of $149,500, $278,000 and $273,000, respectively.
For the years ended December 31, 1995 and 1996 and for period from January
1, 1997 to October 24, 1997, MERCER paid interest of $17,808, $15,672 and
$14,576, respectively to stockholders on the notes payable--individuals.
14. PROFIT-SHARING PLAN
MERCER has adopted a profit-sharing plan that covers substantially all
employees and provides for discretionary employer and voluntary employee
contributions. For the years ended December 31, 1995, and 1996, and for the
period from January 1, 1997 to October 24, 1997, no profit-sharing
contribution was made. For the years ended December 31, 1995, and 1996, and
for the period from January 1, 1997 to October 24, 1997, MERCER made matching
payments of $21,969, $14,777, and $24,287, respectively under Section 401(k)
of the Internal Revenue Code of 1986.
15. CHANGE IN ACCOUNTING ESTIMATE
In 1996 MERCER changed the depreciable life and estimated salvage value of
its rental equipment purchased after December 31, 1995 from 60 months to 50
months and from 28% to 50%. The effect of these changes in estimated life and
salvage value was to decrease depreciation on rental equipment by $58,859.
16. SUBSEQUENT EVENT
On October 24, 1997, United Rentals, Inc. purchased all of MERCER's issued
and outstanding common stock.
F-193
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
A&A Tool Rentals & Sales, Inc.:
We have audited the accompanying consolidated balance sheets of A&A Tool
Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19,
1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended October 31, 1995 and 1996, and the
period from November 1, 1996 to October 19, 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 financial position of A&A Tool
Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19,
1997 and the results of their operations and their cash flows for the years
ended October 31, 1995 and 1996, and the period from November 1, 1996 to
October 19, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Sacramento, California
November 20, 1997
F-194
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash....................................... $ 308,331 $ 108,327 $ 187,082
Trade accounts receivable, less allowance
for doubtful accounts of $80,000 at
October 31, 1996 and at October 19, 1997,
and $94,608 at July 31, 1997
(notes 2 and 3)........................... 1,416,142 1,415,775 1,324,684
Merchandise inventory...................... 847,035 862,200 906,969
Rental equipment, primarily machinery, at
cost, net of accumulated depreciation and
amortization of $5,909,751 at October 31,
1996, $6,822,441 at October 19, 1997, and
$6,727,264 at July 31, 1997
(notes 2 and 3)........................... 3,190,093 2,780,854 3,133,863
Operating property and equipment, net of
accumulated depreciation and amortization
of $912,230 at October 31, 1996, $955,007
at October 19, 1997, and $975,498 at July
31, 1997 (notes 2 and 3).................. 384,759 281,593 306,415
Due from related party (note 5)............ 228,737 332,613 316,364
Prepaid expenses and other assets.......... 234,976 303,553 152,251
---------- ---------- ----------
Total assets........................... $6,610,073 $6,084,915 $6,327,628
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt (note 2)................... $ 90,400 $ 449,670 $ 484,700
Accounts payable........................... 766,465 1,040,494 703,583
Accrued liabilities........................ 244,938 203,709 221,763
Income tax payable......................... 6,019 12,262 2,992
Long-term debt and capital lease
obligations (note 3)...................... 4,351,394 3,463,807 3,868,069
---------- ---------- ----------
Total liabilities...................... 5,459,216 5,169,942 5,281,107
---------- ---------- ----------
Commitments (notes 6 and 9)................
Stockholders' equity:
Common stock, Class A--voting par value
$.10. Authorized 2,000,000 shares;
issued and outstanding 720,000 shares... 72,000 72,000 72,000
Common stock, Class B--nonvoting.
Authorized 5,000,000 shares; issued and
outstanding 277,172 shares at October
31, 1996, 272,491 shares at October 19,
1997, and 275,242 shares at July 31,
1997.................................... 395,201 378,714 393,058
Retained earnings........................ 683,656 464,259 581,463
---------- ---------- ----------
Total stockholders' equity............. 1,150,857 914,973 1,046,521
---------- ---------- ----------
Total liabilities and stockholders'
equity................................ $6,610,073 $6,084,915 $6,327,628
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-195
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 1, NINE MONTHS
YEAR ENDED OCTOBER 31, 1996 TO ENDED JULY 31,
----------------------- OCTOBER 19, ----------------------
1995 1996 1997 1996 1997
----------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals..... $ 4,800,767 $5,918,148 $6,022,196 $4,165,881 $4,501,537
New equipment sales... 4,283,294 4,463,117 4,355,965 3,310,409 3,228,472
Sales of parts,
supplies and
rental equipment..... 848,193 1,027,943 778,141 824,910 657,572
Other................. 237,205 296,926 290,140 198,144 215,542
----------- ---------- ---------- ---------- ----------
Total revenues.......... 10,169,459 11,706,134 11,446,442 8,499,344 8,603,123
----------- ---------- ---------- ---------- ----------
Costs of Revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation and
amortization......... 2,049,172 2,542,965 2,583,884 1,976,183 2,097,280
Depreciation and amor-
tization, equipment
rentals.............. 1,040,233 1,382,048 1,465,586 902,347 1,193,986
Cost of new equipment
sales................ 4,054,467 4,304,301 4,148,874 3,234,457 3,016,957
Cost of sales of
parts, supplies, and
equipment............ 598,545 622,956 595,424 330,714 296,725
Other................. 38,358 32,582 31,339 24,337 33,115
----------- ---------- ---------- ---------- ----------
Total costs of
revenues............... 7,780,775 8,884,852 8,825,107 6,468,038 6,638,063
----------- ---------- ---------- ---------- ----------
Gross Profit............ 2,388,684 2,821,282 2,621,335 2,031,306 1,965,060
Selling, general and
administration....... 2,063,730 2,215,936 2,178,383 1,614,263 1,696,104
Non-rental
depreciation and
amortization......... 107,390 120,757 124,648 88,896 95,171
----------- ---------- ---------- ---------- ----------
Operating income
(loss)................. 217,564 484,589 318,304 328,147 173,785
Other income
(expense)............ 50,090 116,539 80,080 61,119 105,777
----------- ---------- ---------- ---------- ----------
Income before interest
and taxes.............. 267,654 601,128 398,384 389,266 279,562
----------- ---------- ---------- ---------- ----------
Interest income....... 56,053 54,993 39,967 51,898 34,590
Interest expense...... (324,957) (401,204) (642,478) (264,613) (410,345)
----------- ---------- ---------- ---------- ----------
Net interest
expense............ (268,904) (346,211) (602,511) (212,715) (375,755)
----------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes........... (1,250) 254,917 (204,127) 176,551 (96,193)
Income tax expense
(note 4)............. (1,600) (7,619) (15,270) (1,600) (6,000)
----------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations.. (2,850) 247,298 (219,397) 174,951 (102,193)
Loss from operation of
discontinued
subsidiary (note 1).. (55,929) -- -- -- --
Loss from disposal of
discontinued
subsidiary (note 1).. -- (44,269) -- (16,318) --
----------- ---------- ---------- ---------- ----------
Net income (loss)....... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193)
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-196
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON
STOCK STOCK
CLASS A CLASS B
--------------- ----------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at October 31,
1994................... 720,000 $72,000 363,433 $487,609 $539,406 $1,099,015
Purchase Class B common
stock from ESOP........ -- -- (27,847) (29,796) -- (29,796)
Net loss................ -- -- -- -- (58,779) (58,779)
------- ------- ------- -------- -------- ----------
Balances at October 31,
1995................... 720,000 72,000 335,586 457,813 480,627 1,010,440
Purchase Class B common
stock from ESOP........ -- -- (58,414) (62,612) -- (62,612)
Net income.............. -- -- -- -- 203,029 203,029
------- ------- ------- -------- -------- ----------
Balances at October 31,
1996................... 720,000 72,000 277,172 395,201 683,656 1,150,857
Purchase Class B common
stock from ESOP........ -- -- (4,681) (16,487) -- (16,487)
Net loss................ -- -- -- -- (219,397) (219,397)
------- ------- ------- -------- -------- ----------
Balances at October 19,
1997................... 720,000 $72,000 272,491 $378,714 $464,259 $ 914,973
======= ======= ======= ======== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-197
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED OCTOBER 31, NOVEMBER 1, 1996 NINE MONTHS ENDED JULY 31,
----------------------- TO OCTOBER 19, ----------------------------
1995 1996 1997 1996 1997
---------- ----------- ---------------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income (loss)...... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193)
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization.......... 1,147,623 1,502,805 1,590,234 991,243 1,289,157
Provision for bad
debts................. 71,600 96,216 73,894 52,515 59,985
Provision for write-
down of inventory..... 31,709 -- 35,403 -- 35,403
Gain on sale of equip-
ment.................. (213,049) (364,504) (220,017) (196,325) (167,944)
Changes in operating
assets:
(Increase) decrease
in trade accounts
receivable........... (282,115) (151,882) (73,527) (190,069) 31,473
(Increase) decrease
in related party
receivables.......... (54,741) 748 (103,876) (30,385) (87,627)
(Increase) decrease
in merchandise
inventory............ 38,955 (96,479) (50,568) (348,187) (95,337)
(Increase) decrease
in prepaid expenses
and other assets..... (29,102) 10,934 (174,821) (42,445) (50,309)
Increase (decrease)
in accounts payable,
trade................ 18,196 61,005 274,029 114,982 (62,882)
Increase (decrease)
in accrued liabili-
ties................. 52,801 9,680 (41,229) (39,228) (23,175)
Decrease in deferred
revenue.............. (4,440) -- -- -- --
Increase (decrease)
in income tax pay-
able................. -- 6,019 6,243 -- (3,027)
---------- ----------- ---------- ----------- ----------
Net cash provided by
operating
activities.......... 718,658 1,277,571 1,096,368 470,734 823,524
---------- ----------- ---------- ----------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Proceeds from the sale
of rental equipment
and operating property
and equipment......... 277,390 469,489 348,374 245,232 213,013
Purchases of rental
equipment and
operating property
and equipment......... (1,620,011) (2,689,358) (1,206,186) (2,042,083) (1,199,652)
Proceeds from sale of
marketable securi-
ties.................. 4,954 2,514 -- 2,514 --
---------- ----------- ---------- ----------- ----------
Net cash used in
investing
activities.......... (1,337,667) (2,217,355) (857,812) (1,794,337) (986,639)
---------- ----------- ---------- ----------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Borrowings on long-term
debt.................. 788,967 3,062,482 855,435 3,224,342 828,345
Payments on long-term
debt.................. (574,595) (1,121,435) (1,743,022) (572,655) (1,311,670)
Net borrowings (pay-
ments) on short-term
debt.................. 513,771 (901,881) 359,270 (1,553,999) 394,300
Premiums paid for offi-
cers' life insurance.. (60,042) (64,743) (93,756) (50,799) (66,966)
Drawings on cash
surrender value of
officers' life
insurance............. -- -- 200,000 -- 200,000
Purchase of Class B
common stock.......... (29,796) (62,612) (16,487) (59,590) (2,143)
---------- ----------- ---------- ----------- ----------
Net cash provided by
(used in) financing
activities.......... 638,305 911,811 (438,560) 987,299 41,866
---------- ----------- ---------- ----------- ----------
Net increase (de-
crease) in cash..... 19,296 (27,973) (200,004) (336,304) (121,249)
Cash at beginning of
period................. 317,008 336,304 308,331 336,304 308,331
---------- ----------- ---------- ----------- ----------
Cash at end of period... $ 363,304 $ 308,331 $ 108,327 $ -- $ 187,082
========== =========== ========== =========== ==========
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Cash paid during the
period for:
Interest............... $ 324,957 $ 401,204 $ 516,307 $ 264,613 $ 410,345
========== =========== ========== =========== ==========
Income taxes........... $ 1,600 $ 1,600 $ 4,606 $ 1,600 $ 10,627
========== =========== ========== =========== ==========
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Sale of property and
equipment for
promissory note....... $ 10,000 $ -- $ -- $ -- $ --
========== =========== ========== =========== ==========
Conversion of short-
term debt to long-term
debt.................. $ -- $ 686,963 $ -- $ -- $ --
========== =========== ========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-198
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1995 AND 1996 AND PERIOD FROM NOVEMBER 1, 1996 TO OCTOBER 19, 1997
(THE INFORMATION AS OF JULY 31, 1997 AND FOR THE NINE MONTHS ENDED JULY 31,
1997 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary Operations Management Systems,
Inc. (OMS). The Company rents and sells construction and industrial supplies
and power equipment in Northern California. OMS marketed and sold computer
hardware and software to construction related businesses. All significant
intercompany accounts and transactions were eliminated in consolidation. 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.
As of October 31, 1995, the Company decided to discontinue the operations of
its subsidiary, OMS. Certain assets of OMS were sold as of October 31, 1995.
The Company disposed of the remaining assets and liabilities of OMS, which
included cash, accounts receivable, inventory, property and equipment,
accounts payable and accrued liabilities, during fiscal year 1996. The Company
recognized a loss on disposal of the remaining assets. The loss from the
disposal of OMS assets was $44,269 for the year ended October 31, 1996 and
$16,318 for the nine months ended July 31, 1996. The loss from operations of
OMS was $55,929 for the year ending October 31, 1995.
(b) Interim Financial Statements
The accompanying consolidated balance sheet at July 31, 1997 and the
consolidated statements of operations and cash flows for the nine month
periods ended July 31, 1996 and 1997 are unaudited and have been prepared on
the same basis as the audited consolidated financial statements included
herein. In the opinion of management, such unaudited consolidated financial
statements include all adjustments necessary to present fairly the information
set forth therein, which consist solely of normal recurring adjustments. The
results of operations for such interim periods are not necessarily indicative
of results for the full year.
(c) Merchandise Inventory
Merchandise inventory is stated at the lower of cost or market. Cost is
determined using the weighted-average method.
(d) Revenue Recognition
Revenue related to the sale of construction and industrial supplies and
power equipment is recognized at the point of sale. Revenue related to the
rental of construction and industrial power equipment is recognized at the
time of return for rentals of twenty-eight days or less, and ratably over the
contract term for rentals in excess of twenty-eight days.
(e) Property and Equipment
Property and equipment are stated at cost and consist of rental equipment
and operating property and equipment. Property and equipment under capital
leases are stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated using an accelerated
method.
F-199
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Depreciation for property and equipment is taken over the asset's useful
life of 5 years, except for leasehold improvements which are amortized over 10
to 20 years.
(f) Other Assets
Other assets consist primarily of the cash surrender value of officers' life
insurance net of loans against the cash surrender value of the policies and
unbilled rental revenue. The loans outstanding were $410,000 at October 31,
1996, and $610,000 at October 19, 1997 and July 31, 1997. The Company is named
beneficiary under the life insurance policy. Unbilled rental revenue
represents the revenue recognized on contracts over twenty-eight days, but not
billed. At October 19, 1997 unbilled rental revenue was $180,178.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability method
under which deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under the asset
and liability method, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(h) 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on November 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(j) Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have
been reclassified to conform to the 1997 consolidated financial statement
presentation.
(2) SHORT-TERM DEBT
As of October 31, 1996, the Company had borrowed $90,400, on a credit
facility that allows the Company to borrow up to $500,000 at the bank's prime
rate (8.25% at October 31, 1996) plus 2%. Borrowings under this facility are
collateralized by trade accounts receivable.
F-200
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, the Company had borrowed on a credit facility that allows the
Company to borrow up to $500,000 at the bank's prime rate (8.5% at October 19,
1997 and July 31, 1997) plus 2%. At October 19, 1997 and July 31, 1997, the
amounts outstanding were $449,670 and $484,700, respectively.
(3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT PAYOR AND TERMS
Union Safe Deposit Bank--Various notes
with combined monthly payments of
$54,592 including interest at prime
plus 2%, due from 1996 through 1999.
Collateralized by equipment and
accounts receivable................... $1,382,482 $ 851,741 $ 989,334
American Equipment Leasing--Various
leases with combined monthly payments
of $24,149 including interest ranging
from 11.5% to 12%, due from 1997
through 1998. Collateralized by
equipment............................. 510,567 377,619 381,122
Atlas Copco, Inc.--Various notes with a
combined monthly payment of $22,212
including interest ranging from 8.5%
to 12.36%, due from 1996 through 1998.
Collateralized by equipment........... 352,446 257,875 323,727
Clark Equipment Credit Co.--Various
notes with a combined monthly payment
of $3,546 including interest ranging
from 8.7% to 12.39%, due from 1996
through 1999. Collateralized by
equipment............................. 105,889 39,083 45,433
Ingersoll-Rand--One note with a monthly
payment of $3,254 including interest
at 9.75%, due in 1999. Collateralized
by equipment.......................... 91,121 52,069 61,832
Prospect Leasing--Two leases with a
combined monthly payment of $1,798
including interest at 10%, due in
1998. Collateralized by equipment..... 36,364 18,712 24,106
Miller Electric Finance--Two notes with
a combined monthly payment of $3,964
including interest ranging from 10.25%
to 11.3%, due in 1999. Collateralized
by equipment.......................... 72,746 89,813 101,704
The Associates--Various notes and
leases with a combined monthly payment
of $35,365 including interest ranging
from 9% to 13.5%, due from 1996
through 2000. Collateralized by
equipment............................. 924,064 1,002,327 1,175,627
JI Case Credit Corporation--Three notes
with combined monthly payments of
$14,428 including interest ranging
from 6.9% to 8.2%, due from 1997
through 2000. Collateralized by
equipment............................. 515,184 349,235 346,540
John Deere--One note with a monthly
payment of $885 including interest at
8.75%, due in 1998. Collateralized by
equipment............................. 14,159 3,540 6,195
</TABLE>
F-201
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT PAYOR AND TERMS--(CONTINUED)
Caterpillar Financial Services--Various
notes with a combined monthly payment
of $12,279 including interest ranging
from 9.4% to 11.3%, due from 1998
through 2001. Collateralized by
equipment.............................. 546,420 458,438 493,833
Colonial Pacific Leasing--One note with
a monthly payment of $1,323 including
interest at 10%, due in 1997.
Collateralized by equipment............ 5,293 -- --
Newcourt Financial--Two notes with a
combined monthly payment of $4,207
including interest ranging from 10% to
11%, due in 1998 and 2001.
Collateralized by equipment............ 196,194 148,508 158,329
Other................................... 80,773 62,181 105,030
---------- ---------- ----------
Total long-term debt.................... 4,833,702 3,711,141 4,212,812
Less amounts representing interest...... 482,308 247,334 344,743
---------- ---------- ----------
Long-term debt, net of interest......... $4,351,394 $3,463,807 $3,868,069
========== ========== ==========
</TABLE>
Subsequent to October 19, 1997, all amounts outstanding under the long-term
debt agreements and capital lease agreements were paid except for $18,546 which
is scheduled for payment in fiscal year 1998.
(4) INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, NINE MONTHS
OCTOBER 31, 1996 TO ENDED JULY 31,
------------- OCTOBER 19, ---------------
1995 1996 1997 1996 1997
------ ------ ----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current............................ $1,600 $7,619 $15,270 $ 1,600 $ 6,000
Deferred........................... -- -- -- -- --
------ ------ ------- ------- -------
$1,600 $7,619 $15,270 $ 1,600 $ 6,000
====== ====== ======= ======= =======
</TABLE>
F-202
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and deferred tax liabilities are comprised of the
following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets:
Allowance for bad debts.............. $ 34,600 $ 34,600 $ 41,000
Inventory reserve.................... -- 6,600 --
Noncurrent deferred tax assets:
Depreciation and amortization
expense............................. 12,000 14,000 11,300
Net operating loss................... 188,300 236,800 198,800
Alternative minimum taxes............ 25,500 39,000 29,900
--------- --------- ---------
Total deferred tax assets............ 260,400 331,000 281,000
Less: Valuation allowance............ (260,400) (331,000) (281,000)
--------- --------- ---------
Total deferred tax assets............ -- -- --
Total deferred tax liabilities....... -- -- --
--------- --------- ---------
Net deferred tax asset/liability... $ -- $ -- $ --
========= ========= =========
</TABLE>
The effective rate for income tax expense differs from the statutory tax
rate of 34% when applied to income (loss) from continuing operations before
income taxes as a result of the following:
<TABLE>
<CAPTION>
OCTOBER
31,
----------- OCTOBER 19, JULY 31,
1995 1996 1997 1997
---- ---- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected U.S. Federal income tax....... (34%) 34% (34%) (34%)
State franchise tax, net............... 128% 1% -- 2%
Net operating loss carryforward........ -- (34%) -- --
Effect of valuation allowance.......... 34% -- 34% 34%
Alternative minimum tax................ -- 2% 7% 4%
--- --- --- ---
Total.............................. 128% 3% 7% 6%
=== === === ===
</TABLE>
The net change in the total valuation allowance for the year ended October
31, 1995 and 1996 and the period from November 1, 1996 to October 19, 1997 was
an increase of $8,000, a decrease of $100,600 and an increase of $70,600,
respectively.
(5) RELATED PARTY TRANSACTIONS
Building
The Company leased its Stockton, California premises from officers and
stockholders of the Company. The Company executed a new five year lease on
June 1, 1993 with monthly rent of $21,500. On October 20, 1997, this lease was
amended for an additional five years with monthly rent of $17,000. In
addition, the Company as lessee is to pay all taxes and insurance relating to
the property. At October 19, 1997, the remaining commitment under this lease,
as amended, is $1,020,000 plus property taxes and insurance.
F-203
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due From Related Party
Due from related party comprise the following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 19, JULY 31,
1996 1997 1997
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
President and shareholder................ $228,737 $317,613 $316,364
Vice president and shareholder........... -- 15,000 --
-------- -------- --------
$228,737 $332,613 $316,364
======== ======== ========
</TABLE>
The amounts due from related parties were paid subsequent to October 19,
1997.
(6) OPERATING LEASES
The Company leases vehicles from various unrelated companies through 1999.
The vehicle leases, as well as the lease for the Company's business premises,
are classified as operating leases. At October 19, 1997, future minimum lease
payments under the operating leases including amounts amended as discussed in
note (5) are:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31
----------------------
<S> <C>
1998............................................................ $ 442,636
1999............................................................ 305,036
2000............................................................ 204,000
2001............................................................ 204,000
2002............................................................ 204,000
----------
$1,359,672
==========
</TABLE>
Operating lease expense aggregated $520,210, $533,619 and $501,473 in 1995,
1996 and for the period from November 1, 1996 to October 19, 1997,
respectively, and $167,032 and $359,378 for the nine months ended July 31,
1996 and 1997, respectively.
(7) EMPLOYEE STOCK OWNERSHIP PLAN
Effective October 31, 1972, the Company established an Employee Stock
Ownership Plan (ESOP) for the benefit of its eligible employees. The ESOP is
designed to invest primarily in the stock of the Company. Contributions to the
ESOP are determined annually by the Board of Directors, however, in no case
may the contribution exceed the lesser of (a) fifteen percent (15%) of the
compensation of eligible employees, or (b) $30,000 for each participant. No
contributions were made in the years ended October 31, 1995 and 1996 or the
period from November 1, 1996 to October 19, 1997.
The ESOP measures compensation for Plan purposes as the Company's
contribution to the Plan. No compensation cost was recognized by the Plan for
the years ended October 31, 1995 and 1996, or the period from November 1, 1996
to October 19, 1997.
The ESOP held 277,172, 272,491 and 275,242 allocated shares at October 31,
1996, October 19, 1997, and July 31, 1997, respectively. No committed-to-be-
released or suspense shares were held by the ESOP at October 31, 1996, October
19, 1997, or at July 31, 1997.
Following termination of employment, participants receive a distribution of
their vested ESOP account balance in the form of cash or Company shares in
accordance with the provisions of the ESOP. If shares are distributed to the
participant, the participant has the right to sell the shares back to the
Company, for a limited period of time, at the fair market value of the shares.
F-204
<PAGE>
A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) PROFIT SHARING PLAN
In August 1995, the Company established a Profit Sharing/401(k) Savings Plan
(Plan) under Section 401 and 501 of the Internal Revenue Code. Substantially
all employees are eligible for the Plan. Yearly employer contributions to the
Plan are discretionary. Employees may also elect to contribute to the Plan.
For the years ended October 31, 1995 and 1996, and the period from November 1,
1996 to October 19, 1997, the Company contributed, $8,245, $27,422, and
$27,064, respectively to the Plan and $19,780 and $19,779 for the nine months
ended July 31, 1996 and 1997.
(9) COMMITMENTS
Litigation, contingent liabilities, and claims, all arising in the ordinary
course of business, are not expected to involve any amounts that could be
material to the Company's financial position or results of operations.
(10) SUBSEQUENT EVENT
On October 17, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. (United). The transaction closed on October 20, 1997
and under the terms of the stock purchase agreement, United purchased all of
the issued and outstanding common stock of the Company.
F-205
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
J & J Rental Services, Inc.
We have audited the balance sheets of the predecessor companies to J & J
Rental Services, Inc. (see Note 1) as of December 31, 1996 and for J&J Rental
Services, Inc. as of October 22, 1997 and the related statements of income,
stockholders' equity and partners' capital and cash flows for each of the two
years in the period ended December 31, 1996, the six months ended June 30,
1997 and for the period from July 1, 1997 to October 22, 1997. 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 the predecessor companies
to J & J Rental Services, Inc. at December 31, 1996, and for J&J Rental
Services, Inc. as of October 22, 1997 and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1996, the six months ended June 30, 1997 and for the period from July 1, 1997
to October 22, 1997 in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 23, 1998
F-206
<PAGE>
J & J RENTAL SERVICES, INC.
BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------ -----------
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash................................................. $ 666,153 $ 1,431,287
Accounts receivable, net of allowance for doubtful
accounts of $428,270, and $226,273 at 1996 and 1997,
respectively........................................ 1,502,119 1,470,608
Trade notes receivable, net of allowance for doubtful
accounts of $93,337 at 1996......................... 37,081
Rental equipment, net................................ 6,669,365 7,961,850
Property and equipment, net.......................... 467,460 319,219
Investments in marketable equity securities.......... 81,175
Due from Predecessor Stockholder..................... 120,000
Due from Related Party............................... 354,388
Prepaid expenses and other assets.................... 126,221 4,006
Intangible assets, net............................... 3,270,614
---------- -----------
Total assets................................... $9,669,574 $14,811,972
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL
Liabilities:
Accounts payable................................... $ 628,252 $ 936,725
Accrued expenses................................... 336,884 360,990
Income tax payable................................. 24,814
Deferred tax liability............................. 430,000
Debt............................................... 5,766,651 14,078,932
Due to Predecessor Stockholder..................... 336,498
---------- -----------
Total liabilities.............................. 7,523,099 15,376,647
Commitments and contingencies
Stockholders' equity and partners' capital:
Stockholder's equity--J & J Equipment, Inc.
Common stock, $1.00 par value, 50,000 shares
authorized, issued and outstanding.............. 50,000
Unrealized gain on marketable equity securities.. 1,165
Retained earnings................................ 981,955
----------
1,033,120
Partners' capital--Tri-Star Rentals, Ltd........... 1,113,355
----------
Stockholders' equity--J & J Rental Services, Inc.
Common stock, no par value, 1,000,000 shares
authorized, 77,500 shares issued and
outstanding..................................... 1,000
Accumulated deficit.............................. (565,675)
-----------
Total stockholders' equity (deficit) and partners'
capital............................................. 2,146,475 (564,675)
---------- -----------
Total liabilities and stockholders' equity and
partners' capital............................... $9,669,574 $14,811,972
========== ===========
</TABLE>
See accompanying notes.
F-207
<PAGE>
J & J RENTAL SERVICES, INC.
STATEMENTS OF INCOME
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------------------ ---------------
THE PERIOD FROM
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JULY 1, TO
------------------------ JUNE 30, OCTOBER 22,
1995 1996 1997 1997
----------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Equipment rentals................................................. $7,573,784 $7,769,716 $3,823,790 $2,544,233
Sales of equipment and parts...................................... 1,810,400 1,243,297 573,450 129,963
----------- ----------- ---------- ----------
Total revenues.................................................. 9,384,184 9,013,013 4,397,240 2,674,196
Cost of revenues:
Cost of revenues, excluding depreciation.......................... 3,906,336 3,544,040 1,629,299 1,363,085
Depreciation, equipment rentals................................... 2,048,619 2,389,929 1,171,685 359,672
Cost of revenues of equipment and parts........................... 898,190 452,522 326,847 46,653
----------- ----------- ---------- ----------
Total cost of revenues.......................................... 6,853,145 6,386,491 3,127,831 1,769,410
----------- ----------- ---------- ----------
Gross profit........................................................ 2,531,039 2,626,522 1,269,409 904,786
Selling, general and administrative expenses........................ 1,840,973 1,521,562 713,488 786,907
Non-rental depreciation............................................. 125,004 123,971 78,643 7,629
----------- ----------- ---------- ----------
Operating income................................................ 565,062 980,989 477,278 110,250
Interest expense.................................................... 411,731 478,341 180,769 378,231
Other (income), net................................................. (45,103) (27,523) (11,418) (26,306)
----------- ----------- ---------- ----------
Income (loss) before provision for income taxes................. 198,434 530,171 307,927 (241,675)
Provision for income taxes.......................................... 35,678 49,685 98,000 --
----------- ----------- ---------- ----------
Net income (loss)............................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675)
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-208
<PAGE>
J & J RENTAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(NOTE 1)
<TABLE>
<CAPTION>
UNREALIZED
(LOSS) GAIN ON
COMMON STOCK MARKETABLE RETAINED PARTNERS'
SHARES AMOUNT SECURITIES EARNINGS CAPITAL
------ ------- -------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Predecessors:
Balance at January 1,
1995.................. 50,000 $50,000 $(6,500) $ 796,096 $ 927,272
Net income............. 75,762 86,994
Distributions paid to
partners.............. (169,741)
Unrealized gain on
marketable
securities............ 9,250
------ ------- ------- ---------- ----------
Balance at December 31,
1995.................. 50,000 50,000 2,750 871,858 844,525
Net income............. 110,097 370,389
Distributions paid to
partners.............. (101,559)
Unrealized loss on
marketable
securities............ (1,585)
------ ------- ------- ---------- ----------
Balance at December 31,
1996.................. 50,000 50,000 1,165 981,955 1,113,355
Net income (loss) from
January 1, 1997 to
June 30, 1997......... 311,262 (101,335)
Distributions paid to
partners.............. (50,500)
------ ------- ------- ---------- ----------
Balance at June 30,
1997.................. 50,000 $50,000 $ 1,165 $1,293,217 $ 961,520
====== ======= ======= ========== ==========
Company:
Issuance of common
stock................. 77,500 $ 1,000
Net loss from July 1,
1997 to October 22,
1997.................. $ (241,675)
Basis adjustment....... (324,000)
------ ------- ------- ---------- ----------
Balance at October 22,
1997.................. 77,500 $ 1,000 $ (565,675)
====== ======= ======= ========== ==========
</TABLE>
See accompanying notes.
F-209
<PAGE>
J & J RENTAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
------------------------------------- -----------
THE PERIOD
SIX MONTHS FROM JULY 1
YEAR ENDED DECEMBER 31, ENDED TO
------------------------ JUNE 30, OCTOBER 22,
1995 1996 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 2,173,623 2,513,900 1,250,328 396,823
Bad debt expense (recovery)............................................. 128,092 (57,621) 7,214 226,273
Gain on sale of rental equipment........................................ (396,704) (369,379) (210,390) (43,878)
Gain on sale of property and equipment.................................. (2,809) (6,591) -- --
Deferred taxes.......................................................... 23,000 12,000 -- --
Changes in assets and liabilities:
Increase in accounts receivable........................................ (64,895) (10,430) (512,942) (1,696,881)
(Increase) decrease in trade notes receivable.......................... (170,337) 39,859 37,081 --
Increase in prepaid expenses and other assets.......................... (31,561) (84,918) (26,028) (4,006)
Increase (decrease) in accounts payable................................ 46,476 (41,052) 372,230 936,725
Increase in accrued expenses........................................... 53,632 1,919 123,765 360,990
Increase in income tax payable......................................... 7,613 17,201 73,186 --
Increase in Related Party receivable................................... (354,388)
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities....................... 1,928,886 2,495,374 1,324,371 (420,017)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment................................... (270,369) (195,823) (614,414) (548,346)
Proceeds from sale of rental equipment.................................. 930,860 755,122 1,227,501 232,148
Proceeds from sale of property and equipment............................ 24,634 74,585 -- --
Purchase of other company, net of cash acquired......................... (7,238,924)
Unrealized gain/(loss) on marketable securities......................... 9,250 (1,585) -- --
Purchase of marketable securities....................................... (9,250) (28,425) -- --
Payments on loans to Predecessor Stockholder............................ (21,573) (73,724) (79,254) --
Proceeds received on Predecessor Stockholder loans...................... 94,857 -- 6,884 --
Loan to Predecessor Stockholder......................................... (120,000) -- -- --
----------- ----------- ----------- -----------
Cash provided by (used in) investing activities....................... 638,409 530,150 540,717 (7,555,122)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowing under credit facilities....................................... 871,496 351,958 -- 10,000,000
Principal payments on debt.............................................. (3,117,926) (3,171,213) (1,920,472) (593,574)
Distributions paid...................................................... (169,741) (101,559) (50,500) --
----------- ----------- ----------- -----------
Cash provided by (used in) financing activities....................... (2,416,171) (2,920,814) (1,970,972) 9,406,426
----------- ----------- ----------- -----------
Increase (decrease) in cash ............................................. 151,124 104,710 (105,884) 1,431,287
Cash at beginning of year................................................ 410,319 561,443 666,153 --
----------- ----------- ----------- -----------
Cash at end of year................................................... $ 561,443 $ 666,153 $ 560,269 $ 1,431,287
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-210
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
AND OCTOBER 22, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
J & J Rental Services, Inc. (the "Company") was formed in May 1997, and
pursuant to the terms of an Asset Purchase Agreement (the "Agreement"), on
June 30, 1997 acquired all of the rental equipment and property and equipment
from J & J Equipment, Inc. ("J & J"), and Tri-Star Rentals, Ltd. ("Tri-Star")
(collectively, the "Predecessors") and assumed all operations of the
Predecessors (the "Acquisition"). The purchase price of $10,700,000 consisted
of cash of $7,200,000 and a promissory note payable for $3,500,000. The sole
stockholder and partner of J & J and Tri-Star, respectively, (the "Predecessor
Stockholder") has, on a fully-diluted basis, a 9% ownership interest in the
outstanding common stock of the Company, and has continued in a management
role as chief operating officer.
The accompanying financial statements as of December 31, 1996 and for the
years ended December 31, 1995 and 1996, and for the six month period ended
June 30, 1997 present the accounts and results of operations of the
Predecessors on a combined, historical cost basis. Although the financial
statements of the Predecessors have been combined, the balance sheets and
statements of income and cash flows do not represent those of a single legal
entity. All significant intercompany accounts and transactions have been
eliminated in combination.
The financial statements as of October 22, 1997 and for the period from July
1 to October 22, 1997 present the accounts and results of operations of the
Company since the Acquisition.
The Acquisition has been accounted for as a purchase effective July 1, 1997
and, accordingly, at such date the Company recorded the assets acquired at
their estimated fair values, adjusted for the impact of the Predecessor
Stockholder's continuing residual interest as described below. The assets
acquired have been reduced by $324,000 representing the Predecessor
Stockholder's continuing residual interest in the Company with a corresponding
charge against the Company's retained earnings.
The adjusted purchase price and the preliminary allocation of the adjusted
purchase price to the historical assets of the Company as of July 1, 1997 are
as follows:
<TABLE>
<S> <C>
Purchase price................................................. $10,739,000
Adjustment necessary to value Predecessor Stockholder's
continuing residual interest at Predecessor's basis........... 324,000
-----------
Adjusted purchase price........................................ $10,415,000
===========
Allocation of adjusted purchase price:
Net assets acquired, at fair values.......................... $ 7,115,000
Covenant not to compete...................................... 50,000
Goodwill..................................................... 3,250,000
-----------
Total adjusted purchase price allocation................... $10,415,000
===========
</TABLE>
Business Activity
The Company rents and sells light weight and heavy off-road construction
equipment for use by construction and maintenance companies, and has ancillary
sales of parts and supplies. The rentals are on a daily, weekly or monthly
basis. The Company has two locations in Houston, Texas and its
F-211
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
principal market area is the state of Texas. 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 balance sheets are presented on an unclassified basis.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over estimated useful lives of three
to five years through June 30, 1997 and two to ten years subsequent to June
30, 1997 with no salvage value. Rental equipment costing less than $500 is
immediately expensed at the date of purchase. Equipment rental revenue is
recorded as earned under the operating method. Equipment rental revenue in the
statements of operations includes revenues earned on equipment rentals, and
related fuel sales and rental equipment delivery fees. Proceeds from the
disposal and the related net book value of the equipment are recognized in the
period of disposal and reported as revenue from rental equipment sales in the
statements of operations. Ordinary maintenance and repair costs are charged to
operations as incurred.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
of 5 to 10 years.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations. Ordinary maintenance and repair costs
are charged to operations as incurred.
Advertising Costs
The Company advertises primarily through trade journals, phone directories
and the distribution of promotional items. All advertising costs are expensed
as incurred. Advertising expenses amounted to approximately $40,095 and
$52,483 in the years ended December 31, 1995 and 1996, respectively, $1,297 in
the six months ended June 30, 1997, and $9,433 from July 1 to October 22,
1997.
Income Taxes
J & J applied an asset and liability approach to accounting for income
taxes. Deferred income tax assets and liabilities arise from differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. Deferred tax balances are determined by using tax rates
expected to be in effect when the taxes will actually be paid or refunds
received. Under federal and state income tax law, Tri-Star, a partnership, is
not a taxable entity and, therefore, incurs no income tax liability. Any
profits and losses of Tri-Star flow through to the individual partners.
Investments
The Company's investments consist of marketable equity securities and are
classified as available for sale. Any unrealized gains or losses are excluded
from income and are presented as a component of stockholders' equity.
Intangible assets
Intangible assets are recorded at cost and consist of goodwill of $3,250,134
and covenant not to compete of $50,000. Goodwill is being amortized by the
straight-line method over its estimated useful life of forty years. The
covenant not to compete reflects an agreement made regarding confidentiality
and restricting competitive activity and is being amortized by the straight-
line method over the period of the agreement, which is 5 years. Amortization
expense was $29,520 for the period from July 1 to October 22, 1997.
F-212
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounting Estimates
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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, accordingly, management believes this mitigates the amount of credit
risk. Concentrations of credit risk with respect to customer receivables are
limited due to the large number of customers comprising the Company's customer
base and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
<S> <C> <C>
Rental equipment.................................... $12,520,482 $8,313,840
Less accumulated depreciation....................... 5,851,117 351,990
----------- ----------
Rental equipment, net............................... $ 6,669,365 $7,961,850
=========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
<S> <C> <C>
Transportation equipment............................ $763,402 $166,003
Furniture, fixtures and office equipment............ 92,082 59,760
Shop equipment...................................... 39,356
Leasehold improvements.............................. 38,386
Construction in progress............................ 101,085
-------- --------
933,226 326,848
Less accumulated depreciation....................... 465,766 7,629
-------- --------
Total............................................... $467,460 $319,219
======== ========
</TABLE>
F-213
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
<S> <C> <C>
CIT Group--Various notes dated from September 21,
1995 through August 5, 1997, with annual interest
rates ranging from 8% to 9.4% due in monthly
payments ranging from $867 to $43,987. ............. $1,246,231 $637,956
The Associates--Note dated April 1, 1996, with annual
interest of 8.8% due in monthly payments of
$3,609. ............................................ 110,450
Case Power & Equipment--Various notes dated from
January 1, 1992 through December 30, 1996, with
annual interest rates ranging from 5.5% to 7.9% due
in monthly payments ranging from $408 to $7,747. ... 795,344
Sterling Bank--Various notes dated from January 26,
1994 through December 20, 1996, with annual interest
rates ranging from 8% to 11% due in monthly payments
ranging from $582 to $2,084. ....................... 306,708
KDC Financial--Various notes dated from June 14, 1993
through December 31, 1996, with annual interest
rates ranging from 4.5% to 9.5% due in monthly
payments ranging from $840 to $4,691. .............. 1,443,971
John Deere Financial--Notes dated December 31, 1995
and September 10, 1996, with annual interest rates
of 7.9% and 6.9% due in monthly payments of $807 and
$1,083. ............................................ 69,247
Frost National Bank--Various notes dated from January
25, 1995 through August 15, 1995, with annual
interest rates ranging from 8.75% to 9.5% due in
monthly principal payments ranging from $582 to
$8,492. ............................................ 101,771
Citicorp--Note dated June 15, 1993, with an annual
interest rate of 5.9% due in monthly payments of
$921. .............................................. 5,433
First Prosperity Bank--Various notes dated from
September 8, 1994 through December 13, 1996, with
annual interest ranging from 7.25% through 9.9% due
in monthly payments ranging from $354 to $1,039. ... 55,139
CAT Financial--Notes dated June 2, 1995 and December
31, 1994, with annual interest rates of 9.69% and
9.5% due in monthly payments of $4,227 and
$3,036. ............................................ 152,293
CAT Financial--Notes dated October 11, 1996 and
November 25, 1996, non-interest bearing, with
monthly payments of $1,205 and $3,522. ............. 161,102
Chase/Clark Credit--Various notes dated from March
17, 1994 through September 28, 1994, with annual
interest rates ranging from 9.75% to 12.765% due in
monthly installments ranging from $194 to $1,430. .. 30,232
First Prosperity--Various notes dated from August 16,
1993 through December 13, 1996, with annual interest
rates ranging from 6.4% to 11% due in monthly
installments ranging from $423 to $4,205............ 171,518
Associates Commercial Credit Corp.--Various notes
dated from May 16, 1994 through July 8, 1996, with
annual interest rates ranging from 7.75% to 11.25%
due in monthly installments ranging from $912 to
$6,656.............................................. 246,570
</TABLE>
F-214
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 22,
1996 1997
------------ -----------
<S> <C> <C>
Ingersoll-Rand Company--Various notes dated from June
30, 1992 through September 8, 1996 with annual
interest rates ranging from 7% to 9.5% due in
monthly installments ranging from $301 to $7,794.... 316,003
Wacker Corporation--Various notes dated from January
7, 1994 through May 25, 1996, with annual interest
rates ranging from 6.25% to 10.25% due in monthly
installments ranging from $854 to $2,889............ 99,666
AEL Leasing Co., Inc.--Various notes dated from April
21, 1994 through May 20, 1996, with annual interest
rates ranging from 8.72% to 12.93% due in monthly
installments ranging from $371 to $4,883............ 261,043
AEL Leasing Co., Inc.--Various non-interest bearing
notes dated from April 21, 1994 through February 26,
1996, due in 12 principal installments ranging from
$8,022 to $18,249................................... 36,498
Shandee--Note dated August 31, 1995, with an annual
interest rate of 11.25% due in monthly installments
of $2,803........................................... 21,510
Sterling Bank--Note dated January 2, 1996, with an
annual interest rate of 9.5% due in 24 principal
installments of $4,118.............................. 53,538
Miller Financing--Various notes dated from February
15, 1996 through June 1, 1996, with annual interest
rates ranging from 9.25 % to 10.25% due in monthly
installments ranging from $375 to $2,922............ 82,384
Toyota Motor Credit Corp.--Notes dated July 12 and
August 28, 1997, with annual interest rates of 5.4%
and 6.9%, respectively, due in monthly installments
of $543 and $ 561, respectively..................... 47,460
AEL Leasing Co., Inc.--Note dated October 10, 1997
with annual interest of 9.33% due in monthly
payments of $3,345.................................. 157,807
Case Credit--Various notes dated June 30, 1997 with
an annual interest rate of 7.9% due in monthly
installments ranging from $1,685 to $2,254.......... 290,260
Case Credit--Term note dated June 30, 1997, with
interest due monthly at prime plus .75% (9.25% at
September 30, 1997). Principal is due June 30, 2002.
This note is secured by all of the Company's rental
assets and property, plant and equipment, and is
personally guaranteed by the majority owners of the
Company............................................. 7,445,449
J & J and Tri-Star--Promissory note dated June 30,
1997 with an annual interest rate of 7.5%. Principal
payments of $175,000 are due quarterly beginning
October 1, 2000..................................... 3,500,000
Equus II Incorporated--Senior subordinated note dated
June 30, 1997, with interest to be paid monthly on
the unpaid principal balance at a variable rate not
to exceed 10% (10% at September 30, 1997). Principal
is to be paid in four annual installments of
$500,000 beginning June 30, 2001.................... 2,000,000
---------- -----------
$5,766,651 $14,078,932
========== ===========
</TABLE>
Substantially all rental equipment collateralize the above notes.
F-215
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
All debt at October 22, 1997, except for $200,000 of the J & J and Tri-Star
note, were paid off by October 31, 1997 as a result of the acquisition
discussed in Note 10.
6. INCOME TAXES
The provision for income taxes relates to the operating results of J & J
before July 1, 1997 and consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE
--------------- 30,
1995 1996 1997
------- ------- ----------
<S> <C> <C> <C>
Current:
Federal............................................ $ 7,216 $32,054 $86,500
State.............................................. 5,462 5,631 11,500
------- ------- -------
12,678 37,685 98,000
Deferred:
Federal............................................ 20,300 10,600 --
State.............................................. 2,700 1,400 --
------- ------- -------
23,000 12,000 --
------- ------- -------
Total............................................ $35,678 $49,685 $98,000
======= ======= =======
</TABLE>
Tri-Star is a pass-through entity and, therefore incurs no tax liability.
Significant components of J & J's deferred tax liability at December 31, 1996
is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C> <C>
Difference in basis of accounting......................... $221,000
Cumulative tax depreciation in excess of book............. 209,000
--------
Deferred tax liability $430,000
========
</TABLE>
Effective July 1, 1997, the Company and its shareholders have elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
federal tax purposes. Under those provisions the Company does not pay federal
income taxes; instead, the shareholders are liable for individual income taxes
on the Company's profit. Therefore, no provision for federal income taxes is
included in the Company's financial statements for the period from July 1 to
October 22, 1997.
7. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1995 and 1996; the six months ended June
30, 1997; and the period from July 1 to October 22, 1997, total interest paid
was $411,731 and $478,341; $180,769; and $259,705, respectively.
For the years ended December 31, 1995 and 1996; the six months ended June
30, 1997; and the period from July 1 to October 22, 1997, total income taxes
paid was $ -- and $ --; $24,814; and $ --, respectively.
During the years ended December 31, 1995 and 1996, and the six months ended
June 30, 1997, and for the period from July 1 to October 22, 1997 the Company
purchased $3,738,807, and $3,160,914; $1,172,917; and $1,172,506,
respectively, of equipment which was financed.
F-216
<PAGE>
J & J RENTAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLAN
The Predecessor sponsored a defined contribution 401(k) retirement plan,
which was implemented during 1995 and covers substantially all full time
employees. The Predecessor matched a portion of the participants'
contributions. Predecessor contributions to the plan were $9,272, $6,395, $--,
and $ -- for the years ended December 31, 1995, and 1996, for the six month
period ended June 30, 1997 and for the period from July 1 to October 22, 1997,
respectively.
9. RELATED PARTY TRANSACTIONS
On November 27, 1995, Tri-Star loaned $120,000 to the Predecessor
Stockholder. This non-interest bearing note is unsecured, and is due on
demand. The outstanding balance on this note receivable at December 31, 1996
was $120,000.
On November 30, 1995, Tri-Star issued a $100,000 note payable to the
Predecessor Stockholder, which bears interest at 11.4% per annum, requires
monthly principal and interest payments of $6,097, and is unsecured. The
outstanding balance on this note at December 31, 1996 was $79,254.
J & J has a note payable outstanding to the Predecessor Stockholder, which
required interest to be paid quarterly at 6.5% per annum, and is due on
January 1, 1998. The outstanding balance on this note payable at December 31,
1996 was $257,244.
During the period from July 1 to October 22, 1997 the Company made payments
of $354,388 on behalf of another Company owned by the Company's Stockholder.
The Company leases its operating facilities from the Predecessor
Stockholder, and paid monthly rent of $8,600 through June 30, 1997. These
leases are month-to-month and can be canceled by either party.
10. SUBSEQUENT EVENT
On October 23, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
the Company.
F-217
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Coran Enterprises, Inc.
and
Monterey Bay Equipment Rental, Inc.
We have audited the accompanying combined statements of earnings,
stockholders' equity, and cash flows of Coran Enterprises, Inc., dba A-1
Rents, and Monterey Bay Equipment Rental, Inc. for the years ended
December 31, 1995 and 1996. We have also audited the combined statements of
earnings, stockholders' equity, and cash flows for the period from January 1,
1997 through October 24, 1997. 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 combined results of operations and combined cash
flows of Coran Enterprises, Inc. dba A-1 Rents, and Monterey Bay Equipment
Rental, Inc. for the years ended December 31, 1995 and 1996, and also for the
period from January 1, 1997 through October 24, 1997, in conformity with
generally accepted accounting principles.
/s/ Grant Thornton LLP
San Jose, California
January 21, 1998
F-218
<PAGE>
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1997
YEAR ENDED DECEMBER 31, THROUGH
----------------------- OCTOBER 24,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Equipment rentals........................ $ 6,962,130 $ 7,679,713 $6,743,497
Sales of parts, supplies and rental
equipment............................... 565,586 738,330 974,713
----------- ----------- ----------
Total revenues......................... 7,527,716 8,418,043 7,718,210
Costs:
Cost of equipment rentals................ 3,835,982 4,254,243 3,764,346
Rental equipment depreciation............ 611,577 1,304,847 1,328,193
Cost of sales of supplies................ 200,746 257,500 204,248
Other.................................... 49,523 115,758 53,590
----------- ----------- ----------
Total costs............................ 4,697,828 5,932,348 5,350,377
----------- ----------- ----------
Gross margin........................... 2,829,888 2,485,695 2,367,833
Selling, general and administrative........ 1,786,650 2,062,246 1,768,439
Non-rental depreciation.................... 28,435 17,202 15,370
----------- ----------- ----------
Operating Income....................... 1,014,803 406,247 584,024
Interest expense........................... 21,120 96,464 170,183
----------- ----------- ----------
Earnings before income taxes........... 993,683 309,783 413,841
Provision for income taxes................. 12,275 8,221 276,383
----------- ----------- ----------
Net earnings............................. $ 981,408 $ 301,562 $ 137,458
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-219
<PAGE>
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SHARES ISSUED
-------------
CEI MBERI
------ ------ ADDITIONAL
$1 PAR NO PAR COMMON PAID-IN RETAINED
VALUE VALUE STOCK CAPITAL EARNINGS TOTAL
------ ------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995..................... 75,000 10,000 $275,000 $37,920 $1,691,541 $2,004,461
Net earnings............ -- -- -- -- 981,408 981,408
------ ------ -------- ------- ---------- ----------
Balance at December 31,
1995..................... 75,000 10,000 275,000 37,920 2,672,949 2,985,869
Net earnings............ -- -- -- -- 301,562 301,562
Dividends paid to
stockholders........... -- -- -- -- (750,000) (750,000)
------ ------ -------- ------- ---------- ----------
Balance at December 31,
1996..................... 75,000 10,000 275,000 37,920 2,224,511 2,537,431
Net earnings January 1,
1997 through October 24,
1997................... -- -- -- -- 137,458 137,458
Dividends paid to
stockholders........... -- -- -- -- (781,852) (781,852)
Stock redemption........ -- (2,500) (50,000) -- (200,000) (250,000)
------ ------ -------- ------- ---------- ----------
Balance at October 24,
1997..................... 75,000 7,500 $225,000 $37,920 $1,380,117 $1,643,037
====== ====== ======== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-220
<PAGE>
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1,
YEAR ENDED 1997
DECEMBER 31, THROUGH
---------------------- OCTOBER 24,
1995 1996 1997
--------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................ $ 981,408 $ 301,562 $ 137,458
Adjustments to reconcile net earnings to
net cash provided by operating activi-
ties:
Depreciation and amortization......... 640,012 1,322,049 1,343,563
Gain on sale of equipment............. (85,747) (163,753) (446,621)
Change in assets and liabilities:
Accounts receivable................. (210,091) 60,246 (61,976)
Other assets........................ 5,220 (3,108) 59,276
Accounts payable and accrued liabil-
ities.............................. 36,638 32,355 625,287
--------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 1,367,440 1,549,351 1,656,987
Cash flows from investing activities:
Purchases of rental equipment........... (633,519) (4,017,946) (315,346)
Proceeds from sale of equipment......... 110,273 205,639 492,977
--------- ----------- -----------
Net cash provided by (used in)
investing activities............. (523,246) (3,812,307) 177,631
Cash flows from financing activities:
Change in bank overdraft................ (15,760) -- --
Borrowings on equipment loans........... 244,235 1,096,820 --
Payments on equipment loans............. (46,853) (158,893) (42,649)
Payment of dividends.................... -- (750,000) (781,853)
Stock redemption........................ -- -- (250,000)
Borrowings on notes payable--stockhold-
ers.................................... -- 1,249,988 --
Payments on notes payable--stockhold-
ers.................................... (95,888) -- (538,156)
--------- ----------- -----------
Net cash provided by (used in)
financing activities............. 85,734 1,437,915 (1,612,658)
--------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............. 929,928 (825,041) 221,960
Cash and cash equivalents--beginning of
period................................... 35,259 965,187 140,146
--------- ----------- -----------
Cash and cash equivalents--end of period.. $ 965,187 $ 140,146 $ 362,106
========= =========== ===========
Supplementary disclosures of cash flow in-
formation:
Cash paid during the period for:
Interest.............................. $ 21,120 $ 95,958 $ 151,792
========= =========== ===========
Income taxes.......................... $ 1,600 $ 23,047 $ 800
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-221
<PAGE>
CORAN ENTERPRISES, INC.
DBA A-1 RENTS ANDMONTEREY BAY EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. Nature of Business and Basis of Presentation
The combined financial statements include the accounts of Coran Enterprises,
Inc. and Monterey Bay Equipment Rental, Inc. (collectively the "Company").
Coran Enterprises, Inc. ("CEI") and Monterey Bay Equipment Rental, Inc.
("MBERI") are combined due to common ownership and operations which are
complimentary. All significant intercompany balances and transactions have
been eliminated in combination.
The Company leases equipment for home and contractors' use under short-term
rental agreements principally in the Northern California area.
2. Property and Equipment
The Company provides for depreciation in amounts sufficient to relate the
costs of depreciable assets to operations over their estimated service lives
using the double-declining balance method. Leasehold improvements are
amortized on a straight-line basis over the lives of the improvements or the
term of the lease, whichever is shorter. Maintenance and repairs costs are
expensed as incurred. Supplies and replacement parts are expensed when
purchased.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
4. Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE B--RELATED PARTY TRANSACTIONS
The Company leases facilities from its stockholders on a month-to-month
basis. Total rent expense on the facilities was $662,880 and $667,638 for the
years ended December 31, 1995 and 1996. Total rent expense for the period from
January 1, 1997 through October 24, 1997 was $545,702.
The Company incurred interest expense of $17,755 and $27,627, respectively,
for the years ended December 31, 1995 and 1996, related to notes payable to
stockholders. For the period from January 1, 1997 through October 24, 1997 the
interest expense related to the stockholder notes was $80,693.
NOTE C--INCOME TAXES
The stockholders of the Company have elected "S" Corporation status for
income tax purposes. Therefore, income or loss for federal and California
state income tax purposes is reported on the shareholders' individual income
tax returns. Although the "S" Corporation tax treatment is recognized by the
State of California, the net corporate income is subject to a 1.5% corporate
surtax. (See Note E)
F-222
<PAGE>
CORAN ENTERPRISES, INC.
DBA A-1 RENTS AND
MONTEREY BAY EQUIPMENT RENTAL, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997
NOTE D--EQUIPMENT LOANS
Equipment loans consist of notes payable, collateralized by equipment, due
in monthly installments ranging from $1,095 to $5,375 with interest rates from
5.75% to 8.75%. These loans were paid in full as of October 31, 1997. Interest
expense on the equipment loans aggregated $3,365 and $68,837, respectively,
for the years ended December 31, 1995 and 1996. Interest expense on the
equipment loans was $89,455 for the period January 1, 1997 through October 24,
1997.
NOTE E--CHANGE IN OWNERSHIP
Effective October 24, 1997, the stockholders of CEI and MBERI sold 100% of
the outstanding shares of each company to United Rentals, Inc. The Company
provided $270,000 for state income taxes resulting from the stock sale.
F-223
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Bronco Hi-Lift, Inc.
We have audited the balance sheets of Bronco Hi-Lift, Inc. as of December
31, 1996 and October 24, 1997 and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1995 and
1996, and the period from January 1, 1997 to October 24, 1997. 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 Bronco Hi-Lift, Inc. at
December 31, 1996 and October 24, 1997, and the results of its operations and
its cash flows for the years ended December 31, 1995 and 1996, and the period
from January 1, 1997 to October 24, 1997 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 19, 1998
F-224
<PAGE>
BRONCO HI-LIFT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER
1996 24, 1997
------------ ----------
<S> <C> <C>
ASSETS
Cash................................................... $ 305,506 $ 180,745
Accounts receivable, net............................... 826,849 998,467
Unbilled receivables................................... 40,722 283,865
Inventory.............................................. 67,825 273,119
Rental equipment, net.................................. 1,972,910 2,725,464
Property and equipment, net............................ 234,914 423,918
Due from related party................................. -- --
Prepaid expenses and other assets...................... 13,530 44,273
---------- ----------
Total assets....................................... $3,462,256 $4,929,851
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other
liabilities......................................... $ 90,584 $ 277,651
Debt................................................. 3,051,711 3,473,516
---------- ----------
Total liabilities.................................. 3,142,295 3,751,167
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value and $1.00 stated value,
100,000 shares authorized, 10,000 issued and
outstanding at December 31, 1996, and October 24,
1997................................................ 10,000 10,000
Additional paid-in capital........................... 598,000 598,000
Notes receivable from stockholders................... (300,000) --
Retained earnings.................................... 11,961 570,684
---------- ----------
Total stockholders' equity......................... 319,961 1,178,684
---------- ----------
Total liabilities and stockholders' equity......... $3,462,256 $4,929,851
========== ==========
</TABLE>
See accompanying notes.
F-225
<PAGE>
BRONCO HI-LIFT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD
FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1997 TO
------------------------ OCTOBER
1995 1996 24, 1997
----------- ----------- ----------
<S> <C> <C> <C>
Revenues:
Equipment rentals...................... $ 3,427,596 $ 4,313,855 $4,330,000
New equipment sales.................... 266,308 611,033 533,370
Sales of parts, supplies and rental
equipment............................. 155,331 410,957 375,451
Other.................................. 147,214 194,469 182,355
----------- ----------- ----------
Total revenues....................... 3,996,449 5,530,314 5,421,176
Cost of revenues:
Cost of equipment rentals, excluding
depreciation.......................... 335,028 699,455 374,845
Depreciation, equipment rentals........ 637,766 736,525 660,598
Cost of new equipment sales............ 206,268 479,920 412,592
Cost of sales of parts, supplies and
equipment............................. 107,989 293,987 148,464
Other.................................. 32,418 119,315 112,107
----------- ----------- ----------
Total cost of revenues............... 1,319,469 2,329,202 1,708,606
----------- ----------- ----------
Gross profit............................. 2,676,980 3,201,112 3,712,570
Selling, general and administrative
expenses................................ 2,540,699 2,359,326 2,353,924
Non-rental depreciation.................. 84,463 99,669 85,707
----------- ----------- ----------
Operating income..................... 51,818 742,117 1,272,939
Interest expense......................... 171,305 334,035 229,154
Other (income), net...................... (26,575) (46,175) (29,938)
----------- ----------- ----------
Net income (loss).................... $ (92,912) $ 454,257 $1,073,723
=========== =========== ==========
</TABLE>
See accompanying notes.
F-226
<PAGE>
BRONCO HI-LIFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTES RECEIVABLE RETAINED
----------------- PAID-IN FROM EARNINGS
SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT)
------- -------- --------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... 20,000 $ 20,000 $ 345,020 $ -- $ 693,596
Purchase and
retirement of common
stock................ (12,000) (12,000) (345,020) (1,042,980)
Issuance of common
stock................ 2,000 2,000 598,000 (500,000)
Net loss.............. (92,912)
------- -------- --------- --------- -----------
Balance at December 31,
1995................... 10,000 10,000 598,000 (500,000) (442,296)
Payment on notes
receivable from
stockholders......... 200,000
Net income............ 454,257
------- -------- --------- --------- -----------
Balance at December 31,
1996................... 10,000 10,000 598,000 (300,000) 11,961
Payments on notes
receivable from
stockholders......... 300,000
Net income............ 1,073,723
Dividends paid........ (515,000)
------- -------- --------- --------- -----------
Balance at October 24,
1997................... 10,000 $ 10,000 $ 598,000 $ -- $ 570,684
======= ======== ========= ========= ===========
</TABLE>
See accompanying notes.
F-227
<PAGE>
BRONCO HI-LIFT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED DECEMBER 31 1997 TO
------------------------ OCTOBER 24,
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)..................... $ (92,912) $ 454,257 $ 1,073,723
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 722,229 836,194 746,305
Gain on equipment sales............. (317,871) (302,777) (355,159)
Interest expense not requiring
cash............................... 17,500
Changes in assets and liabilities:
Increase in accounts receivable... (132,976) (235,655) (171,618)
Decrease (increase) in unbilled
receivables...................... 5,646 27,632 (243,143)
(Increase) decrease in inventory.. (102,542) 89,645 (205,294)
Decrease (increase) in prepaid
expenses and other assets........ 30,774 20,171 (30,743)
(Decrease) increase in accounts
payable, accrued expenses and
other liabilities................ (60,113) (14,377) 187,067
---------- ------------ -----------
Total adjustments............... 145,147 438,333 (72,585)
---------- ------------ -----------
Cash provided by operating
activities..................... 52,235 892,590 1,001,138
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of rental equipment.......... (92,727) (1,368,253) (1,631,309)
Proceeds from sale of rental
equipment............................ 350,739 745,687 573,316
Purchases of property and equipment,
net.................................. (101,985) (90,932) (304,711)
---------- ------------ -----------
Cash provided by (used in)
investing activities........... 156,027 (713,498) (1,362,704)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends paid................... (485,000)
Issuance of stock..................... 100,000
Re-payments on notes due from
stockholders......................... 200,000 300,000
Principal payments on debt............ (742,891) (802,358) (278,195)
Principal payments on capital lease
obligations.......................... (32,711)
Advances to related party............. (412,113)
Borrowings under credit facility...... 900,000 500,000 700,000
---------- ------------ -----------
Cash provided by (used) in
financing activities........... (187,715) (102,358) 236,805
---------- ------------ -----------
Increase (decrease) in cash........... 20,547 76,734 (124,761)
Cash balance at beginning
period......................... 208,225 228,772 305,506
---------- ------------ -----------
Cash balance at end of period... $ 228,772 $ 305,506 $ 180,745
========== ============ ===========
</TABLE>
See accompanying notes.
F-228
<PAGE>
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996 AND OCTOBER 24, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Bronco Hi-Lift, Inc. (the "Company") rents, sells and repairs aerial lift
equipment for use by construction companies and maintenance and media crews.
The rentals are on a daily, weekly or monthly basis. The Company is located in
Denver, Colorado and its principal market area is the state of Colorado. 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 balance sheets are presented on an
unclassified basis.
Inventory
Inventories consists primarily of general replacement parts and fuel for the
equipment and are stated at the lower of cost, determined under the first-in,
first-out method, or market.
Rental Equipment
Rental equipment is recorded at cost. Depreciation for rental equipment is
computed using the straight-line method over an estimated five-year useful
life with no salvage value.
Ordinary maintenance and repair costs are charged to operations as incurred.
Proceeds from the disposal and the related net book value of the equipment are
recognized in the period of disposal and reported as revenue from sales of
equipment and cost of sales of equipment, respectively, in the statements of
operations.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and
equipment is computed on the straight-line method over estimated useful lives
of 5 to 10 years.
Ordinary maintenance and repair costs are charged to operations as incurred.
The cost of assets sold, retired, or otherwise disposed of, and the related
accumulated depreciation is eliminated from the accounts and any resulting
gain or loss is included in operations.
Rental Revenue
Rental revenue is recorded as earned under the operating method.
Advertising Costs
The Company advertises primarily through trade journals, trade associations
and phone directories. All advertising costs are expensed as incurred.
Advertising expenses amounted to approximately $74,400 and $43,000 in the
years ended December 31, 1995 and 1996, respectively, and $49,500 in the
period from January 1, 1997 to October 24, 1997.
Income Taxes
The Company has elected, by unanimous consent of its shareholders, to be
taxed under the provisions of Subchapter S of the Internal Revenue Code for
both federal and state purposes. Under those provisions the Company does not
pay federal or state income taxes; instead, the shareholders are liable for
individual income taxes on the Company's profits. Therefore, no provision for
federal or state income taxes is included in the accompanying financial
statements.
F-229
<PAGE>
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounting Estimates
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.
2. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash balances with a quality financial institution
and, accordingly, management believes this mitigates the amount of credit
risk. Concentrations of credit risk with respect to customer receivables are
limited due to the large number of customers comprising the Company's customer
base and its credit policy.
3. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consisted of the
following:
<TABLE>
<CAPTION>
OCTOBER
DECEMBER 31, 24,
1996 1997
------------ ----------
<S> <C> <C>
Rental equipment.................................... $5,176,658 $5,943,569
Less accumulated depreciation....................... 3,203,748 3,218,105
---------- ----------
Rental equipment, net............................... $1,972,910 $2,725,464
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 24,
1996 1997
------------ -----------
<S> <C> <C>
Furniture and fixtures.............................. $ 59,572 $172,839
Transportation equipment............................ 520,356 664,543
Shop equipment...................................... 37,591 37,591
-------- --------
617,519 874,973
Less accumulated depreciation....................... 382,605 451,055
-------- --------
Total............................................. $234,914 $423,918
======== ========
</TABLE>
F-230
<PAGE>
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
OCTOBER
DECEMBER 31 24,
1996 1997
----------- ----------
<S> <C> <C>
Citicorp Dealer Finance Agreement.................... $1,585,000 $2,135,000
GMAC note dated October 27, 1994 paid in full in
August 1997......................................... 17,564 --
Kenworth/Trial-EZE dated July 11, 1994 paid in full
in September 1997................................... 49,147 --
Notes payable to a former shareholder for $900,000
and $500,000 at an annual interest rate of 9%. The
$900,000 note requires monthly interest payments
through January 31, 1998 at which time the note is
due in full. The $500,000 note requires monthly
interest payments through January 31, 1997.
Beginning February 1, 1997, the note is payable in
60 monthly installments of principal and interest of
$10,379 through December 31, 2001. The above
$500,000 note is subordinated to the Citicorp Dealer
Finance Agreement................................... 1,400,000 1,338,516
---------- ----------
$3,051,711 $3,473,516
========== ==========
</TABLE>
Substantially all of the Company's assets collateralize the debt outstanding
under the Financing Agreement. All debt at October 24, 1997 was paid off in
connection with the acquisition discussed in Note 10.
6. OPERATING LEASES
During 1994, the Company leased 7,000 square feet of office and shop space
on a twelve month lease, renewable annually. For the period from January 1,
1995 to April 30, 1995, the Company leased approximately 7,000 square feet of
office and shop space under a new month to month lease. Effective May 1, 1995,
the Company moved to a new location and entered into a lease agreement with a
related party, Coyote Investments, LLC ("Coyote") (see Note 9). The facility
consists of 17,000 square feet of office and shop area located on 1.8 acres.
The 15 year lease expires April 30, 2010. The Company is responsible for all
operating expenses of the facility including property taxes, assessments,
insurance, repairs and maintenance.
Rent expense under these leases totaled $52,000 and $78,000 for the years
ended December 31, 1995 and 1996 and $65,000 for the period from January 1,
1997 to October 24, 1997. Under the lease agreement with Coyote, rent is
payable in monthly installments of $6,500 for the first two years of the
lease. Thereafter the rent shall be increased annually to reflect the then
current fair market rent for the premises, provided that each annual increase
shall not exceed 10% of the previous year's rental rate. Future minimum rent
commitments are $78,000 each for years ended December 31, 1998 to December 31,
2009 and $26,000 for January 1, 2010 to April 30, 2010, provided there is no
increase in fair market rent for the premises.
7. COMMITMENTS
The Company has employment agreements, which expire in 1998, with three
officers which grant certain severance pay rights to these officers provided
that certain conditions of employment are met.
F-231
<PAGE>
BRONCO HI-LIFT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Under terms of the employment agreements, the officers received approximately
$253,000, $703,000, and $521,000 for the years ended December 31, 1995 and
1996 and for the period from January 1, 1997 to October 24, 1997,
respectively. Additional compensation to be paid to the officers, until the
agreements expire, amounts to approximately $100,000 for the two months ended
December 31, 1997 and $270,000 during 1998.
The Company guarantees Coyote's debt on the building leased by the Company
(see Note 9).
8. SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended December 31, 1995 and 1996 and for the period from
January 1, 1997 to October 24, 1997, total interest paid was $171,305,
$335,686 and $224,016, respectively.
During 1995, the Company purchased $726,355, of equipment which was
financed. There were no purchases in 1996 or for the period from January 1,
1997 to October 24, 1997.
On December 20, 1995, the Company purchased and retired 12,000 shares of its
stock for two notes totaling $1,400,000. On December 21, 1995, the Company
issued 2,000 shares of its stock to two officers of the Company in exchange
for $100,000 cash and $500,000 of notes receivable from these officers. During
1996, the officers repaid $200,000 in accordance with the note agreements. In
October of 1997, the notes were repaid in full.
During 1997, the Company paid dividends of $515,000, of which $30,000
represented a non-cash transfer of a fixed asset.
9. RELATED PARTY TRANSACTIONS
Coyote is owned by the shareholders of the Company. The Company leases its
office and shop facility from Coyote (see Note 6). All stockholders and the
Company have guaranteed Coyote's debt on the facility. The amount of debt
principal on the facility was $555,080 at December 31, 1996 and $540,200 at
October 24, 1997.
Advances to Coyote were $412,113 at December 31, 1995. Coyote paid $3,434 of
interest to the Company during 1996. As part of the Citicorp Amendment No. 1
Refinancing Agreement, the Company owed Coyote $152,187, which it paid with
interest of $7,990 during August 1996. These obligations were fulfilled with a
non-cash transaction in connection with the above mentioned amended agreement.
On December 21, 1995 the Company issued 2,000 shares to two officers of the
Company in exchange for $100,000 cash and two notes for $250,000 each. The
notes bear interest at 9% per annum and are payable bi-annually. Principal on
each note is payable $100,000 in 1996, $100,000 in 1997 and $50,000 in 1998.
Interest paid to the Company during 1996 by these stockholders was $42,400. In
October of 1997, the notes were repaid in full.
10. SUBSEQUENT EVENT
On October 24, 1997, the Company entered into a stock purchase agreement
with United Rentals, Inc. ("United"). Under the terms of the stock purchase
agreement, United purchased all of the issued and outstanding capital stock of
the Company.
F-232
