<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998
REGISTRATION NO. 333-49223
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NATIONAL EQUIPMENT SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7359 36-4087016
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
1800 SHERMAN AVENUE
EVANSTON, ILLINOIS 60201
TELEPHONE: (847) 733-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL OFFICES)
PAUL R. INGERSOLL
VICE PRESIDENT
NATIONAL EQUIPMENT SERVICES, INC.
1800 SHERMAN AVENUE
EVANSTON, ILLINOIS 60201
TELEPHONE: (847) 733-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
BETH R. NECKMAN
H. KURT VON MOLTKE
KIRKLAND & ELLIS LATHAM & WATKINS
200 EAST RANDOLPH DRIVE 885 THIRD AVENUE, SUITE 1000
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10022
(312) 861-2000 (212) 906-1200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A POST- +
+EFFECTIVE AMENDMENT TO A REGISTRATION STATEMENT RELATING TO THESE SECURITIES +
+HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES +
+MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH +
+POST-EFFECTIVE AMENDMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT +
+CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL +
+THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 1, 1998
PROSPECTUS
6,000,000 SHARES
[LOGO OF NATIONAL EQUIPMENT SERVICES, INC. APPEARS HERE]
NATIONAL EQUIPMENT SERVICES, INC.
COMMON STOCK
All of the shares of Common Stock, par value $.01 per share (the "Common
Stock"), of National Equipment Services, Inc., a Delaware corporation ("NES" or
the "Company"), offered hereby (the "Offering") are being offered by the
Company.
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. It is currently estimated that the initial public
offering price will be between $13.00 and $14.00 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. The Common Stock has been approved for trading on the
New York Stock Exchange under the symbol "NSV," subject to official notice of
issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total (3) $ $ $
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</TABLE>
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering estimated at $2,000,000 payable
by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 900,000 shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $ , $ , and $ ,
respectively.
------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1998 at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
SALOMON SMITH BARNEY
WILLIAM BLAIR & COMPANY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1998
<PAGE>
[Pictures to come]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZATION BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the Financial Statements and notes thereto, included elsewhere in this
Prospectus. Unless otherwise stated, the information contained in this
Prospectus has been adjusted to give effect to the Reclassification (as
defined) and a 139 for one stock split of the Common Stock. Unless otherwise
stated in this Prospectus or unless the context otherwise requires, "NES" or
the "Company" shall mean National Equipment Services, Inc., including (i) all
of its 13 acquired businesses and (ii) Falconite, Inc. ("Falconite"), which the
Company has a definitive agreement to acquire concurrent with the Offering
(collectively, the "Acquired Businesses"). References herein to various
financial information on a "pro forma basis" (i) give effect to acquisitions of
the Acquired Businesses as if such transactions had been completed as of the
first day of the related period, (ii) give effect to the Offering assuming no
exercise of the Underwriters' overallotment option, (iii) give effect to the
borrowings to be outstanding under the New Credit Facility (as defined) and
payment of related fees and (iv) reflect certain adjustments described in
"Selected Pro Forma Financial Data."
THE COMPANY
GENERAL
National Equipment Services, Inc. is a leading participant in the growing and
highly fragmented $18 billion equipment rental industry. Through its 14
businesses acquired or to be acquired since January 1997, NES specializes in
the rental of specialty and general equipment to industrial and construction
end-users. The Company rents over 750 different types of machinery and
equipment and distributes new equipment for nationally recognized original
equipment manufacturers. The Company also sells used equipment as well as
complementary parts, supplies and merchandise, and provides repair and
maintenance services to its customers. NES is geographically diversified, with
79 locations across 19 states, and is a leading competitor in each of the
geographic markets it serves. For the year ended December 31, 1997, on a pro
forma basis, the Company generated revenues of $218.6 million, an increase of
29.4% compared to 1996 combined revenues of $168.9 million.
Management believes that the Company offers one of the most modern and well
maintained fleets of specialty or general equipment in each of its markets. The
average age of the Company's equipment fleet is approximately three years.
Specialty equipment includes electric and pneumatic hoists, hydraulic and
truck-mounted cranes, liquid storage tanks, pumps and highway safety equipment.
General industrial and construction equipment includes aerial work platforms,
air compressors, cranes, earth-moving equipment and rough terrain forklifts.
The Company rents and sells this equipment to industrial and construction end-
users, which represented approximately 53% and 44%, respectively, of the
Company's revenues for the year ended December 31, 1997, on a pro forma basis.
NES is led by a senior management team with significant industry experience
and an impressive track record of acquiring and integrating companies in the
equipment rental industry. Prior to founding the Company, the NES senior
management team was responsible for building Brambles Equipment Services
("Brambles"), the U.S. equipment rental business of an Australian public
company, into a leading participant in the industry. At Brambles, this team
executed a growth strategy that combined a disciplined acquisition program with
significant organic growth. Management believes that the team's extensive
industry experience allows them to more easily identify quality acquisition
targets and successfully integrate these businesses through effective financial
and operating controls and the proper deployment of capital. The Company's
local operations are managed by experienced professionals who have an average
of over 15 years of experience in the industry and have extensive knowledge of
and relationships in their local markets. These managers are typically former
owners of the businesses acquired by the Company. The Company also benefits
from the financial expertise of Golder, Thoma, Cressey, Rauner, Inc., an
established investment firm specializing in the consolidation of fragmented
industries. Golder, Thoma, Cressey, Rauner Fund V, L.P., an affiliate of
Golder, Thoma, Cressey, Rauner, Inc., is the Company's principal equity
investor.
3
<PAGE>
INDUSTRY OVERVIEW
Revenues for the $18 billion equipment rental industry have grown at a
compound annual rate of approximately 24% from 1984 to 1997 according to
surveys conducted by the Associated Equipment Distributors and have grown in 12
of the past 13 years. Management believes that the equipment rental industry
growth will continue to be driven by the trend among customers to outsource
non-core operations in order to reduce their capital investment and minimize
the downtime, maintenance, repair and storage costs associated with equipment
ownership. While customers traditionally have rented equipment for specific
purposes such as supplementing capacity during peak periods and in connection
with special projects, customers are increasingly looking to rental operators
to provide an ongoing, comprehensive supply of equipment, enabling such
customers to benefit from the economic advantages and convenience of rental.
According to a survey published in 1997 by The CIT Group, contractors intended
to increase the percentage of equipment they rent without a purchase option to
an estimated 15% of their total equipment requirements in 1997 from less than
5% in 1994.
The highly fragmented equipment rental industry consists of a large number of
relatively small independent businesses typically serving discrete local
markets within 30 to 50 miles of the store location, and a small number of
multi-location regional or national operators. According to Rental Equipment
Register, there are more than 12,000 participants in the industry, with the
largest 100 rental companies accounting for less than 20% of 1996 industry
revenues. Management believes that the rental equipment industry offers
substantial consolidation opportunities for large, well-capitalized equipment
rental companies such as NES. Relative to smaller companies with only one or
two rental locations, multi-regional operators such as NES benefit from a
number of competitive advantages, including access to capital, the ability to
offer a broader range of modern, high-quality equipment, standardized
management information systems, volume purchasing discounts and the ability to
service larger, multi-regional accounts. In addition, management believes that
multi-regional operators are less affected by changes in local economic
conditions.
GROWTH STRATEGY
Management believes that NES is well positioned to benefit from industry
trends of growth and consolidation. The Company's strategic objective is to
continue to grow profitably in both existing and new markets by acquiring
additional specialty and general equipment rental companies, by increasing
revenues from industrial customers, by maximizing higher margin rental revenues
and by leveraging its new remanufacturing center. The Company intends to attain
its objective by continuing to execute the following growth strategy:
Acquire Specialty and General Equipment Rental Businesses. The Company seeks
to acquire strong and successful specialty and general equipment rental
businesses. In 1997, NES generated approximately 33% and 67% of its revenues on
a pro forma basis from specialty and general equipment businesses,
respectively. The Company routinely evaluates attractive markets for expansion
where a leading position can be created by acquiring an existing business. The
Company generally targets acquisition candidates that (i) are profitable
businesses with a proven track record, (ii) generate a high percentage of
revenues from rentals with a significant portion derived from industrial
customers, (iii) are led by a strong management team that is willing to
continue with the business, (iv) have a strong local market share or
participate in a high-growth market and (v) provide opportunities to expand
their customer base through better access to and employment of capital. The
Company also seeks to acquire smaller businesses in locations already served by
the Company that offer product lines or services that are complementary to
those at existing locations. Since January 1997, the Company has completed 13
acquisitions and expects to complete the acquisition of Falconite concurrent
with the Offering. Management believes that with over 12,000 participants, the
equipment rental industry will continue to offer a significant number of
businesses that fit the Company's acquisition profile.
Increase Revenues from Industrial Customers. The Company is committed to
increasing its revenues derived from industrial customers. Management believes
that these revenues are more stable than revenues from
4
<PAGE>
construction customers due to the fact that industrial customers typically
utilize rental equipment for ongoing and periodic maintenance work on their
existing facilities as well as for material handling applications. Industrial
customers tend to rent equipment for longer periods and use equipment under
less severe conditions than contractors, thereby increasing the Company's
equipment utilization and decreasing the Company's equipment maintenance costs.
The good condition and quality of rental equipment are essential for industrial
customers in order to avoid costly slowdowns or shutdowns of plant facilities.
Management believes that larger well-capitalized companies such as NES are
better able to provide well-maintained and high quality equipment. The Company
intends to continue to expand its industrial customer base by providing
additional equipment and services to its existing industrial customers and
establishing new relationships through its existing businesses as well as
through acquisitions. For the year ended December 31, 1997, on a pro forma
basis, revenues derived from industrial end-users represented approximately 53%
of the Company's total revenues.
Maximize High-Margin Rental Revenues Through Efficient Fleet Management. The
Company is focused on growing its high-margin rental revenues by expanding
fleet inventory, efficiently managing fleet inventory in order to maximize
equipment utilization, optimizing fleet maintenance, and systematically
evaluating the optimal timing of used equipment sales. The Company's
acquisition targets have typically operated under capital constraints, which
prevented them from purchasing rental equipment sufficient to meet customer
demand and consequently resulted in lost revenue opportunities. In pursuing
acquisitions, NES evaluates the target's customer base and fleet inventory and,
following its acquisition, typically provides capital to expand the equipment
fleet and improve utilization, resulting in significant increases in rental
revenues.
Leverage New Remanufacturing Center. As part of the acquisition of Falconite,
the Company will acquire a recently-constructed 45,000 square foot equipment
remanufacturing facility in the Paducah, Kentucky area. The Company believes
this facility will enhance its ability to perform major repair operations and
maintain its rental fleet in top condition. Management anticipates that the
center will increase rental gross profit margins by reducing capital
expenditure requirements and related rental equipment depreciation. The Company
also expects that the center will provide an additional source of revenue by
allowing NES to perform repair and rebuild services for third party equipment
owners. The center incorporates four production lines to simultaneously
refurbish equipment by replacing or rebuilding all major components including
engines, transmissions and mechanical, hydraulic and electrical systems.
RECENT ACQUISITIONS
In the first quarter of 1998, the Company completed seven acquisitions to add
to the six businesses acquired in 1997. These first quarter 1998 acquisitions
generated 1997 pro forma revenues of $89.3 million and added 32 locations. For
additional information on these first quarter 1998 acquisitions, see Note 13 to
the Company's Consolidated Financial Statements included elsewhere herein. In
addition, the Company has entered into a definitive agreement to acquire all of
the outstanding stock of Falconite for an aggregate purchase price of $175.0
million concurrent with the Offering. Falconite is a leading aerial rental
equipment company serving a diverse range of more than 5,500 active commercial
customers from 29 locations in nine southern and mid-western states.
Falconite's rental fleet consists primarily of large equipment, such as aerial
work platforms, cranes and forklifts. Falconite's customers operate in a wide
range of industries, including automotive, chemical, commercial construction,
pulp and paper, and utilities. Falconite generated 1997 pro forma revenues of
$72.6 million. The agreement to acquire Falconite is subject to customary
conditions.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............... 6,000,000 shares
Common Stock to be outstanding
after the Offering................ 22,405,279 shares of Common Stock (1)(2)
Use of Proceeds.................... The Company intends to use the net proceeds
from the Offering, together with borrowings
under the New Credit Facility, to fund the
acquisition of Falconite.
New York Stock Exchange Symbol..... NSV
</TABLE>
- --------
(1) Excludes 880,000 shares of Common Stock issuable upon the exercise of
outstanding options and 1,320,000 additional shares of Common Stock
reserved for issuance under the Incentive Plan (as defined). See
"Management--Long Term Incentive Plan."
(2) Includes (i) 277,778 shares of Common Stock to be issued upon the mandatory
conversion at the initial public offering price of $3,750 principal amount
of 8% senior subordinated promissory notes to be issued in connection with
the acquisition of Falconite and (ii) 3,603,601 shares of Common Stock to
be issued upon the conversion of the Old Preference Stock assuming
consummation of the Offering on June 15, 1998.
RECLASSIFICATION AND STOCK SPLIT
Immediately prior to the consummation of the Offering, each outstanding share
of Old Common Stock (as defined) will be converted into one share of Common
Stock and each outstanding share of Old Preference Stock will be converted into
a number of shares of Common Stock based on a specified formula (the
"Reclassification"). Each share of Common Stock will then be split into 139
shares of Common Stock (the "Stock Split"). See "Description of Capital Stock--
Old Preference Stock and Old Common Stock" and "Description of Capital Stock--
Reclassification and Stock Split."
6
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company was founded in June 1996 to acquire and integrate equipment
rental companies. In 1997, the Company acquired six businesses in separate
transactions. In 1998, the Company acquired seven businesses in separate
transactions and has a definitive agreement to acquire Falconite concurrent
with the Offering. While the Acquired Businesses were or will be acquired at
various dates during 1997 and 1998, the following pro forma operating, per
share and other data are presented as if all such acquisitions, the Offering
and certain borrowings under the New Credit Facility had occurred on January 1,
1997. The following pro forma balance sheet data give effect to the
aforementioned transactions as if they had occurred on March 31, 1998. See
"Capitalization." The summary historical and pro forma financial information
should be read in conjunction with the information contained in "Selected Pro
Forma Financial Data," "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
-------------------- --------------------- --------------------
ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(A) ACTUAL PRO FORMA(A)
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues......... $41,288 $218,628 $ 2,319 $45,238 $22,151 $52,831
Gross profit........... 15,573 90,260 843 17,179 8,651 20,663
Operating income
(loss)................ 6,187 38,917 (28) 5,565 3,313 6,878
Interest expense, net.. 4,336 27,364 262 6,841 3,100 6,841
Income (loss) before
income taxes.......... 1,923 11,870 (290) (1,134) 290 52
Income tax expense
(benefit)............. 818 4,981 (135) (475) 151 21
Net income (loss)...... 1,105 6,889 (155) (659) 139 31
PER SHARE DATA:
Basic earnings (loss)
per share............. $ 0.09 $ 0.33 $ (0.02) $ (0.03) $ 0.01 $ 0.00
Basic shares
outstanding........... 12,337 21,106 9,611 21,106 12,079 21,366
Diluted earnings (loss)
per share............. $ 0.08 $ 0.31 $ (0.01) $ (0.03) $ 0.01 $ 0.00
Diluted shares
outstanding........... 14,124 22,405 11,222 22,405 16,079 22,405
OTHER DATA:
Rental fleet purchases. $15,336 $ 86,030 $ 853 $26,919 $12,385 $17,073
EBITDA(b).............. 12,744 77,995 395 15,314 6,924 16,848
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------
ACTUAL PRO FORMA(A)
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<S> <C> <C>
BALANCE SHEET
DATA:
Cash.......... $ 3,773 $ 2,158
Rental
equipment,
net.......... 104,937 210,573
Total assets.. 242,303 433,562
Total debt.... 193,954 292,759
Total
stockholders'
equity....... 26,860 104,750
</TABLE>
(a) For an explanation of the calculation of the pro forma adjustments, see
"Selected Pro Forma Financial Data."
(b) Reflects operating income plus other income (expense), net, before interest
expense, net, income taxes, rental equipment depreciation and non-rental
depreciation and amortization. EBITDA is not intended to represent cash
flow from operations or net income as defined by generally accepted
accounting principles and should not be considered as a measure of
liquidity or an alternative to, or more meaningful than, cash flow from
operations or net income as an indication of the Company's operating
performance. EBITDA is included herein because management believes that
EBITDA, as presented, represents a useful measure of assessing the
performance of the Company's ongoing operating activities as it reflects
the earnings trends of the Company without the impact of interest, income
taxes and certain non-cash charges.
7
<PAGE>
RISK FACTORS
This Prospectus contains certain forward-looking statements concerning the
Company. Also, documents subsequently filed by the Company with the Securities
and Exchange Commission (the "SEC" or the "Commission") will contain forward-
looking statements. Such forward-looking statements are based on the beliefs
of the Company's management as well as on assumptions made by and information
currently available to the Company at the time such statements are made. When
used in this Prospectus, the words "anticipate," "believe," "estimate,"
"expect," "intends" and similar expressions, as they relate to the Company are
intended to identify forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result
of the risk factors set forth below, the matters set forth or incorporated in
the Prospectus generally and certain economic and business factors, some of
which may be beyond the control of the Company. The Company cautions the
reader, however, that this list of factors may not be exhaustive, particularly
with respect to future filings with the Commission. In analyzing an investment
in the Common Stock offered hereby, prospective investors should carefully
consider, along with the other matters referred to herein, the risk factors
described below.
SIGNIFICANT INDEBTEDNESS COULD ADVERSELY AFFECT STOCKHOLDERS
The Company has incurred significant indebtedness. As of March 31, 1998, on
a pro forma basis, after giving effect to the Offering and certain borrowings
under the New Credit Facility and the application of the proceeds therefrom,
the Company would have had $292.8 million of indebtedness outstanding and its
stockholders' equity would have been approximately $104.8 million. The level
of the Company's indebtedness could have important consequences to holders of
Common Stock, including: (i) a substantial portion of the Company's cash flow
from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the industry and
economic conditions generally. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Description of Certain Indebtedness."
ABILITY TO COMPLETE AND INTEGRATE ACQUISITIONS; RISKS RELATING TO GROWTH
STRATEGY
A significant portion of the Company's strategy is to pursue and complete
acquisitions that meet its acquisition criteria. The Company has acquired and
seeks to acquire companies that can benefit from the Company's operations,
management and access to capital. The Company's ability to grow by acquisition
is dependent upon, and may be limited by, the availability of suitable
acquisition candidates and capital and the restrictions contained in the New
Credit Facility and the Indenture (as defined) and the Company's other
financing arrangements. See "Description of Certain Indebtedness." To the
extent that cash generated internally and cash available under the New Credit
Facility are not sufficient to provide the capital required for acquisitions,
the Company will require additional debt and/or equity financing in order to
provide for such capital. Future debt financings, if available, will result in
increased interest and amortization expense, increased leverage and decreased
income available to fund acquisitions and expansion, and may limit the
Company's ability to withstand competitive pressures and render the Company
more vulnerable to economic downturns. Future equity financings may dilute the
equity interests of existing stockholders. Growth by acquisition also involves
risks that could adversely affect the Company's operating results, including
difficulties in integrating the operations and personnel of acquired
companies, eliminating duplicative costs and reducing overhead, and the
potential loss of key employees of acquired companies. In addition, although
the Company performs a due diligence investigation of each business that it
acquires, there may nevertheless be liabilities of the Acquired Businesses or
future acquired companies that the Company fails or is unable to discover
during its due diligence investigation and for which the Company, as a
successor owner, may be responsible.
8
<PAGE>
There can be no assurance that the Company will be able to obtain the
capital necessary to pursue its growth strategy, consummate acquisitions on
satisfactory terms or, if any such acquisitions are consummated, successfully
integrate such acquired businesses into the Company and remedy any
undiscovered liabilities of any acquired companies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Certain Indebtedness."
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: large national companies; regional competitors
which operate in one or two states; small, independent businesses with one or
two rental locations; and equipment vendors and dealers who both sell and rent
equipment to customers. Some of the Company's competitors have greater
financial resources, are more geographically diverse and have greater name
recognition than the Company. There can be no assurance that the Company will
not encounter increased competition from existing competitors or new market
entrants that may be significantly larger and have greater financial and
marketing resources. In addition, to the extent existing or future competitors
seek to gain or retain market share by reducing prices, the Company may be
required to lower its prices and rates, thereby adversely affecting operating
results. Existing or future competitors also may seek to compete with the
Company for acquisitions, which could have the effect of increasing the price
for acquisitions or reducing the number of suitable acquisitions. See
"Business--Competition."
DEPENDENCE ON KEY PERSONNEL
Certain of the executive officers of the Company are of significant
importance to the direction and management of the Company. The loss of the
services of such persons could have a material adverse effect on the Company's
business and future operations, and there can be no assurance that the Company
would be able to find replacements for such persons with comparable business
experience. The Company does not maintain key man life insurance with respect
to such executive officers. See "Management--Directors and Executive
Officers."
GENERAL ECONOMIC CONDITIONS
A majority of the Company's revenues are derived from customers which are in
industries and businesses that are cyclical in nature and subject to changes
in general economic conditions, such as the construction industry. In
addition, because the Company conducts its operations in a variety of
geographic markets, it is subject to the economic conditions in each such
geographic market. General economic downturns or localized downturns in
markets where the Company has operations, including any downturns in the
construction industry, could have a material adverse effect on the Company and
its business, results of operations and financial condition.
GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P. WILL CONTINUE TO EXERCISE
SIGNIFICANT CONTROL OVER THE COMPANY
Golder, Thoma, Cressey, Rauner Fund V, L.P. owns and controls a majority of
the Common Stock of the Company. Upon the completion of the Offering, Golder,
Thoma, Cressey, Rauner Fund V, L.P. and its affiliates will collectively hold
approximately 61.7% of the outstanding shares of Common Stock (or
approximately 59.3% if the Underwriters' over-allotment option is exercised in
full). As a result, Golder, Thoma, Cressey, Rauner Fund V, L.P. will continue
to have significant control over the election of the Company's Board of
Directors (the "Board of Directors" or the "Board") and significant control
over the affairs and management of the Company, including corporate
transactions such as mergers, acquisitions, divestitures and asset sales. See
"Principal Stockholders," "Certain Relationships and Related Transactions--
Stockholders Agreement" and
"--Registration Agreement."
9
<PAGE>
ENVIRONMENTAL LIABILITIES
The Company's facilities are subject to federal, state and local
environmental requirements, including those relating to discharges to air,
water and land, the handling and disposal of solid and hazardous waste and the
cleanup of properties affected by hazardous substances. Certain environmental
laws impose substantial penalties for noncompliance, and others impose strict,
retroactive, joint and several liability upon persons responsible for releases
of hazardous substances.
The Company does not currently anticipate any material adverse effect on its
operations or financial condition as a result of its efforts to comply with,
or its liabilities under, such requirements. Some risk of environmental
liability is inherent in the Company's business, however, and there can be no
assurance that material environmental costs will not arise in the future. See
"Business--Governmental and Environmental Regulation."
LIABILITY AND INSURANCE
The Company's business exposes it to claims for personal injury or death
resulting from the use of equipment rented or sold by the Company, from
injuries caused in motor vehicle accidents in which Company delivery and
service personnel are involved, as well as workers' compensation claims and
other employment-related claims by the Company's employees. The Company
carries insurance coverage for product liability, general and automobile
liability and employment related claims from various national insurance
carriers. There can be no assurance, however, that existing or future claims
will not exceed the level of the Company's insurance, that the Company will
have sufficient capital available to pay any uninsured claims or that its
insurance will continue to be available on economically reasonable terms, if
at all. See "Business--Legal Proceedings."
INTANGIBLE ASSETS
The Company's balance sheet immediately following the Offering and after
giving effect to all completed and planned acquisitions of the Acquired
Businesses will include an amount designated as "goodwill" that represents 33%
of total assets and 136% of stockholders' equity. Goodwill arises when an
acquirer pays more for a business than the fair value of the tangible and
separately measurable intangible net assets. Generally accepted accounting
principles require that this and all other intangible assets be amortized over
the period benefited. Management has determined that period to be no less than
40 years.
If management were not to give effect to shorter benefit periods of factors
giving rise to a material portion of the goodwill, earnings reported in
periods immediately following the acquisition would be overstated. In later
years, the Company would be burdened by a continuing charge against earnings
without the associated benefit to income valued by management in arriving at
the consideration paid for the business. Earnings in later years could also be
significantly affected if management determined then that the remaining
balance of goodwill was impaired.
Management has reviewed with its independent accountants all of the factors
and related future cash flows which it considered in arriving at the amount
incurred to acquire each of the Acquired Businesses. Management concluded that
the anticipated future cash flows associated with intangible assets recognized
in the acquisitions will continue indefinitely, and there is no persuasive
evidence that any material portion will dissipate over a period shorter than
40 years.
QUARTERLY FLUCTUATIONS OF OPERATING RESULTs
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter due to a number of factors, including: seasonal rental
patterns of the Company's customers (with rental activity tending to be lower
in the winter); changes in general economic conditions in the Company's
markets; the timing of acquisitions and related costs; the effect of the
integration of acquired businesses; the timing of expenditures for new
equipment and the disposition of used equipment; and price changes in response
to competitive factors. These factors, among others, may result in the
Company's results of operations in some future periods not meeting
expectations, which could have a material adverse impact on the market price
of the Common Stock.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price of the Common Stock will be determined by
negotiations between the Company and the Representatives (as defined herein)
and may not be indicative of the market price for shares of the Common Stock
after the Offering. For a description of factors considered in determining the
initial public offering price, see "Underwriting."
10
<PAGE>
There can be no assurance that an active trading market for the Common Stock
will develop or if developed, that such market will be sustained. The market
price for shares of the Common Stock is likely to be volatile and may be
significantly affected by such factors as quarter-to-quarter variations in the
Company's results of operations, news announcements, changes in general market
conditions for equipment rental businesses, regulatory actions, adverse
publicity regarding the Company or the industry in general, changes in
financial estimates by securities analysts and other factors. In addition,
broad market fluctuation and general economic and political conditions may
adversely affect the market price of the Common Stock, regardless of the
Company's actual performance. There can be no assurance that the market price
of the Common Stock will not decline below the initial public offering price.
SUBSTANTIAL DILUTION
Because the initial public offering price is substantially higher than the
book value per share of Common Stock, purchasers of the Common Stock in the
Offering will be subject to immediate and substantial dilution of $15.68 per
share. In addition, pursuant to certain provisions of the Company's restated
Certificate of Incorporation (the "Restated Certificate"), the Company has the
authority to issue additional shares of Common Stock and shares of one or more
series of voting Preferred Stock. The issuance of such shares could result in
the dilution of voting power of the shares of Common Stock purchased in the
Offering. See "Dilution" and "Description of Capital Stock."
ABSENCE OF DIVIDENDS; RESTRICTIONS ON PAYMENT OF DIVIDENDS
Following the completion of the Offering, the Company intends to retain any
future earnings for use in its business and therefore does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future. In
addition, the New Credit Facility and the Indenture contain covenants which
restrict the ability of the Company to declare dividends. See "Dividend
Policy."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon consummation of the Offering, the Company expects to have 22,405,279
shares of Common Stock outstanding. Of these shares, the 6,000,000 shares of
Common Stock (6,900,000 shares if the Underwriters' over-allotment option is
exercised in full) sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except any such shares which may be acquired
by an "affiliate" of the Company. The Company and the holders of the remaining
outstanding shares of Common Stock have agreed not to sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase, or
otherwise transfer or dispose of, any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock,
other than the shares subject to the Underwriters' over-allotment option,
without the prior written consent of Salomon Smith Barney, for a period of 180
days after the date of this Prospectus (the "Lockup Agreements"), subject to
certain limited exceptions. After such time, such shares may be resold
pursuant to an exemption from registration under the Securities Act, including
Rule 144 thereunder. The existing stockholders of the Company have certain
registration rights described under "Certain Relationships and Transactions--
Registration Agreement." No prediction can be made as to the effect, if any,
that market sales of shares or the availability of such shares for future sale
will have on the market price of shares of Common Stock prevailing from time
to time. The prevailing market price of the Common Stock after the Offering
could be adversely affected by future sales of substantial amounts of Common
Stock by existing stockholders or the perception that such sales may occur.
See "Shares Eligible for Future Sale," "Certain Relationships and
Transactions," "Principal Stockholders" and "Underwriting."
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Restated Certificate and the Company's By-laws
(the "By-laws") may inhibit changes in control of the Company not approved by
the Company's Board of Directors. These provisions include: (i) a classified
Board of Directors; (ii) a prohibition on stockholder action through written
consents; (iii) a requirement that special meetings of stockholders be called
only by the Board of Directors; (iv) advance notice requirements for
stockholder proposals and nominations; (v) limitations on the ability of
stockholders to amend, alter or repeal the By-laws; and (vi) the authority of
the Board of Directors to issue without stockholder approval preferred stock
with such terms as the Board of Directors may determine. The Company will also
be afforded the protections of Section 203 of the General Corporation Law of
the State of Delaware, which could have a similar effect. See "Description of
Capital Stock."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering will be approximately
$74.1 million, based upon an assumed initial public offering price of $13.50
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. The Company intends to
use such net proceeds, together with borrowings under the New Credit Facility,
to fund the acquisition of Falconite.
DIVIDEND POLICY
The Company presently anticipates that all of its future earnings will be
retained to finance the expansion of its business and does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future. In
addition, the New Credit Facility and the Indenture contain covenants which
restrict the ability of the Company to declare dividends. Any future
determination to declare or pay dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other factors, the
Company's results of operations, financial condition, capital requirements,
contractual restrictions and such other factors as the Board of Directors
deems relevant.
12
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth: (i) the actual capitalization of the Company
as of March 31, 1998; and (ii) such capitalization on a pro forma basis to
reflect (a) the acquisition of Falconite, (b) the Reclassification (based on
the aggregate cumulative yield on the Old Preference Stock as of June 15,
1998) and the Stock Split and (c) the Offering, assuming an initial public
offering price of $13.50 per share, certain borrowings under the New Credit
Facility and the application of the net proceeds to the Company therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the Financial Statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C>
Debt:
Credit Facility.................................... $ 95,128 (a) $ --
New Credit Facility................................ -- 193,933 (b)
10% Senior Subordinated Notes due 2004 ("Notes")
(c)............................................... 98,826 98,826
-------- --------
Total Debt....................................... 193,954 292,759
Stockholders' equity:
Preferred Stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding....... -- --
Class A Common Stock, $0.01 par value (the "Old
Preference Stock"); 50,000 shares authorized;
25,221 shares issued on an actual basis; no shares
issued on a pro forma basis....................... 1 --
Class B Common Stock, $0.01 par value (the "Old
Common Stock"); 150,000 shares authorized; 90,100
shares issued on an actual basis; no shares issued
on a pro forma basis.............................. 1 --
Common Stock, $0.01 par value; 100,000,000 shares
authorized; no shares issued on an actual basis;
22,405,279 shares issued on a pro forma basis (d). -- 224
Additional paid-in capital......................... 25,911 103,579
Retained earnings.................................. 1,049 1,049
Stock subscription receivable...................... (102) (102)
-------- --------
Total stockholders' equity....................... 26,860 104,750
-------- --------
Total capitalization............................. $220,814 $397,509
======== ========
</TABLE>
- --------
(a) As of June 29, 1998, $123,361 was outstanding under the Credit Facility.
(b) Reflects the repayment of the New Credit Facility with $3,257 of cash on
hand at the Acquired Businesses purchased or to be purchased on or after
March 31, 1998. In addition, reflects an assumed borrowing of $3,085 under
the New Credit Facility to fund certain potential purchase price
adjustments in connection with the Acquired Businesses purchased in 1998.
(c) Reflects unamortized original issue discount of $1,174.
(d) Excludes 880,000 shares of Common Stock issuable upon the exercise of
outstanding options and 1,320,000 additional shares of Common Stock
reserved for issuance under the Incentive Plan. See "Management--Long Term
Incentive Plan." Includes (i) 277,778 shares of Common Stock to be issued
upon the mandatory conversion at the initial public offering price of
$3,750 principal amount of 8% subordinated promissory notes to be issued
in connection with the acquisition of Falconite and (ii) 3,603,601 shares
of Common Stock to be issued upon the conversion of the Old Preference
Stock assuming consummation of the Offering on June 15, 1998.
13
<PAGE>
DILUTION
As of March 31, 1998, after giving effect to the Reclassification and the
Stock Split, the net tangible book value of the Company was approximately
$(66.2) million, or $(4.10) per share. After giving effect to the Offering,
certain borrowings under the New Credit Facility and the application of the
net proceeds therefrom as set forth under "Use of Proceeds," including the
acquisition of Falconite, the net tangible book value of the Company as of
March 31, 1998 would have been approximately $(48.8) million, or $(2.18) per
share. This represents an immediate increase in net tangible book value per
share of $1.92 per share to the existing stockholders and an immediate
dilution of $15.68 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.......... $13.50
Net tangible book value per share before the Offering
(a)..................................................... $(4.10)
Increase per share attributable to payments by new
investors............................................... 1.92
------
Pro forma net tangible book value per share after the
Offering................................................ (2.18)
------
Dilution per share to new investors (b).................. $15.68
======
</TABLE>
- --------
(a) Net tangible book value per share of Common Stock is determined by
dividing the Company's tangible net worth at March 31, 1998, of $(66.2)
million by the aggregate number of shares of Common Stock outstanding
after giving effect to the Reclassification and the Stock Split.
(b) Dilution is determined by subtracting pro forma net tangible book value
per share after the Offering from the initial public offering price per
share.
The following table summarizes, as of March 31, 1998, the difference between
the existing stockholders and the new investors with respect to the number of
shares of Common Stock purchased (or to be purchased) from the Company, the
total consideration paid (or to be paid) and the average price per share paid
(or to be paid) assuming an initial public offering price of $13.50 per share
and before deducting the estimated offering expenses and underwriting
discounts and commissions, in each case after giving effect to: (i) the
acquisition of the Acquired Businesses purchased or to be purchased in 1998;
(ii) the Reclassification and the Stock Split; and (iii) the Offering, certain
borrowings under the New Credit Facility and the application of the net
proceeds to the Company therefrom as set forth under "Use of Proceeds:"
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
------------------ -------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- -------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(a)..................... 16,405,279 73.2% $ 29,806,000 26.9% $ 1.82
New investors............ 6,000,000 26.8 81,000,000 73.1 13.50
---------- ----- ------------ ----- ------
Total................ 22,405,279 100.0% $110,806,000 100.0% $ 4.95
========== ===== ============ ===== ======
</TABLE>
- --------
(a) Includes (i) 277,778 shares to be issued upon the mandatory conversion at
the initial public offering price of the $3.75 million principal amount of
8% subordinated promissory notes to be issued in connection with the
acquisition of Falconite and (ii) 3,603,601 shares of Common Stock to be
issued upon the conversion of the Old Preference Stock assuming
consummation of the Offering on June 15, 1998 and does not include 880,000
shares of Common Stock issuable upon the exercise of outstanding options
and 1,320,000 additional shares of Common Stock reserved for issuance
under the Incentive Plan. To the extent the foregoing options excluded
from the computations above are exercised in the future, there will be
further dilution to new investors. See "Management--Long Term Incentive
Plan."
14
<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The Company was founded in June 1996 to acquire and integrate equipment
rental companies. In 1997, the Company acquired six businesses in separate
transactions. In 1998, the Company acquired seven businesses in separate
transactions and has a definitive agreement to acquire Falconite concurrent
with the Offering. The Offering is conditioned on the acquisition of Falconite
and consummation of the New Credit Facility. While the Acquired Businesses
were or will be acquired at various dates during 1997 and 1998, the following
pro forma statements of operations are presented as if all such acquisitions,
the Offering and certain borrowings under the New Credit Facility had occurred
on January 1, 1997. The following pro forma balance sheet gives effect to such
transactions as if they had occurred on March 31, 1998.
The following selected pro forma financial data have been derived from
Company (the Company herein defined to include the Acquired Businesses)
prepared financial information (and, when applicable, includes adjustments to
conform fiscal periods to calendar periods), the audited and unaudited
Financial Statements and notes thereto of certain of the Acquired Businesses
for certain periods and the audited and unaudited Financial Statements and
notes thereto of the Company since inception, which Financial Statements
appear elsewhere in this Prospectus.
The selected pro forma financial data have been prepared for comparative
purposes only and do not purport to be indicative of the results which would
have been achieved had the Acquired Businesses been purchased, the Offering
been consummated and certain borrowings under the New Credit Facility been
made as of the assumed dates, nor are the results indicative of the Company's
future results. The selected pro forma financial data should be read in
conjunction with "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and notes thereto of the Company since inception and
certain of the Acquired Businesses for certain periods and the Unaudited Pro
Forma Financial Statements and notes thereto included elsewhere herein.
15
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
THE ACQUIRED
COMPANY(A) BUSINESSES(B) ADJUSTMENTS(C) PRO FORMA
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues.......... $26,398 $115,678 $ 4,227 $146,303
Rental equipment sales... 4,186 15,638 2,910 22,734
New equipment sales and
other................... 10,704 37,193 1,694 49,591
------- -------- ------- --------
Total revenues............. 41,288 168,509 8,831 218,628
COST OF REVENUES:
Rental equipment
depreciation............ 5,009 23,320 763 (d) 29,092
Cost of rental equipment
sales................... 2,935 10,579 2,561 16,075
Cost of new equipment
sales................... 4,872 17,444 1,579 23,895
Other operating expenses. 12,899 46,594 (187)(e) 59,306
------- -------- ------- --------
Total cost of revenues..... 25,715 97,937 4,716 128,368
------- -------- ------- --------
Gross profit............... 15,573 70,572 4,115 90,260
Selling, general and
administrative expenses... 7,910 38,088 (4,324)(f) 41,674
Non-rental depreciation and
amortization.............. 1,476 3,776 4,417 (g) 9,669
------- -------- ------- --------
Operating income........... 6,187 28,708 4,022 38,917
Other income (expense),
net....................... 72 (1,177) 1,422 (h) 317
Interest expense, net...... 4,336 10,622 12,406 (i) 27,364
------- -------- ------- --------
Income before income taxes. 1,923 16,909 (6,962) 11,870
Income tax expense......... 818 3,172 991 (j) 4,981
------- -------- ------- --------
Net income................. $ 1,105 $ 13,737 $(7,953) $ 6,889(k)
======= ======== ======= ========
Basic earnings per share... $ 0.33(k)
Diluted earnings per share. $ 0.31(k)
</TABLE>
(See Notes to Selected Pro Forma Financial Data)
16
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
--------------------------------------------------
THE ACQUIRED
COMPANY(A) BUSINESSES(B) ADJUSTMENTS(C) PRO FORMA
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues......... $1,276 $26,031 $ 989 $28,296
Rental equipment sales.. 93 5,564 727 6,384
New equipment sales and
other.................. 950 9,196 412 10,558
------ ------- ------- -------
Total revenues............ 2,319 40,791 2,128 45,238
COST OF REVENUES:
Rental equipment
depreciation........... 335 6,276 642 (d) 7,253
Cost of rental equipment
sales.................. 75 3,495 640 4,210
Cost of new equipment
sales.................. 306 4,248 395 4,949
Other operating
expenses............... 760 10,951 (64)(e) 11,647
------ ------- ------- -------
Total cost of revenues.... 1,476 24,970 1,613 28,059
------ ------- ------- -------
Gross profit.............. 843 15,821 515 17,179
Selling, general and
administrative expenses.. 783 9,391 (914)(f) 9,260
Non-rental depreciation
and amortization......... 88 993 1,273 (g) 2,354
------ ------- ------- -------
Operating income (loss)... (28) 5,437 156 5,565
Other income, net......... -- 39 103 (h) 142
Interest expense, net..... 262 2,357 4,222 (i) 6,841
------ ------- ------- -------
Income (loss) before
income taxes............. (290) 3,119 (3,963) (1,134)
Income tax expense
(benefit)................ (135) 935 (1,275)(j) (475)
------ ------- ------- -------
Net income (loss)......... $ (155) $ 2,184 $(2,688) $ (659)(k)
====== ======= ======= =======
Basic earnings per share.. $ (0.03)(k)
Diluted earnings per
share.................... $ (0.03)(k)
</TABLE>
(See Notes to Selected Pro Forma Financial Data)
17
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------
THE ACQUIRED
COMPANY(A) BUSINESSES(B) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues............ $15,815 $20,700 $ -- $36,515
Rental equipment sales..... 1,742 2,100 -- 3,842
New equipment sales and
other..................... 4,594 7,880 -- 12,474
------- ------- ------ -------
Total revenues............... 22,151 30,680 -- 52,831
COST OF REVENUES:
Rental equipment
depreciation.............. 2,727 4,855 (99)(d) 7,483
Cost of rental equipment
sales..................... 1,037 1,316 -- 2,353
Cost of new equipment
sales..................... 2,187 4,173 -- 6,360
Other operating expenses... 7,549 8,585 (162)(e) 15,972
------- ------- ------ -------
Total cost of revenues....... 13,500 18,929 (261) 32,168
------- ------- ------ -------
Gross profit................. 8,651 11,751 261 20,663
Selling, general and
administrative expenses..... 4,531 8,008 (1,226)(f) 11,313
Non-rental depreciation and
amortization................ 807 925 740 (g) 2,472
------- ------- ------ -------
Operating income............. 3,313 2,818 747 6,878
Other income (expense), net.. 77 (62) -- 15
Interest expense, net........ 3,100 2,681 1,060 (i) 6,841
------- ------- ------ -------
Income before income taxes... 290 75 (313) 52
Income tax expense........... 151 -- (130)(j) 21
------- ------- ------ -------
Net income................... $ 139 $ 75 $ (183) $ 31
======= ======= ====== =======
Basic earnings per share..... $ 0.00(k)
Diluted earnings per share... $ 0.00(k)
</TABLE>
(See Notes to Selected Pro Forma Financial Data)
18
<PAGE>
PRO FORMA BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------------------------------
THE PRO
COMPANY(L) FALCONITE(L) ADJUSTMENTS(M) FORMA
---------- ------------ -------------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents... $ 3,773 $ 1,642 $ (3,257)(i) $ 2,158
Accounts receivable, net.... 24,095 8,862 -- 32,957
Inventory, net.............. 7,158 2,658 -- 9,816
Rental equipment, net....... 104,937 112,937 (7,301)(ii) 210,573
Property and equipment, net. 6,968 11,547 2,150 (iii) 20,665
Intangible assets, net...... 86,888 17,069 41,574 (iv) 145,531
Loan origination costs, net. 6,139 -- 1,867 (v) 8,006
Prepaid and other assets,
net........................ 2,345 1,511 3,856
-------- -------- --------- --------
Total assets............ $242,303 $156,226 $ 35,033 $433,562
======== ======== ========= ========
LIABILITIES
Accounts payable............ $ 9,647 $ 1,715 $ -- $ 11,362
Accrued interest............ 3,904 715 -- 4,619
Accrued expenses and other
liabilities................ 7,938 12,134 -- 20,072
Debt........................ 193,954 108,430 (9,625)(vi) 292,759
-------- -------- --------- --------
Total liabilities....... 215,443 122,994 (9,625) 328,812
Stockholders' equity........ 26,860 33,232 44,658 (vii) 104,750
-------- -------- --------- --------
Total liabilities and
stockholders' equity... $242,303 $156,226 $ 35,033 $433,562
======== ======== ========= ========
</TABLE>
(See Notes to Selected Pro Forma Financial Data)
19
<PAGE>
NOTES TO SELECTED PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) Results for the year ended December 31, 1997 and for the three months
ended March 31, 1997 represent actual historical 1997 results for the
Company, including results for the Acquired Businesses purchased in the
related 1997 period from the date of acquisition. Results for the three
months ended March 31, 1998 represent actual historical results for the
Company, including results for the Acquired Businesses purchased in the
first quarter of 1998 from the date of acquisition.
(b) Results for the year ended December 31, 1997 and for the three months
ended March 31, 1997 represent combined historical 1997 results for (i)
the Acquired Businesses purchased in the related 1997 period prior to the
date of acquisition and (ii) the Acquired Businesses purchased or to be
purchased in 1998. Results for the three months ended March 31, 1998
represent combined historical results for (i) the Acquired Businesses
purchased in 1998 prior to the date of acquisition and (ii) Falconite.
(c) In each of the following items, reflects the elimination of a location
not purchased from Cormier Equipment as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------ ------------
<S> <C> <C>
Rental revenues......... $ 130 $100
New equipment sales and
other.................. 21 17
----- ----
Total revenues.......... 151 117
Rental equipment
depreciation........... 81 60
Other operating
expenses............... 102 50
----- ----
Total cost of revenues.. 183 110
----- ----
Gross profit (loss)..... (32) 7
Selling, general and
administrative
expenses............... 72 41
Non-rental depreciation
and amortization....... 1 1
----- ----
Operating loss.......... $(105) $(35)
===== ====
</TABLE>
In addition, reflects the acquisition of GenEquip, Inc., a business acquired
by Falconite, Inc. in January 1998 as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------ ------------
<S> <C> <C>
Rental revenues................................. $4,357 $1,089
Rental equipment sales.......................... 2,910 728
New equipment sales and other................... 1,715 429
------ ------
Total revenues.................................. 8,982 2,246
Rental equipment depreciation................... 1,583 396
Cost of rental equipment sales.................. 2,561 640
Cost of new equipment sales..................... 1,578 395
Other operating costs........................... 1,664 416
------ ------
Total cost of revenues.......................... 7,386 1,847
------ ------
Gross profit.................................... 1,596 399
Selling, general and administrative expenses.... 1,221 305
Non-rental depreciation and amortization........ 107 27
------ ------
Operating income................................ 268 67
Other income, net............................... 59 15
Interest income, net............................ 23 6
------ ------
Income before income taxes...................... $ 350 $ 88
====== ======
</TABLE>
20
<PAGE>
(d) Pursuant to SEC reporting requirements, rental equipment depreciation has
been derived utilizing the rental equipment asset values of each of the
Acquired Businesses at the time of their acquisition rather than utilizing
values of rental equipment assets actually held by each of the Acquired
Businesses in the period presented. Reflects the impact on rental
equipment depreciation resulting from the application of the Company's
depreciation policy rather than those of the former owners of the Acquired
Businesses. In addition, reflects the change in rental equipment
depreciation resulting from the write-up or write-down of rental equipment
assets to fair value arising from purchase accounting. In addition,
reflects the increase in rental equipment depreciation resulting from the
purchase of equipment referred to in note (e) below.
(e) Reflects the elimination of lease expense resulting from the termination
of certain rental equipment leases which occurred with the purchase of the
underlying equipment. Also reflects the rent expense resulting from the
Company's current lease terms as compared to lease terms entered into by
former owners. In addition, reflects the increase in rent expense and
corresponding decrease in depreciation expense and real estate tax expense
resulting from the Company leasing rather than owning certain related
facilities and, conversely, the decrease in rent expense and corresponding
increase in depreciation expense and real estate tax expense resulting
from the termination of certain facility leases which occurred with the
purchase of the underlying facility by the Company. Also, reflects the
decrease in rent expense resulting from the termination of certain
facility leases.
(f) Reflects the decrease resulting from differentials between the
compensation levels of former owners of the Acquired Businesses and the
terms of the employment agreements entered into between certain of the
former owners and the Company. The employment agreements provide for
bonuses to be paid based on increased future earnings. Compensation
amounts presented reflect bonuses due based on current operating results.
Additional bonuses would be due if increased earnings levels are achieved.
(g) Pursuant to SEC reporting requirements, non-rental depreciation has been
derived utilizing the property, plant and equipment values of each of the
Acquired Businesses at the time of their acquisition, rather than
utilizing values of property, plant and equipment actually held by each of
the Acquired Businesses in the period presented. Reflects the decrease in
non-rental depreciation resulting from the application of the Company's
depreciation policy rather than those of the former owners of the Acquired
Businesses. In addition, reflects the increase in non-rental depreciation
resulting from the write-up of property, plant and equipment to fair value
arising from purchase accounting. Also reflects amortization of goodwill
calculated on a goodwill life of 40 years and amortization of non-compete
agreements calculated on their contract terms of two to five years, in
each case specifically related to the purchases of the Acquired
Businesses. The pro forma adjustments consist of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------
1997 1997 1998
------------ ------ ----
<S> <C> <C> <C>
Non-rental depreciation......................... $1,159 $ 312 $220
Amortization of goodwill........................ 2,702 759 477
Amortization of non-compete agreements.......... 556 202 43
------ ------ ----
$4,417 $1,273 $740
====== ====== ====
</TABLE>
(h) Reflects discontinuation and elimination of unrelated businesses
previously operated and related charges incurred by the former owners of
certain of the Acquired Businesses.
(i) Reflects increased interest expense at the Company's borrowing rate under
the New Credit Facility on the indebtedness resulting from the purchase of
Falconite after giving effect to the partial repayment of the New Credit
Facility with $3,257 of cash on hand at the Acquired Businesses purchased
or to be purchased on or after March 31, 1998 and the borrowing of $3,085
under the New Credit Facility to fund certain potential purchase price
adjustments in connection with the Acquired Businesses purchased in 1998.
21
<PAGE>
(j) Reflects the income tax rate that would have been in effect if the
Acquired Businesses had been combined and subject to a federal statutory
rate of 34% and the applicable state statutory rate for each of the
Acquired Businesses throughout the period presented.
(k) Unaudited pro forma earnings per share has been computed based on the
weighted average number of common shares outstanding during the period,
after giving effect to the Reclassification, the Stock Split, the Offering
and the mandatory conversion of the 8% convertible subordinated promissory
notes to be issued in connection with the acquisition of Falconite, but
without giving effect to shares issuable upon exercise of outstanding
options because they are not dilutive. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123")
allows entities to choose between a new fair value based method of
accounting for employee stock options or similar equity instruments and
the current intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25 ("APB No. 25"). Entities
electing to account for employee stock options or similar equity
instruments under APB No. 25 must make pro forma disclosures of net income
and earnings per share as if the fair value method of accounting has been
applied. The Company has elected APB No. 25, and will provide such pro
forma disclosure of net income and earnings per share, as applicable, in
the notes to future consolidated financial statements. Had pro forma
compensation cost for NES's stock based compensation plans been determined
based on the pro forma fair value at the assumed grant date for awards
under those plans consistent with the method of SFAS 123, the Company's
pro forma net income and net income per share would have been as follows
for the year ended December 31, 1997 and the three month periods ended
March 31, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, --------------
1997 1997 1998
------------ ------ ------
<S> <C> <C> <C>
Net income.................................. $6,317 $ (802) $ (116)
Basic earnings per share.................... $ 0.29 $(0.04) $(0.01)
Diluted earnings per share.................. $ 0.28 $(0.04) $(0.01)
</TABLE>
The pro forma fair value of the options was estimated on the assumed date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 0%, expected volatility of
30%, risk free interest rates of 5.67% and expected lives of 5 years.
(l) Represents the actual historical balance sheets of the Company and
Falconite as of March 31, 1998.
(m) The following are adjustments to the aforementioned balance sheets:
(i) Reflects the use of the cash on hand at the Acquired Businesses
purchased or to be purchased on or after March 31, 1998 of $3,257.
(ii) Reflects the write-down of rental equipment as part of purchase
accounting related to the residual value in excess of fair value.
(iii) Reflects the write-up of property and equipment to fair value as part
of purchase accounting.
(iv) Reflects $41,174 of goodwill representing the excess of the purchase
price over the fair value of net assets acquired. In addition,
reflects $400 of noncompete agreements entered into by the Company and
certain selling shareholders.
(v) Reflects the incremental loan origination costs related to the New
Credit Facility.
(vi) Reflects the use of cash on hand at the Acquired Businesses purchased
or to be purchased on or after March 31, 1998 of $3,257 and the
elimination of Falconite indebtedness, partially offset by additional
borrowings under the New Credit Facility, and the borrowing of $3,085
under the New Credit Facility to fund certain potential purchase price
adjustments in connection with the Acquired Businesses purchased in
1998.
(vii) Reflects the cash proceeds from the Offering of $81,000 and the
mandatory conversion at the initial public offering price of $3,750
of 8% subordinated promissory notes to be issued in connection with
the Falconite acquisition, net of estimated Offering costs of $6,860
and the elimination of equity of Falconite of $33,232.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
The Company was founded in June 1996 to acquire and integrate equipment
rental companies. In 1997, the Company acquired Aerial Platforms, BAT Rentals,
Equipco Rentals & Sales, Industrial Hoist Services, Lone Star Rentals and
Sprintank in separate transactions. For historical financial data presentation
purposes, Aerial Platforms, BAT Rentals, Equipco Rentals & Sales, Lone Star
Rentals and Sprintank have been identified as the predecessor companies and
are collectively referred to herein as the "Predecessor Companies." The
following selected historical financial data of the Predecessor Companies as
of and for the years ended December 31, 1996 and 1997 (or the corresponding
fiscal year) have been derived from audited Financial Statements and notes
thereto included elsewhere in this Prospectus. The following selected
historical financial data of BAT Rentals, Equipco Rentals & Sales, Lone Star
Rentals and Sprintank as of and for the year ended December 31, 1995 (or the
corresponding fiscal year) have been derived from audited Financial Statements
and notes thereto included elsewhere in this Prospectus. The following
selected historical financial data of Aerial Platforms as of and for the year
ended December 31, 1995 (or the corresponding fiscal year) have been derived
from unaudited financial statements which have been prepared on the same basis
as the audited Financial Statements and, in the opinion of management, reflect
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of such data. The following selected historical
financial data of the Predecessor Companies as of and for the years ended
December 31, 1993 and 1994 (or the corresponding fiscal year) have been
derived from unaudited financial statements, which have been prepared on the
same basis as the audited Financial Statements and, in the opinion of
management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data.
The Company has entered into a definitive agreement to acquire Falconite
concurrent with the Offering. Due to the materiality of Falconite to the
Company on a pro forma basis, the following selected historical financial data
includes results of Falconite, which year end information has been derived
from audited Financial Statements and notes thereto included elsewhere herein.
The selected historical financial data of the Company as of and for the
period from inception (June 4, 1996) through December 31, 1996 and as of and
for the year ended December 31, 1997 have been derived from audited Financial
Statements and notes thereto appearing elsewhere in this Prospectus.
The selected historical financial data of Falconite and the Company as of
and for the three months ended March 31, 1997 and 1998 have been derived from
unaudited Financial Statements included elsewhere in this Prospectus, which
have been prepared on the same basis as the audited Financial Statements and,
in the opinion of management, reflect all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of such data.
The selected historical financial data should be read in conjunction with
the information contained in "Selected Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto included elsewhere
herein.
OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ----------------
1993 1994 1995 1996 1997(A) 1997 1998
------ ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
COMPANIES:(B)
Aerial Platforms
Total revenues......... $1,571 $ 2,039 $ 3,269 $ 4,746 $ 233
Operating income
(loss)................ 356 351 887 998 (8)
Income (loss) before
income taxes.......... 265 266 818 874 (14)
BAT Rentals
Total revenues......... $9,214 $10,932 $12,453 $13,140 $ 3,802
Operating income....... 1,893 2,099 1,973 2,877 757
Income before income
taxes................. 1,956 1,944 1,899 2,801 710
Equipco Rentals & Sales
Total revenues......... $3,080 $ 3,768 $ 5,390 $ 5,832 $ 4,369
Operating income....... 133 216 305 407 911
Income before income
taxes................. 65 124 145 227 837
Lone Star Rentals
Total revenues......... $7,333 $ 8,935 $ 9,703 $ 9,349 $ 1,643
Operating income
(loss)................ 993 1,263 1,103 640 (229)
Income (loss) before
income taxes.......... 598 707 726 381 (254)
Sprintank
Total revenues......... $3,810 $ 5,182 $ 7,879 $ 9,598 $ 6,042
Operating income....... 482 830 1,522 1,503 2,179
Income before income
taxes................. 98 407 655 480 1,616
THE COMPANY:
Total revenues......... $ -- $41,288 $ 2,319 $22,151
Operating income
(loss)................ (336) 6,187 (28) 3,313
Income (loss) before
income taxes.......... (332) 1,923 (290) 290
FALCONITE:(B)
Total revenues......... $35,661 $48,086 $63,646 $14,374 $16,633
Operating income....... 11,306 12,075 11,959 2,672 1,969
Income before income
taxes and minority
interests............. 8,094 7,959 3,817 1,343 (219)
</TABLE>
23
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------- AT MARCH 31,
1993 1994 1995 1996 1997 1998
------ ------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANIES:
Aerial Platforms
Rental equipment, net... $ 326 $ 306 $ 1,396 $ 1,758
Total assets............ 921 944 2,455 2,889
Total debt.............. 878 549 1,216 1,243
BAT Rentals
Rental equipment, net... $3,122 $ 3,499 $ 4,434 $ 5,779
Total assets............ 8,603 9,212 10,111 11,504
Total debt.............. 2,734 2,659 3,191 3,302
Equipco Rentals & Sales
Rental equipment, net... $1,112 $ 1,588 $ 2,047 $ 2,553
Total assets............ 2,102 2,750 3,337 4,102
Total debt.............. 1,224 1,470 1,846 2,393
Lone Star Rentals
Rental equipment, net... $4,765 $ 6,954 $ 7,622 $ 6,952
Total assets............ 7,144 9,910 10,094 9,405
Total debt.............. 4,301 6,390 6,121 4,983
Sprintank
Rental equipment, net... $4,664 $ 4,665 $ 8,118 $ 9,741
Total assets............ 6,831 6,807 10,727 12,546
Total debt.............. 4,739 4,702 7,370 8,987
THE COMPANY:
Rental equipment, net... $ -- $ 46,801 $104,937
Total assets............ 216 131,137 242,303
Total debt.............. -- 98,782 193,954
Total stockholders'
equity................. 106 26,473 26,860
FALCONITE:
Rental equipment, net... $ 81,583 $107,721 $112,937
Total assets............ 117,458 148,068 156,226
Total debt.............. 60,619 100,200 108,430
</TABLE>
- --------
(a) With respect to the Predecessor Companies, includes results prior to
acquisition by the Company. With respect to Falconite, represents actual
1997 results. With respect to the Company, represents actual 1997 results,
including results for the Predecessor Companies and Industrial Hoist
Services after acquisition by the Company.
(b) Operating income (loss) and income (loss) before income taxes reflect
private company expenses such as certain owners' compensation which would
not be included in the Company's results going forward.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS)
The following discussion and analysis of the Company's and Falconite's
results of operations and the Company's financial condition and liquidity
should be read in conjunction with "Selected Pro Forma Financial Data" and
"Selected Historical Financial Data" and the Financial Statements and notes
thereto included elsewhere herein.
GENERAL
NES was founded in June 1996 to acquire and integrate businesses that
specialize in the rental of specialty and general equipment to industrial and
construction end-users. Since January 1997, the Company has acquired 13
businesses in separate transactions and entered into a definitive agreement to
acquire Falconite. The following discussion of the Company's pro forma results
of operations is presented as if the 14 acquisitions and the Offering had been
completed and certain borrowings under the New Credit Facility had been
outstanding on the first day of the earliest period discussed. The Company's
pro forma results are based upon adjustments described in the notes to
"Selected Pro Forma Financial Data." Management believes that the Acquired
Businesses and others that the Company will acquire will benefit from
increased access to capital, the support of experienced and professional
senior management, centrally coordinated purchasing and an increased emphasis
on financial management. Therefore, the Company's pro forma results discussed
below do not necessarily represent the results of the Company had each of the
Acquired Businesses been operated by the Company during those periods.
The Company derives its revenues from four sources: (i) rental of equipment;
(ii) rental equipment sales; (iii) new equipment sales; and (iv) the sale of
complementary parts and services. The Company's primary source of revenue is
the rental of equipment to industrial and construction end-users. The growth
of rental revenues is dependent on several factors, including demand for
rental equipment, the amount and quality of equipment available for rent,
rental rates and general economic conditions. Revenues generated from the sale
of used rental equipment are impacted by price, general economic conditions
and the fleet maintenance programs conducted by the Company. Sales of new
equipment are impacted by price and general economic conditions. Revenues from
the sale of complementary parts and services are primarily affected by
equipment rental and sales volumes.
Cost of revenues consists primarily of rental equipment depreciation, the
cost of new equipment, the net book value of rental equipment sold and other
direct operating costs. Given the varied, and in some cases specialized,
nature of its rental equipment, the Company utilizes a range of periods over
which it depreciates its equipment on a straight line basis. On average, the
Company depreciates its equipment over an estimated useful life of seven years
with no residual value.
The Company has entered into a definitive agreement to purchase Falconite
concurrent with the Offering. Due to the materiality of Falconite to the
Company on a pro forma basis, the following includes a discussion and analysis
of Falconite's results of operations.
25
<PAGE>
The following table sets forth, for the periods indicated, information
derived from the combined, historical and pro forma consolidated statements of
operations of the Company expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
----------------- ---------------------- ------------------ -----------------
COMBINED ACTUAL PRO FORMA ACTUAL PRO FORMA ACTUAL PRO FORMA
----------------- --------- ---------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Rental revenues......... 67.7% 63.9% 66.9% 55.0% 62.6% 71.4% 69.1%
Rental equipment sales.. 9.7 10.2 10.4 4.0 14.1 7.9 7.3
New equipment sales and
other.................. 22.6 25.9 22.7 41.0 23.3 20.7 23.6
----- --------- --------- ----- ----- ----- -----
Total revenues.......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........ 59.5 62.3 58.7 63.6 62.0 60.9 60.9
----- --------- --------- ----- ----- ----- -----
Gross profit............ 40.5% 37.7 41.3 36.4 38.0 39.1 39.1
=====
Selling, general and
administrative
expenses............... 19.2 19.1 33.8 20.5 20.5 21.4
Non-rental depreciation
and amortization....... 3.6 4.4 3.8 5.2 3.6 4.7
--------- --------- ----- ----- ----- -----
Operating income (loss). 14.9 17.8 (1.2) 12.3 15.0 13.0
Other income, net....... 0.2 0.1 0.0 0.3 0.3 0.0
Interest expense, net... 10.5 12.5 11.3 15.1 14.0 13.0
--------- --------- ----- ----- ----- -----
Income (loss) before
income taxes........... 4.6 5.4 (12.5) (2.5) 1.3 (0.0)
Income tax expense
(benefit).............. 2.0 2.3 (5.8) (1.0) 0.7 (0.0)
--------- --------- ----- ----- ----- -----
Net income (loss)....... 2.6% 3.1% (6.7)% (1.5)% 0.6% (0.0)%
========= ========= ===== ===== ===== =====
</TABLE>
PRO FORMA AND COMBINED RESULTS OF OPERATIONS--THE COMPANY
Pro Forma Three Months Ended March 31, 1998 as Compared to Pro Forma Three
Months Ended March 31, 1997
Revenues. Total revenues increased 16.8%, or $7,593, from $45,238 to $52,831
from first quarter 1997 to first quarter 1998. Rental revenue growth accounted
for $8,219 or 108% of the increase, partially offset by a decline in rental
equipment sales of $2,542. Portions of the rental revenue growth were
attributable to increased investment in rental equipment and strong demand for
storage tanks at Sprintank and general equipment at Albany Ladder and
Falconite. Revenues from new equipment sales and other increased $1,916 or
18.1%.
Gross Profit. Gross profit increased from $17,179 to $20,663 from first
quarter 1997 to first quarter 1998. Gross margin increased from 38.0% to
39.1%. This margin improvement was primarily the result of increased higher
margin rental revenues as a percentage of total revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9,260 to $11,313 from first quarter
1997 to first quarter 1998, primarily reflecting costs incurred to support the
growth in the Company's businesses. As a percentage of total revenues, these
costs increased from 20.5% to 21.4%.
Non-Rental Depreciation and Amortization. Non-rental depreciation and
amortization increased from $2,354 to $2,472 from first quarter 1997 to first
quarter 1998. As a percentage of total revenues, non-rental depreciation and
amortization decreased from 5.2% to 4.7%.
Operating Income. As a result of the foregoing, operating income increased
23.6% from $5,565 or 12.3% of total revenues in first quarter 1997 to $6,878
or 13.0% of total revenues in first quarter 1998.
Interest Expense, Net. Interest expense, net was $6,841 for each of first
quarter 1997 and first quarter 1998.
26
<PAGE>
Income Tax Expense. Income tax expense (benefit) was $(475) for first
quarter 1997 and $21 for first quarter 1998.
Pro Forma Year Ended December 31, 1997 as Compared to Combined Year Ended
December 31, 1996
Revenues. Total revenues increased 29.4%, or $49,738, from $168,890 to
$218,628 from 1996 to 1997. Rental revenue growth accounted for $31,880 or
64.1% of such increase. A portion of the rental revenue growth was
attributable to eight locations opened or acquired by Falconite during
November and December 1996 and the acquisition of GenEquip, Inc. by Falconite
in January 1998, which contributed approximately $15,000 in 1997. The
remaining approximately $16,900 of rental revenue growth resulted primarily
from increased capital investment in rental equipment by the Company. Rental
equipment sales increased 38.9%, or $6,371, reflecting strong demand for the
Company's equipment, the dispositions of certain equipment in order to
optimize the average age of the Company's expanding fleet and the acquisition
of GenEquip, Inc. by Falconite. New equipment sales and other increased
$11,487 or 30.1% due to strong demand for the Company's new hoists and pump
equipment as well as strong performances at Albany Ladder and Falconite.
Gross Profit. Gross profit increased from $68,382 to $90,260 from 1996 to
1997. Gross margin increased from 40.5% to 41.3%.
Pro Forma Year Ended December 31, 1997
Revenues. Total revenues were $218,628. Rental revenues accounted for 66.9%
of total revenues.
Gross Profit. Gross profit was $90,260, or 41.3% of total revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $41,674 or 19.1% of total revenues.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $9,669, or 4.4% of total revenues.
Operating Income. Operating income was $38,917, or 17.8% of total revenues.
Interest Expense, Net. Interest expense, net was $27,364, or 12.5% of total
revenues.
Income Tax Expense. Income tax expense was $4,981, or 2.3% of total
revenues.
HISTORICAL RESULTS OF OPERATIONS--THE COMPANY
The Company's historical Financial Statements included herein cover the
period from inception on June 4, 1996 through December 31, 1996, the year
ended December 31, 1997 and the three months ended March 31, 1998. The Company
believes that comparison of its historical results for such periods are not
meaningful given the fact that (i) the Company did not complete its first
acquisition until January 1997, (ii) the Company completed five additional
acquisitions at different times in 1997 and (iii) the Company completed seven
additional acquisitions at different times in the first quarter of 1998.
Three Months Ended March 31, 1998 as Compared to Three Months Ended March 31,
1997.
Revenues. Total revenues increased from $2,319 to $22,151 from first quarter
1997 to first quarter 1998. Rental revenues increased from $1,276 to $15,815.
The increases were primarily the result of the acquisition of 10 additional
businesses after the first quarter of 1997 as well as the inclusion in 1998 of
a full quarter's results for the businesses acquired during the first quarter
of 1997.
Gross Profit. Gross profit increased from $843 to $8,651 from first quarter
1997 to first quarter 1998. Gross margin increased from 36.4% to 39.1%. This
margin improvement was primarily the result of increased higher margin rental
revenues as a percentage of total revenues.
27
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $783 to $4,531 from first quarter 1997
to first quarter 1998. As a percentage of total revenues, selling, general and
administrative expenses decreased from 33.8% to 20.5%.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization increased from $88 to $807 from first quarter 1997 to first
quarter 1998.
Operating Income (Loss). As a result of the foregoing, operating income
increased from ($28) for first quarter 1997 to $3,313 or 15.0% of total
revenues for first quarter 1998.
Interest Expense, Net. Interest expense, net increased from $262 to $3,100
from first quarter 1997 to first quarter 1998. This increase was due to
additional debt resulting from the acquisition of 10 additional businesses.
Income Tax Expense (Benefit). Income tax increased from a benefit of ($135)
to an expense of $151 from first quarter 1997 to first quarter 1998.
Year Ended December 31, 1997
Revenues. Total revenues were $41,288 for 1997. Rental revenues accounted
for 63.9% of such revenues.
Gross Profit. Gross profit was $15,573 for 1997. Gross margin was 37.7% for
1997.
Selling, General and Administrative Expenses. For 1997, selling, general and
administrative expenses were $7,910 or 19.2% of total revenues.
Non-rental Depreciation and Amortization. Non-rental depreciation and
amortization was $1,476 or 3.6% of total revenues for 1997.
Operating Income. Operating income was $6,187 or 14.9% of total revenues for
1997.
Interest Expense, Net. Interest expense, net was $4,336 for 1997.
Income Tax Expense. Income tax expense was $818 for 1997.
HISTORICAL RESULTS OF OPERATIONS--FALCONITE
Three Months Ended March 31, 1998 as Compared to Three Months Ended March 31,
1997.
Revenues. Total revenues increased 15.7% from $14,374 to $16,633 from first
quarter 1997 to first quarter 1998. Rental revenues increased 33.9% from
$8,989 to $12,033. These increases resulted primarily from additional
locations opened and acquisitions made during and after the first quarter of
1997 and capital invested in new rental equipment during 1997. This increase
in rental revenues was partially offset by a decrease in rental equipment
sales due to the purchase by Falconite of a large amount of new equipment and
the corresponding sale by Falconite in first quarter 1997 of a large amount of
its older rental equipment fleet as well as the sale of a large piece of used
rental equipment during first quarter 1997.
Gross Profit. Gross profit increased from $6,186 in the first quarter 1997
to $7,131 in the first quarter 1998. Gross margin was 43.0% in first quarter
1997 as compared to 42.9% in first quarter 1998.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses increased from $2,938 to $4,482 from first quarter
1997 to first quarter 1998, primarily reflecting costs associated with the
opening of 5 new locations and the newly acquired GenEquip, Inc. locations, as
well as the opening of Falconite's re-manufacturing facility in Paducah,
Kentucky. In addition, first quarter 1998 selling, general and administrative
expenses reflects certain private company expenses including compensation not
recorded in first quarter 1997. As a percentage of total revenues, these
expenses increased from 20.4% to 26.9%, reflecting the lag between the
incurrence of expense and the related growth in revenues from locations
opened.
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<PAGE>
Non-Rental Depreciation and Amortization. Non-rental depreciation and
amortization increased from $576 or 4.0% of total revenues for first quarter
1997 to $680 or 4.1% of total revenues for first quarter 1998.
Operating Income. As a result of the foregoing, operating income decreased
from $2,672 or 18.6% of total revenues for first quarter 1997 to $1,969 or
11.8% of total revenues for first quarter 1998.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996.
Revenues. Total revenues increased 32.4% from $48,086 to $63,646 from 1996
to 1997. Rental revenue growth accounted for $12,028 or 77.3% of such
increase. The increase in rental revenues resulted primarily from the
contribution of the eight locations opened or acquired during November and
December 1996, which generated approximately $10,700 in rental revenues in
1997. The balance of the rental revenue growth was attributable to locations
open throughout both periods, primarily due to an increase in Falconite's
rental fleet. Sales of used rental equipment increased by $1,548 or 20.2% in
the recently completed period, reflecting the opening of new locations and
dispositions of certain equipment in order to optimize the average age of
Falconite's expanding fleet. Revenues from new equipment sales and other
increased from $7,529 to $9,513 or 26.4% from 1996 to 1997.
Gross Profit. Gross profit increased from $22,824 to $29,452 from 1996 to
1997. Gross margin decreased from 47.5% to 46.3%, with rental gross margin
decreasing from 57.0% to 52.4% and sales gross margin increasing from 26.9% to
31.7%. The decline in rental gross margin was attributable primarily to an
increase in rental equipment depreciation as a percentage of rental revenues
from 20.7% to 24.7% due to the substantial additions to Falconite's rental
fleet during 1996 and 1997. The increase in sales gross margin is primarily
the result of the sale of selected high margin pieces of equipment during
1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $9,985 to $15,065 from 1996 to 1997,
primarily reflecting costs incurred to support the growth in Falconite's
business as well as an increase in executive compensation of $1,200. As a
percentage of revenues, these costs increased from 20.8% to 23.7%, reflecting
the lag between incurrence of expenses and the related growth in revenues from
locations opened in late 1996. In addition, Falconite recorded certain charges
in 1997 aggregating $1,301 resulting from the resolution of certain tax
deficiencies and the termination of certain employment agreements.
Non-Rental Depreciation and Amortization. Non-rental depreciation and
amortization increased from $764 to $2,428 from 1996 to 1997. As a percentage
of total revenues, non-rental depreciation and amortization increased from
1.6% to 3.8%. This increase was attributable primarily to the locations added
in late 1996 and to additional goodwill amortization of approximately $500 in
1997.
Operating Income. As a result of the foregoing and excluding the
aforementioned charges of $1,301, operating income increased from $12,075, or
25.1% of total revenues in 1996, to $13,260, or 20.8% of total revenues in
1997. Including these charges, operating income was $11,959 or 18.8% of total
revenues in 1997.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 34.8% from $35,661 to $48,086 from 1995
to 1996. Rental revenue growth accounted for $9,488 or 76.4% of such increase.
Rental revenues increased primarily as a result of additional locations. The
balance of the rental revenue increases were attributable to locations open
throughout both periods, primarily due to an increase in Falconite's rental
fleet. Sales of used rental equipment increased by $2,226 or 40.9% to $7,674
in 1996, reflecting the opening of new locations and Falconite's increased
emphasis on selling used equipment. Revenues from new equipment sales and
other increased from $6,818 to $7,529 or 10.4%.
29
<PAGE>
Gross Profit. Gross profit increased from $17,576 to $22,824 from 1995 to
1996. Gross margin decreased from 49.3% to 47.5% with rental gross margin
decreasing from 61.2% to 57.0%. The decline in rental gross margin was partly
attributable to an increase in rental equipment depreciation due to
substantial additions to Falconite's rental fleet during 1996 as well as to
the substantial underutilization of equipment at one of its divisions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $5,858 to $9,985 from 1995 to 1996,
primarily reflecting facilities, personnel and administrative infrastructure
costs incurred to support the growth in Falconite's business. As a percentage
of total revenues, these expenses increased from 16.4% to 20.8%, reflecting
the lag between incurrence of expenses and the related growth in revenues from
new location openings.
Non-Rental Depreciation and Amortization. Non-rental depreciation and
amortization increased from $412 to $764 from 1995 to 1996. As a percentage of
total revenues, non-rental depreciation and amortization increased from 1.2%
to 1.6%. This increase resulted primarily from the addition of locations
during 1995, in particular, related transportation equipment and furniture,
fixtures and equipment.
Operating Income. As a result of the foregoing, operating income increased
from $11,306, or 31.7% of total revenues in 1995, to $12,075, or 25.1% of
total revenues in 1996.
HISTORICAL RESULTS OF OPERATIONS--ACQUIRED BUSINESSES
As a result of the timing of their acquisitions by the Company, the Acquired
Businesses' financial results discussed below cover periods of varying
lengths. Accordingly, comparison of historical results for such periods may
not be meaningful.
AERIAL PLATFORMS
Aerial Platforms was purchased by NES in February of 1997. All operating
results of Aerial Platforms from the date of acquisition are reflected in the
Company's results.
Seventeen Days Ended February 17, 1997 as Compared to Year Ended January 31,
1997
Revenues. Total revenues were $4,746 for 1997 and $233 for the 17-day period
ended February 17, 1997.
Gross Profit. Gross profit was $2,374 and gross margin was 50.0% for 1997.
Gross profit was $64 and gross margin was 27.5% for the 17-day period ended
February 17, 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,302 or 27.4% of total revenues for 1997.
Selling, general and administrative expenses were $64 or 27.5% of total
revenues for the 17-day period ended February 17, 1997.
LONE STAR RENTALS
Lone Star Rentals was purchased by NES in March of 1997. All operating
results of Lone Star Rentals from the date of acquisition are reflected in the
Company's results.
Period Ended March 16, 1997 as Compared to Year Ended December 31, 1996 as
Compared to Year Ended December 31, 1995
Revenues. Total revenues decreased 3.6% or $354 from $9,703 to $9,349 from
1995 to 1996. Rental revenues decreased $156. For the period ended March 16,
1997, total revenues were $1,643.
Gross Profit. Gross profit decreased $394 from $3,191 or 32.9% of total
revenues in 1995 to $2,797 or 29.9% of total revenues in 1996. For the period
ended March 16, 1997, gross profit was $272 or 16.6% of total revenues.
30
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $70 from $1,918 or 19.8% of total revenues
in 1995 to $1,988 or 21.3% of total revenues in 1996. For the period ended
March 16, 1997, selling, general and administrative expenses were $475 or
28.9% of total revenues.
BAT RENTALS
BAT Rentals was purchased by NES in April of 1997. All operating results of
BAT Rentals from the date of acquisition are reflected in the Company's
results.
Three Months Ended March 31, 1997 as Compared to Year Ended December 31, 1996
as Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 5.5% or $687 from $12,453 to $13,140 from
1995 to 1996. Rental revenues increased $1,472 or 30.3%. For the three months
ended March 31, 1997, total revenues were 3,802.
Gross Profit. Gross profit increased $744 from 1995 to 1996. Gross margin
increased from 29.2% in 1995 to 33.4% in 1996. For the three months ended
March 31, 1997, gross profit was $1,271 and gross margin was 33.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $1,552 or 12.5% of total revenues in
1995 to $1,399 or 10.6% of total revenues in to 1996. For the three months
ended March 31, 1997, selling, general and administrative expenses were $489
or 12.9% of total revenues.
SPRINTANK
Sprintank was purchased by NES in July of 1997. All operating results of
Sprintank from the date of acquisition are reflected in the Company's results.
Six Months Ended June 30, 1997 as Compared to Year Ended December 31, 1996 as
Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 21.8% or $1,719 from $7,879 to $9,598
from 1995 to 1996. Rental revenue growth accounted for 98.7% or $1,697 of the
increase. For the six months ended June 30, 1997, total revenues were $6,042.
Gross Profit. Gross profit increased from $4,598 or 58.3% of total revenues
in 1995 to $5,981 or 62.3% of total revenues in 1996. For the six months ended
June 30, 1997, gross profit was $4,290 or 71.0% of total revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,977 or 37.8% of total revenues in
1995 to $4,333 or 45.1% of total revenues in 1996. For the six months ended
June 30, 1997, selling, general and administrative expenses were $2,028 or
33.6% of total revenues.
EQUIPCO RENTALS AND SALES
Equipco Rentals and Sales was purchased by NES in July of 1997. All
operating results of Equipco Rentals and Sales from the date of acquisition
are reflected in the Company's results.
Period Ended July 17, 1997 as Compared to Year Ended October 31, 1996 as
Compared to Year Ended October 31, 1995
Revenues. Total revenues increased 8.2% or $442 from $5,390 to $5,832 from
1995 to 1996. Rental revenue growth accounted for 88.7% or $392 of the
increase. For the period ended July 17, 1997, total revenues were $4,369.
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<PAGE>
Gross Profit. Gross profit increased $321 from 1995 to 1996. Gross profit
increased from $1,728 or 32.0% of total revenues in 1995 to $2,049 or 35.1% of
total revenues in 1996. For the period ended July 17, 1997, gross profit was
$1,810 and gross margin was 41.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,339 or 24.8% of total revenues in
1995 to $1,519 or 26.0% of total revenues in 1996. For the period ended July
17, 1997, selling, general and administrative expenses were $823 or 18.8% of
total revenues.
WORK SAFE SUPPLY
Work Safe Supply was purchased by NES in February 1998. All operating
results of Work Safe Supply from the date of acquisition are reflected in the
Company's results.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Revenues. Total revenues increased 12.1% or $794 from $6,570 to $7,364 from
1996 to 1997. Rental revenue growth accounted for 141.9% or $1,127 of the
increase, partially offset by a decrease in rental equipment sales and other
revenues of $333.
Gross Profit. Gross profit increased from $2,755 or 41.9% of total revenues
in 1996 to $3,424 or 46.5% of total revenues in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $1,084 or 16.5% of total revenues in
1996 to $1,237 or 16.8% of total revenues in 1997.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 5.7% or $354 from $6,216 to $6,570 from
1995 to 1996. Rental revenue growth accounted for $190 or 53.7% of the
increase.
Gross Profit. Gross profit increased from $2,633 or 42.4% of total revenues
in 1995 to $2,755 or 41.9% of total revenues in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $2,485 or 40.0% of total revenues in
1995 to $1,084 or 16.5% of total revenues in 1996.
CORMIER EQUIPMENT
Cormier Equipment was purchased by NES in March 1998. All operating results
of Cormier Equipment from the date of acquisition are reflected in the
Company's results.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Revenues. Total revenues decreased $381 from $16,008 to $15,627 from 1996 to
1997.
Gross Profit. Gross profit decreased from $5,423 or 33.9% of total revenues
in 1996 to $5,138 or 32.9% of total revenues in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased from $3,324 or 20.8% of total revenues in
1996 to $3,287 or 21.0% of total revenues in 1997.
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
Revenues. Total revenues increased 2.4% or $369 from $15,639 to $16,008 from
1995 to 1996. Rental revenue growth accounted for $276 or 74.8% of the
increase.
32
<PAGE>
Gross Profit. Gross profit increased $25 from $5,398 or 34.5% of total
revenues in 1995 to $5,423 or 33.9% of total revenues in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $2,976 or 19.0% of total revenues in
1995 to $3,324 or 20.8% of total revenues in 1996.
DRAGON RENTALS
Dragon Rentals was purchased by NES in March 1998. All operating results of
Dragon Rentals from the date of acquisition are reflected in the Company's
results.
Year Ended December 31, 1997 as Compared to Year Ended December 31, 1996
Revenues. Total revenues increased 71.0% or $4,385 from $6,179 to $10,564
from 1996 to 1997. Rental revenue growth accounted for $3,929 or 89.6% of the
increase.
Gross Profit. Gross profit increased $3,056 from $1,442 or 23.3% of total
revenues in 1996 to $4,498 or 42.6% of total revenues in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,296 from $870 or 14.1% of total revenues
in 1996 to $2,166 or 20.5% of total revenues in 1997.
LIQUIDITY AND CAPITAL RESOURCES--THE COMPANY
The Company's primary capital requirements are for the purchase of new
rental equipment fleet and for acquisitions. The Company's other capital
expenditures consist of the purchase of vehicles used for delivery and
maintenance and property, plant and equipment. The Company purchases rental
fleet throughout the year to replace equipment which has been sold as well as
to maintain adequate levels of equipment to meet existing and new customer
needs. Combined rental fleet purchases for the Company and the Acquired
Businesses were $55,525, $65,547, $86,030 and $17,073 in 1995, 1996, 1997 and
the first quarter of 1998, respectively. As the Company's business strategy
continues to be implemented, rental fleet purchases are expected to increase.
Expenditures for rental fleet are expected to be approximately $82,000 in
1998.
On an actual basis, for the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1997 and 1998, the Company's net cash (used in)
provided by operations was $(269) and $7,378, respectively, and $(430) and
$7,661, respectively. On an actual basis, for the years ended December 31,
1996 and 1997 and the three months ended March 31, 1997 and 1998, the
Company's net cash used in investing activities was $20 and $81,497,
respectively, and $23,187 and $120,872, respectively. On an actual basis, for
the years ended December 31, 1996 and 1997 and the three months ended March
31, 1997 and 1998, the Company's net cash provided by financing activities was
$301 and $109,789, respectively and $25,869 and $81,302, respectively. Net
cash provided by financing activities consists of equity capital provided by
Golder, Thoma, Cressey, Rauner Fund V, L.P. and members of management, net
borrowings under the Credit Facility and indebtedness under the Indenture.
The Company has entered into a commitment letter with respect to a New
Credit Facility which will provide for a term loan facility to the Company of
$100,000 of term loans and a revolving credit facility to the Company for up
to $225,000 of revolving loans. As of March 31, 1998, after giving effect to
the Offering, $131,067 would have been available for borrowing under the New
Credit Facility, subject to availability based on certain financial tests
including a borrowing base. The New Credit Facility is expected to close
concurrently with the Offering.
The Company currently has in place a Credit Facility which provides for a
$140,000 line of credit, subject to calculation of the borrowing base, to meet
acquisition and expansion needs as well as seasonal working capital
33
<PAGE>
and general corporate requirements. As of March 31, 1998, $95,128 was
outstanding under the Credit Facility. As of March 31, 1998, the Company was
in default under the Credit Facility with respect to its interest/rental
expense to senior debt covenant. This covenant was eliminated pursuant to an
amendment to the Credit Facility that was entered into in April 1998. The
Company believes it is currently in compliance with all covenants of the
Credit Facility.
The Company believes that the New Credit Facility, together with funds
generated by operations, will provide the Company with sufficient liquidity
and capital resources through the end of 1998 to finance its operations and
pursue its business strategy, including acquisitions. Over the long-term, the
Company will need additional financing to continue its acquisition strategy.
YEAR 2000 SOFTWARE ISSUE
The Company uses a number of computer software programs and operating
systems in its operations, including applications used in sales and marketing,
billing, inventory management and other administrative functions. To the
extent that the software applications used in such functions and
communications are unable to recognize the year 2000, the Company may incur
expenses in connection with the need to remediate such software and also may
incur the risk and potential expense of disruptions that may be caused by the
software's impaired functioning as the year 2000 approaches. The Company
believes that the manufacturers of the software applications it uses most
frequently, including its systems software and its word processing and
spreadsheet software, are in the process of preparing or have already
completed Year 2000 remediations for their products. The Company believes that
with the remediations to existing software and conversions to new software,
the Year 2000 issue will not pose significant operational problems for its
computer systems.
EFFECT OF INFLATION
Management believes that inflation has not had a material effect on the
Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share." For the Company, SFAS No. 128 will be
effective for the year ended December 31, 1997. SFAS No. 128 simplifies the
standards required under current accounting rules for computing earnings per
share and replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings per share
("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could
occur if securities and other contracts to issue common stock were exercised
or converted into common stock. Diluted EPS is computed similarly to fully
diluted earnings per share under current accounting rules.
Reporting Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The Statement
requires 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. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The
adoption of SFAS No. 130 in the first quarter of 1998 had no impact as the
Company had no items of other comprehensive income in any period presented.
34
<PAGE>
BUSINESS
GENERAL
National Equipment Services, Inc. is a leading participant in the growing
and highly fragmented $18 billion equipment rental industry. Through its 14
businesses acquired or to be acquired since January 1997, NES specializes in
the rental of specialty and general equipment to industrial and construction
end-users. The Company rents over 750 different types of machinery and
equipment and distributes new equipment for nationally recognized original
equipment manufacturers. The Company also sells used equipment as well as
complementary parts, supplies and merchandise, and provides repair and
maintenance services to its customers. NES is geographically diversified, with
79 locations across 19 states and is a leading competitor in each of the
geographic markets it serves. For the year ended December 31, 1997, on a pro
forma basis, the Company generated revenues of $218.6 million, an increase of
29.4% compared to 1996 combined revenues of $168.9 million.
Management believes that the Company offers one of the most modern and well
maintained fleets of specialty or general equipment in each of its markets.
The average age of the Company's equipment fleet is approximately three years.
Specialty equipment includes electric and pneumatic hoists, hydraulic and
truck-mounted cranes, liquid storage tanks, pumps and highway safety
equipment. General industrial and construction equipment includes aerial work
platforms, air compressors, cranes, earth-moving equipment and rough terrain
forklifts. The Company rents and sells this equipment to industrial and
construction end-users, which represented approximately 53% and 44%,
respectively, of the Company's revenues for the year ended December 31, 1997,
on a pro forma basis.
NES is led by a senior management team with significant industry experience
and an impressive track record of acquiring and integrating companies in the
equipment rental industry. Prior to founding the Company, the NES senior
management team was responsible for building Brambles, the U.S. equipment
rental business of an Australian public company, into a leading participant in
the industry. At Brambles, this team executed a growth strategy that combined
a disciplined acquisition program with significant organic growth. Management
believes that the team's extensive industry experience allows it to more
easily identify quality acquisition targets and successfully integrate these
businesses through effective financial and operating controls and the proper
deployment of capital. The Company's local operations are managed by
experienced professionals who have an average of over 15 years of experience
in the industry and have extensive knowledge of and relationships in their
local markets. These managers are typically former owners of the businesses
acquired by the Company. The Company also benefits from the financial
expertise of Golder, Thoma, Cressey, Rauner, Inc., an established investment
firm specializing in the consolidation of fragmented industries. Golder,
Thoma, Cressey, Rauner Fund V, L.P., an affiliate of Golder, Thoma, Cressey,
Rauner, Inc., is the Company's principal equity investor.
INDUSTRY OVERVIEW
Revenues for the $18 billion equipment rental industry have grown at a
compound annual rate of approximately 24% from 1984 to 1997 according to
surveys conducted by the Associated Equipment Distributors and have grown in
12 of the past 13 years. Management believes that the equipment rental
industry growth will continue to be driven by the trend among customers to
outsource non-core operations in order to reduce their capital investment and
minimize the downtime, maintenance, repair and storage costs associated with
equipment ownership. While customers traditionally have rented equipment for
specific purposes such as supplementing capacity during peak periods and in
connection with special projects, customers are increasingly looking to rental
operators to provide an ongoing, comprehensive supply of equipment, enabling
such customers to benefit from the economic advantages and convenience of
rental. According to a survey published in 1997 by The CIT Group, contractors
intended to increase the percentage of equipment they rent without a purchase
option to an estimated 15% of their total equipment requirements in 1997 from
less than 5% in 1994.
The highly fragmented equipment rental industry consists of a large number
of relatively small independent businesses typically serving discrete local
markets within 30 to 50 miles of the store location, and a small number
35
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of multi-location regional or national operators. According to Rental
Equipment Register, there are more than 12,000 participants in the industry,
with the largest 100 rental companies accounting for less than 20% of 1996
industry revenues. Management believes that the rental equipment industry
offers substantial consolidation opportunities for large, well-capitalized
equipment rental companies such as NES. Relative to smaller companies with
only one or two rental locations, multi-regional operators such as NES benefit
from a number of competitive advantages, including access to capital, the
ability to offer a broader range of modern, high-quality equipment,
standardized management information systems, volume purchasing discounts and
the ability to service larger, multi-regional accounts. In addition,
management believes that multi-regional operators are less affected by changes
in local economic conditions.
GROWTH STRATEGY
Management believes that NES is well positioned to benefit from industry
trends of growth and consolidation. The Company's strategic objective is to
continue to grow profitably in both existing and new markets by acquiring
additional specialty and general equipment rental companies, by increasing
revenues from industrial customers, by maximizing higher margin rental
revenues and by leveraging its new remanufacturing center. The Company intends
to attain its objective by continuing to execute the following growth
strategy:
Acquire Specialty and General Equipment Rental Businesses. The Company seeks
to acquire strong and successful specialty and general equipment rental
businesses. In 1997, NES generated approximately 33% and 67% of its revenues
on a pro forma basis from specialty and general equipment businesses,
respectively. The Company routinely evaluates attractive markets for expansion
where a leading position can be created by acquiring an existing business. The
Company generally targets acquisition candidates that (i) are profitable
businesses with a proven track record, (ii) generate a high percentage of
revenues from rentals with a significant portion derived from industrial
customers, (iii) are led by a strong management team that is willing to
continue with the business, (iv) have a strong local market share or
participate in a high-growth market, and (v) provide opportunities to expand
their customer base through better access to and employment of capital. The
Company also seeks to acquire smaller businesses in locations already served
by the Company that offer product lines or services that are complementary to
those at existing locations. Since January 1997, the Company has completed 13
acquisitions and expects to complete the acquisition of Falconite concurrent
with the Offering. Management believes that with over 12,000 participants, the
equipment rental industry will continue to offer a significant number of
businesses that fit the Company's acquisition profile.
Increase Revenues from Industrial Customers. The Company is committed to
increasing its revenues derived from industrial customers. Management believes
that these revenues are more stable than revenues from construction customers
due to the fact that industrial customers typically utilize rental equipment
for ongoing and periodic maintenance work on their existing facilities as well
as for material handling applications. Industrial customers tend to rent
equipment for longer periods and use equipment under less severe conditions
than contractors, thereby increasing the Company's equipment utilization and
decreasing the Company's equipment maintenance costs. The good condition and
quality of rental equipment are essential for industrial customers in order to
avoid costly slowdowns or shutdowns of plant facilities. Management believes
that larger well-capitalized companies such as NES are better able to provide
well-maintained and high quality equipment. The Company intends to continue to
expand its industrial customer base by providing additional equipment and
services to its existing industrial customers and establishing new
relationships through its existing businesses as well as through acquisitions.
For the year ended December 31, 1997, on a pro forma basis, revenues derived
from industrial end-users represented approximately 53% of the Company's total
revenues.
Maximize High-Margin Rental Revenues Through Efficient Fleet Management. The
Company is focused on growing its high-margin rental revenues by expanding
fleet inventory, efficiently managing fleet inventory in order to maximize
equipment utilization, optimizing fleet maintenance, and systematically
evaluating the optimal timing of used equipment sales. The Company's
acquisition targets have typically operated under capital constraints, which
prevented them from purchasing rental equipment sufficient to meet customer
demand and consequently resulted in lost revenue opportunities. In pursuing
acquisitions, NES evaluates the target's customer
36
<PAGE>
base and fleet inventory and, following its acquisition, typically provides
capital to expand the equipment fleet and improve utilization, resulting in
significant increases in rental revenues.
Leverage New Remanufacturing Center. As part of the acquisition of
Falconite, the Company will acquire a recently-constructed 45,000 square foot
equipment remanufacturing facility in the Paducah, Kentucky area. The Company
believes this facility will enhance its ability to perform major repair
operations and maintain its rental fleet in top condition. Management
anticipates that the center will increase rental gross profit margins by
reducing capital expenditure requirements and related rental equipment
depreciation. The Company also expects that the center will provide an
additional source of revenue by allowing NES to perform repair and rebuild
services for third party equipment owners. The center incorporates four
production lines to simultaneously refurbish equipment by replacing or
rebuilding all major components including engines, transmissions and
mechanical, hydraulic and electrical systems.
ACQUIRED BUSINESSES
NES was founded in June 1996 to acquire and integrate businesses that focus
on the rental of specialty and general equipment to industrial and
construction end-users. Since January 1997, the Company has acquired 13
businesses and has entered into a definitive agreement to acquire Falconite.
Management believes that with over 12,000 participants, the equipment rental
industry will continue to offer a significant number of acquisition
opportunities. The Company is led by a senior management team with extensive
industry experience. The Company believes this experience allows management to
more easily identify quality acquisition targets and successfully integrate
and optimize these businesses. The following table summarizes the Company's
completed or pending acquisitions to date:
<TABLE>
<CAPTION>
YEARS IN
DIVISION PRODUCTS GEOGRAPHIC FOCUS BUSINESS DATE ACQUIRED
- ----------------------- ------------------------------------ ------------------------ -------- -------------
<S> <C> <C> <C> <C>
Industrial Hoist
Services Pneumatic and electric hoists National 15 January 1997
Aerial Platforms Aerial work platforms Atlanta, Georgia 14 February 1997
Lone Star Rentals General equipment Gulf Coast 16 March 1997
BAT Rentals General equipment Las Vegas, Nevada 36 April 1997
Sprintank Liquid and specialized storage tanks Gulf Coast 8 July 1997
Equipco Rentals & Sales General equipment Western Virginia 20 July 1997
Genpower Pumps Gulf Coast 14 January 1998
Eagle Scaffolding Scaffolding Las Vegas, Nevada 5 January 1998
Grand Hi-Reach Aerial work platforms Grand Rapids, Michigan 13 February 1998
Work Safe Supply Highway safety equipment Michigan 19 February 1998
Dragon Rentals Liquid storage tanks Gulf Coast 6 March 1998
Cormier Equipment General equipment Eastern Coast 14 March 1998
Albany Ladder Aerial work platforms Northeast 66 March 1998
Falconite Aerial work platforms and cranes Mid-South and Gulf Coast 43 Pending
</TABLE>
PRODUCTS AND SERVICES
The Company's primary business is the rental of equipment to industrial and
construction end-users. In addition, to more fully service its customer base
and leverage its fixed costs, the Company sells complementary parts,
merchandise and rental equipment, acts as a distributor of new equipment on
behalf of original equipment manufacturers and services the equipment it sells
and rents.
Equipment Rentals. The Company rents a broad selection of general equipment
ranging from large equipment such as aerial manlifts, forklifts, light earth-
moving equipment and portable air compressors to small equipment such as hand
tools to industrial and commercial construction customers. The Company's
specialty equipment available for rent includes pumps and highway safety
equipment. The Company is the leading renter of industrial hoists in the
United States and the leading renter of portable storage tanks to the chemical
and
37
<PAGE>
petrochemical industries in the Gulf Coast region. The Company's rental
contracts range from a one-day rental contract for a small subcontractor to a
multi-year contract for certain industrial customers, with an overall average
rental period of 19 days. Four categories of equipment represented
approximately 78.8% of the Company's total rental equipment fleet (based on
original equipment cost), on a pro forma basis, at December 31, 1997: (i)
aerial work platforms (44.8%); (ii) forklifts (12.9%); (iii) mobile storage
tanks (11.2%); and (iv) cranes (9.9%). The mix of rental equipment at each of
the Company's locations is a function of the demands of the local customer
base and the focus of the local business. At December 31, 1997, on a pro forma
basis, the original equipment cost of the Company's rental fleet was
approximately $263.3 million and the weighted average age of the Company's
rental equipment fleet was approximately three years. Approximately 66.9% of
the Company's total revenues for the year ended December 31, 1997, on a pro
forma basis, were derived from the rental of equipment.
Sales of Rental Equipment. The Company routinely sells rental equipment to
adjust the size and composition of its rental fleet to changing market
conditions and as part of its ongoing commitment to maintain a new, top
quality fleet. The Company achieves favorable sales prices for its rental
equipment due to its strong preventive maintenance program and its practice of
selling rental equipment before it becomes irreparable or obsolete. Senior
management works with local operating management to optimize the timing of
sales of rental equipment by taking into account maintenance costs, rental
demand patterns and resale prices. The Company sells rental equipment to its
existing rental customers, as well as to domestic and international used
equipment buyers. For the year ended December 31, 1997, on a pro forma basis,
revenues from the sale of rental equipment accounted for approximately 10.4%
of the Company's total revenues.
Sales of New Equipment. The Company is a distributor for certain original
equipment manufacturers, including JLG Industries, Inc., Genie Industries,
Condor (a division of TIME Manufacturing Company), Strato-Lift and Terex Corp.
(d/b/a Marklift) (aerial work platforms and booms), Manitex Crane and
Broderson Crane (cranes), The Gradall Company, Sky Trak, Gehl Equipment and
Tovel Mfg. (rough-terrain forklifts), Atlas-Copco Industrial Compressors, Inc.
and Mitsui Inc. (d/b/a Airman) (air compressors), Mustang Manufacturing, Inc.
(skid steer loaders), Thompson Pump & Manufacturing Co. (pumps), Multiquip
Inc. (generators) and Komatsu Forklift USA, Inc. (industrial forklifts). The
Company believes that the volume of its equipment purchases creates
significant purchasing power with suppliers, which leads to favorable prices
and terms on equipment purchased for its rental fleet and for sale as new
equipment. The Company's ability to sell new equipment offers flexibility to
its customers and enhances the Company's customer relations. Approximately
13.8% of the Company's total revenues for the year ended December 31, 1997, on
a pro forma basis, were derived from the sale of new equipment.
Sales of Parts and Merchandise; Service and Repair. The Company sells a wide
range of parts and merchandise, including saw blades, drill bits, shovels,
goggles, hard hats and other safety gear, as a complement to its core
equipment rental business. These sales enable the Company to attract and
retain customers by offering the convenience of "one-stop shopping." The
Company also provides repair and maintenance services in connection with the
equipment it sells as a complement to its core business. Revenues generated
from sales of parts and merchandise and service and repair accounted for
approximately 8.9% of the Company's total revenues for the year ended December
31, 1997, on a pro forma basis.
CUSTOMERS
Management estimates that the Company currently has more than 10,000
customers, ranging from "Fortune 500" companies to small contractors. For the
year ended December 31, 1997, on a pro forma basis, zero customers accounted
for more than 1.0% of the Company's total revenues, and the Company's top five
customers represented less than 3.0% of total revenues. Customers look to the
Company as an ongoing, comprehensive source of rental equipment because of the
economic advantages and convenience of renting, as well as the high costs
associated with equipment ownership. The Company's primary customer base can
be classified by the following categories: (i) industrial, including
manufacturers, petrochemical facilities, chemical companies, paper mills and
public utilities and (ii) commercial and residential construction, repair and
renovation, including
38
<PAGE>
contractors. In addition to maintaining its historically strong relationship
with local customers, the Company is increasing its emphasis on larger
national and multi-regional accounts. For the year ended December 31, 1997, on
a pro forma basis, industrial, construction and other customers accounted for
approximately 52.6%, 44.4% and 3.0% of the Company's total revenues,
respectively.
Industrial. The Company's industrial customers, many of whom operate 24
hours per day, utilize the Company to outsource their equipment requirements
to reduce the capital investment and minimize the ongoing maintenance, repair
and storage costs associated with equipment ownership. Management believes
that the Company is well-positioned to take advantage of the increasing trend
among industrial customers to outsource equipment needs. In addition, the
Company's specialty products, such as hoists and tanks, are tailored to meet
the needs of industrial end-users. Management believes that given its multi-
regional presence, NES is well positioned to increase its industrial revenue
base. The Company intends to expand its industrial customer base by providing
additional equipment and services to its existing industrial customers and
establishing new relationships through its existing businesses as well as
through acquisitions.
Construction. The Company's construction customers include "Fortune 500"
companies, national and regional contractors and subcontractors involved in
construction projects such as (i) chemical plants and other manufacturing
facilities, (ii) roads, bridges and highways, (iii) schools, hospitals and
airports, and (iv) residential developments and apartment buildings. According
to a survey published in 1997 by The CIT Group, contractors intended to
increase the percentage of equipment they rent without a purchase option to an
estimated 15% of their total equipment requirements in 1997 from an estimated
5% in 1994. Management believes the Company is a leading supplier of rental
equipment to contractors in its markets and is well positioned to benefit from
any increased rental of equipment by such customers.
MANAGEMENT INFORMATION SYSTEMS
The Company has made significant investments in its information systems.
These information systems integrate customer tracking systems that allow the
sales force, through use of lap top computers, to track customer requirements,
while coordinating with inside sales and logistics personnel to ensure that
customer demands are met on a timely basis. These systems also provides real-
time rental management data that allows management to monitor asset
utilization, rental rates, repairs and maintenance, and inventory levels by
region, location, equipment classification, and individual rental item. These
systems are fully integrated into a financial package that tracks
profitability by branch and region, enabling the Company to implement a
decentralized management structure.
OPERATIONS
The Company's equipment rental yards typically include: (i) a customer
service center and showroom displaying selected rental equipment, new
equipment offered for sale and related merchandise; (ii) an equipment service
area; and (iii) equipment storage facilities. Each rental center is staffed by
an average of approximately 14 employees, including a manager, an assistant
manager, sales people, back office clerks, truck drivers, mechanics and yard
personnel. The rental center employees' knowledge of the equipment enables
them to recommend the best equipment for a customer's particular application.
Each rental center manager is responsible for all aspects of the center's
operation, including establishing rental rates, selecting equipment and
determining employee compensation at such location.
SALES
The Company offers rental equipment and related services primarily through
its sales force, consisting of 40 sales managers who oversee 150 sales people.
The sales force at each location is knowledgeable about all of the services
and products provided at that location. Sales managers and representatives
regularly call on contractors' job sites and industrial facilities in their
sales territories, often assisting customers in planning for their equipment
requirements. The Company also provides its sales force with extensive
training, including frequent in-house training by supplier representatives,
regarding the operating features and maintenance
39
<PAGE>
requirements of its equipment. Members of the Company's sales force generally
earn commissions on all equipment rentals and sales that they generate.
PURCHASING AND SUPPLIERS
Management believes that, as a result of the Company's size, it is able to
purchase equipment directly from manufacturers at favorable prices. The
Company has developed strong relationships with many leading original
equipment manufacturers, including JLG Industries, Inc., Genie Industries,
Condor (a division of TIME Manufacturing Company), Strato-Lift, Terex Corp.
(d/b/a Marklift), Manitex Crane, Broderson Crane, The Gradall Company, Sky
Trak, Gehl Equipment, Tovel Mfg., Atlas-Copco Industrial Compressors, Inc.,
Mitsui Inc. (d/b/a Airman), Mustang Manufacturing, Inc., Thompson Pump &
Manufacturing Co., Multiquip, Inc. and Komatsu Forklift USA, Inc., and
operates as a distributor for certain lines of equipment in several of its
markets. The Company intends to acquire businesses that are distributors for
other vendors, thus allowing the Company to purchase from additional sources.
During the year ended December 31, 1997, on a pro forma basis, the Company
purchased approximately $86 million of rental equipment, of which
approximately 36.0% was obtained from its top five suppliers. No single
supplier accounted for more than 18.0% of the Company's total purchases. The
Company believes it could readily replace any of its suppliers if necessary.
LOCATIONS AND PROPERTIES
The Company operates 79 equipment rental locations in the following 19
states: Alabama (6), Florida (2), Georgia (4), Indiana (4), Kentucky (5),
Louisiana (5), Maine (5), Massachusetts (1), Michigan (6), Mississippi (1),
Missouri (1), Nevada (2), New Hampshire (1), New York (6), Pennsylvania (1),
Tennessee (5), Texas (22), Vermont (1) and Virginia (1). The Company's
properties typically include an outside storage yard and a small building
containing offices, a maintenance center and, in certain locations, a retail
showroom. The Company owns 12 of its equipment rental locations and leases the
other 64, as well as its approximately 1,400 square foot headquarters space in
Evanston, Illinois. The net book value of owned facilities was approximately
$4.4 million at December 31, 1997, on a pro forma basis, and the average
annual lease expense on each leased facility was approximately $47,000 in
1997. The Company's leases have terms expiring from 1998 to 2007, with the
majority of its leases having renewal options. Management believes that none
of the Company's leased facilities, individually, is material to the Company's
operations and that all of these leases can be readily replaced at similar
terms. The Company's interests in each of these properties secure borrowings
under the Credit Facility.
COMPETITION
The equipment rental industry is highly fragmented and competitive. Many of
the markets in which the Company operates are served by numerous competitors,
ranging from national and multi-regional companies such as Hertz Equipment
Rental Corporation (an affiliate of Ford Motor Company), U.S. Rentals, Inc.,
Rental Service Corporation and Prime Services, Inc., to small, independent
businesses with a limited number of locations. Management believes that
participants in the equipment rental industry compete on the basis of
availability and quality of equipment, service, delivery, time and price.
Geographic territories for competition are usually limited to 50 to 75 miles
due to servicing requirements and transportation costs of the equipment.
Certain specialized equipment renters, such as Industrial Hoist Services,
compete on a larger regional or national basis. In general, management
believes that national and multi-regional operators, such as the Company,
enjoy substantial competitive advantages over small, independent rental
businesses that cannot afford to maintain the comprehensive rental equipment
fleet and high level of maintenance and service that the Company offers. See
"Risk Factors--Competition."
EMPLOYEES
At May 31, 1998, the Company had a total of 1,137 employees. Only 81 of the
Company's employees are represented by unions, and management believes that
its relationship with all of its employees is excellent. The Company is
committed to, and has realized significant benefits from, its formal employee
training programs. Management believes that this investment in training and
safety awareness programs for employees is a competitive advantage that
positions the Company to be responsive to customer needs.
40
<PAGE>
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's facilities are subject to various evolving federal, state and
local environmental requirements, including those relating to discharges to
air, water and land, the handling and disposal of solid and hazardous waste
and the cleanup of properties affected by hazardous substances. Certain
environmental laws impose substantial penalties for noncompliance, and others,
such as the federal Comprehensive Environmental Response, Compensation, and
Liability Act, as amended, impose strict, retroactive, joint and several
liability upon persons responsible for releases of hazardous substances.
In connection with its corporate acquisitions, the Company usually obtains
environmental assessments from independent environmental consultants. These
assessments generally consist of a site visit, historical record review,
interviews with key personnel and preparation of a report. The purpose of the
consultant's work is to identify potential environmental conditions or
compliance issues associated with the subject property and operations. Based
on these assessments, the Company believes that its operations have been and
are operated in substantial compliance with environmental requirements and
that it has no material liabilities arising under environmental requirements.
Some risk of environmental liability is inherent in the nature of the
Company's business, however, and the Company might in the future incur
material costs to meet current or more stringent compliance, cleanup or other
obligations pursuant to environmental laws.
The Company is currently evaluating whether it must take additional steps at
some locations to ensure compliance with certain environmental laws, including
those relating to the discharge of stormwater and wastewater from the washing
of vehicles and other equipment. The Company does not believe any costs
associated with these efforts will have a material adverse effect on the
Company's operating results or financial position.
The Company dispenses petroleum products from aboveground and underground
storage tanks located at some locations that it operates. The Company
maintains an environmental compliance program designed to minimize the
potential for leaks and spills, to ensure proper maintenance of records and to
keep track of the regular testing and monitoring of tank systems. There can be
no assurance, however, that these tank systems have been or will at all times
remain free from leaks or that the use of these tanks has not or will not
result in spills or other releases. The Company does not believe that the
presence or operation of these tanks will have a material adverse effect on
the Company's operating results or financial position.
The Company uses hazardous substances, such as solvents, to clean and
maintain its rental equipment fleet and generates wastes, such as used motor
oil, radiator fluid and solvents, that are stored on site and disposed of at
off-site locations. Under various environmental laws, the Company could be
liable for contamination at sites where hazardous substances used in its
operations have been disposed of or otherwise released.
The Company believes that its compliance with environmental laws has not had
a material adverse effect on the Company's operating results, financial
condition or competitive position to date. See "Risk Factors--Environmental
Liabilities."
LEGAL PROCEEDINGS
From time to time, the Company has been and is involved in various legal
proceedings, all of which management believes are routine in nature and
incidental to the conduct of its business. The ultimate legal and financial
liability of the Company with respect to such proceedings cannot be estimated
with certainty, but the Company believes, based on its examination of such
matters, that none of such proceedings, if determined adversely to the
Company, would have a material adverse effect on the financial condition or
results of operations of the Company.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of June 1, 1998 with
respect to the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Kevin Rodgers........... 47 President, Chief Executive Officer and Director
Dennis O'Connor......... 48 Chief Financial Officer
Paul Ingersoll.......... 32 Vice President of Corporate Development and Secretary
Carl Thoma.............. 49 Chairman of the Board
William Kessinger....... 32 Director
John Grove.............. 77 Director
Ronald St. Clair........ 60 Director
</TABLE>
Kevin Rodgers. Mr. Rodgers has been President, Chief Executive Officer and a
director of the Company since he founded the Company with Golder, Thoma,
Cressey, Rauner Fund V, L.P. in June 1996. Prior thereto, Mr. Rodgers served
as Chief Executive Officer of Brambles Equipment Services, Inc. and Brambles
Records Management, Inc. from 1991 to June 1996. From 1991 to 1996, Mr.
Rodgers also held the position of Executive Director of Brambles USA, a
subsidiary of Brambles Industries Limited, an Australian public company with
worldwide revenues of over US $2.5 billion. From 1979 to 1990, Mr. Rodgers
held several positions at Morgan Equipment Company, a privately held heavy
equipment dealership with worldwide sales of approximately $300 million,
including Chief Executive Officer of Morgan Equipment's Australian operations
from 1986 to 1990.
Dennis O'Connor. Mr. O'Connor has been Chief Financial Officer of the
Company since August 1996. Prior thereto, Mr. O'Connor served as Chief
Financial Officer of Brambles Equipment Services, Inc. from November 1991 to
August 1996, where Mr. O'Connor directed the financial and administrative
functions for its seven operating divisions and assisted in operations
management. From May 1986 to May 1990, Mr. O'Connor held various positions at
Morgan Equipment Company, including Chief Financial Officer and General
Manager.
Paul Ingersoll. Mr. Ingersoll has been Vice President of Corporate
Development and Secretary of the Company since June 1996. Prior thereto, Mr.
Ingersoll served as Assistant to the Executive Director of Brambles USA from
March 1992 to May 1996 and as Financial Analyst from November 1989 to March
1992. During his tenure at Brambles, Mr. Ingersoll closed 19 acquisitions
related to equipment services and records management.
Carl Thoma. Mr. Thoma is Chairman of the Board of the Company and has served
as a director of the Company since its founding in June 1996. Mr. Thoma is the
Managing Partner of Thoma Cressey Equity Partners, a private equity investment
company in Chicago, Illinois, Denver, Colorado and San Francisco, California
formed in December 1997 as a successor to Golder, Thoma, Cressey, Rauner, Inc.
He also co-founded and has been a Managing Director of Golder, Thoma, Cressey,
Rauner, Inc., the general partner of Golder, Thoma, Cressey, Rauner Fund V,
L.P. and its predecessor funds, in Chicago, Illinois since 1980. Mr. Thoma is
also a director of Global Imaging, Inc., Outsource Partners, Inc. and Paging
Network, Inc.
William Kessinger. Mr. Kessinger has served as a director of the Company
since its founding in June 1996. Mr. Kessinger is a Principal of GTCR Golder
Rauner, LLC, a private equity investment company in Chicago, Illinois formed
in January 1998 as a successor to Golder, Thoma, Cressey, Rauner, Inc. Mr.
Kessinger joined Golder, Thoma, Cressey, Rauner, Inc. in May 1995 and has been
a Principal since September 1997. Prior thereto, Mr. Kessinger was a Principal
with The Parthenon Group from July 1994 to May 1995. From August 1992 to June
1994, Mr. Kessinger attended Harvard Business School and received his MBA.
Prior to that time, Mr. Kessinger served as an Associate with Prudential Asset
Management Asia from August 1988 to June 1992. Mr. Kessinger is also a
director of Answerthink Consulting Group, Inc., Excaliber, Inc., Global
Imaging, Inc., National Computer Print, Inc. and Users, Inc.
42
<PAGE>
John Grove. Mr. Grove has served as a director of the Company since May
1998. Mr. Grove co-founded JLG Industries, Inc., a manufacturer of
hydraulically-operated machinery specializing in aerial work platforms, in
1969 and served as Chairman and Chief Executive Officer until his retirement
in 1993. Prior to 1969, Mr. Grove co-founded Grove Manufacturing Co. and
developed the modern hydraulic crane. Mr. Grove is also a director of Falling
Spring Corp., Truckcraft Corporation and Sentry Trust, Inc.
Ronald St. Clair. Mr. St. Clair has served as a director of the Company
since October 1997. Mr. St. Clair founded High Reach Equipment, an aerial
platform rental company headquartered in Baton Rouge, Louisiana. In 1993, Mr.
St. Clair sold High Reach Equipment to Brambles Equipment Services, Inc. In
1994, Mr. St. Clair retired from High Reach Equipment.
The Board of Directors currently consists of five directors, who are divided
into three classes, with terms expiring at the Company's annual meetings of
stockholders in 1999, 2000 and 2001. Mr. St. Clair's term will expire at the
1999 annual meeting. Mr. Rodgers' and Mr. Kessinger's terms will expire at the
2000 annual meeting. Mr. Thoma's and Mr. Grove's terms will expire at the 2001
annual meeting. Each director is elected to serve for the remaining term of
any vacancy filled by the director or until the third succeeding annual
meeting of stockholders (if elected at an annual meeting of stockholders) or
until a successor is duly elected. The Board has the power to appoint the
officers of the Company. Each officer will hold office for such term as may be
prescribed by the Board and until such person's successor is chosen and
qualified or until such person's death, resignation or removal.
COMPENSATION OF DIRECTORS
Directors of the Company currently do not receive a salary or an annual
retainer for their services, except for (i) Mr. St. Clair, who receives an
annual fee of $40,000 and (ii) Mr. Grove, who receives an annual fee of $8,000
and fees of $1,500 for each Board meeting (or $500 if such Board meeting is
telephonic) and $500 for each Board committee meeting Mr. Grove attends. The
Company expects that new non-employee Directors not otherwise affiliated with
the Company or its stockholders will be paid an annual cash retainer. All
directors are reimbursed for out-of-pocket expenses related to their service
as directors, including expenses incurred in connection with attending
meetings. Directors may also be issued options pursuant to the Incentive Plan.
See "--Long Term Incentive Plan."
Concurrent with the consummation of the Offering, the Company also intends
to grant each of Mr. Grove and Mr. St. Clair, under the Incentive Plan, an
option to acquire 10,000 shares of Common Stock that will vest in equal annual
installments at each of the first five anniversaries of the date of grant. The
Company intends to grant such options at an option price equal to the public
offering price. In addition, at each anniversary of the Offering, the Company
intends to grant each of Mr. Grove and Mr. St. Clair, under the Incentive
Plan, an option to acquire 2,000 shares of Common Stock that will vest in
equal annual installments at each of the first five anniversaries of the date
of grant. The Company intends to grant such options at an option price equal
to the fair market value of the Common Stock on the date of grant.
43
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The compensation of executive officers of the Company will be determined by
the Board of Directors of the Company. The following table sets forth
information regarding the compensation paid or accrued by the Company to the
Chief Executive Officer and each of the Company's other executive officers
(the "Named Executive Officers") for services rendered to the Company in all
capacities during 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- -------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION STOCK OPTIONS/SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) AWARDS ($) ($) ($) ($)
- ------------------------ ---- ------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kevin Rodgers(1)........ 1997 225,000 112,500 -- -- -- -- 10,125(2)
President, Chief 1996 131,250(3) -- -- -- -- -- --
Executive Officer and
Director
Dennis O'Connor(4)...... 1997 125,000 62,500 -- -- -- -- 4,545(5)
Chief Financial Officer 1996 44,015(6) -- -- -- -- -- 30,741(7)
Paul Ingersoll(8)....... 1997 80,000 40,000 -- -- -- -- 3,200(9)
Vice President and 1996 52,464(10) -- -- -- -- -- --
Secretary
</TABLE>
- --------
(1) Mr. Rodgers became an employee of the Company effective June 4, 1996.
(2) The amount shown includes $4,500 of Company 401(k) matching contributions
under the Savings Plan and a $5,625 profit sharing contribution under the
Savings Plan (as defined).
(3) The amount shown includes $43,750 of accrued salary paid in 1997 pursuant
to Mr. Rodgers' employment agreement upon the Company's acquisition of
equipment rental businesses meeting certain financial criteria.
(4) Mr. O'Connor became an employee of the Company effective August 19, 1996.
(5) The amount shown includes $2,045 of Company 401(k) matching contributions
under the Savings Plan and a $2,500 profit sharing contribution under the
Savings Plan.
(6) The amount shown includes $10,909 of accrued salary paid in 1997 pursuant
to Mr. O'Connor's employment agreement upon the Company's acquisition of
equipment rental businesses meeting certain financial criteria.
(7) The amount shown represents reimbursement for relocation and moving
expenses.
(8) Mr. Ingersoll became an employee of the Company effective June 4, 1996.
(9) The amount shown includes $1,600 of Company 401(k) matching contributions
under the Savings Plan and a $1,600 profit sharing contribution under the
Savings Plan.
(10) The amount shown includes $13,116 of accrued salary paid in 1997 pursuant
to Mr. Ingersoll's employment agreement upon the Company's acquisition of
equipment rental businesses meeting certain financial criteria. In
addition, the amount shown includes $5,797 of salary paid by the Company
for work Mr. Ingersoll performed for Golder, Thoma, Cressey, Rauner, Inc.
prior to June 4, 1996 to prepare for the organization and formation of
the Company.
MANAGEMENT EMPLOYMENT AGREEMENTS
Kevin Rodgers. Mr. Rodgers is party to a senior management agreement with
the Company dated as of June 4, 1996, as amended. Under the agreement, Mr.
Rodgers will receive an annual base salary of $250,000, which amount shall be
reviewed (but not reduced) annually by the Board in its sole discretion. Mr.
Rodgers will be
44
<PAGE>
eligible for a bonus of up to 50% of his base salary, which the Board
anticipates awarding if Mr. Rodgers meets or exceeds annual operational and
financial objectives agreed to by the Board and Mr. Rodgers. If the Company
has not met or exceeded its financial or operational objectives, the Board in
its discretion may award Mr. Rodgers a bonus of less than 50% of his base
salary. Mr. Rodgers will also be entitled to all other benefits as are
approved by the Board and made available to the Company's senior management.
Under the agreement, Mr. Rodgers purchased 96 shares of Old Common Stock at
a price of $10 per share. In addition, under the agreement, Mr. Rodgers agreed
to purchase (upon consummation of certain additional investments by Golder,
Thoma, Cressey, Rauner Fund V, L.P. in the Company) up to an additional 7,904
shares of Old Common Stock at a price of $10 per share; provided that Mr.
Rodgers was entitled to purchase all or any portion of such shares at a price
of $10 per share at such earlier time as Mr. Rodgers determined. Mr. Rodgers
purchased all 7,904 of such additional shares in January 1997. All shares of
Old Common Stock owned by Mr. Rodgers will vest over a five-year period
beginning March 1997. In connection with and immediately prior to the
consummation of the Offering, each share of Old Common Stock owned by Mr.
Rodgers will be converted into Common Stock. Upon completion of the Offering,
the portions of the agreement which restrict the transfer of the Company's
securities will be terminated.
Mr. Rodgers' employment with the Company will continue until terminated by
the resignation, death or disability of Mr. Rodgers or by the Board in its
good faith judgment that termination of Mr. Rodgers' employment is in the best
interests of the Company. In the event Mr. Rodgers' employment is terminated
(i) by the Company without cause, (ii) by Mr. Rodgers with good reason or
(iii) as a result of Mr. Rodgers' death or disability, until the end of the
six-month period commencing on the date of his termination, the Company shall
pay to Mr. Rodgers (or his estate) his annual base salary and allow Mr.
Rodgers to continue to participate in all of the Company's medical, disability
and life insurance plans to the extent permitted by the Company's insurance
carriers at a cost not materially in excess of the Company's cost for such
insurance immediately prior to the date of termination. In addition, the
Company shall have the option to extend the severance period to the second
anniversary of the date of termination, during which period the Company shall
pay to Mr. Rodgers (or his estate) his annual base salary and allow Mr.
Rodgers to continue to participate in all of the Company's medical, disability
and life insurance plans to the extent permitted by the Company's insurance
carriers at a cost not materially in excess of the Company's cost for such
insurance immediately prior to the date of termination. Mr. Rodgers has agreed
not to compete with the Company during the term of his employment and for six
months thereafter and during the extended period (if any) and has agreed not
to solicit any employees or customers of the Company during the two years
following the date of termination of his employment.
Dennis O'Connor. Mr. O'Connor is party to a senior management agreement with
the Company dated as of December 31, 1996, as amended. Under the agreement,
Mr. O'Connor will receive an annual base salary of $165,000, which amount
shall be reviewed (but not reduced) annually by the Company's Chief Executive
Officer with the approval of the Board in its sole discretion. Mr. O'Connor
will also be entitled to all other benefits as are approved by the Board and
made available to the Company's senior management.
Under the agreement, Mr. O'Connor purchased 24 shares of Old Common Stock at
a price of $10 per share. In addition, under the agreement, Mr. O'Connor
agreed to purchase (upon consummation of certain additional investments by
Golder, Thoma, Cressey, Rauner Fund V, L.P. in the Company) up to an
additional 1,976 shares of Old Common Stock at a price of $10 per share;
provided that Mr. O'Connor was entitled to purchase all or any portion of such
shares at a price of $10 per share at such earlier time or times as Mr.
O'Connor determined. Mr. O'Connor purchased all 1,976 of such additional
shares in January 1997. All shares of Old Common Stock owned by Mr. O'Connor
will vest over a five-year period beginning March 1997. In connection with and
immediately prior to the consummation of the Offering, each share of Old
Common Stock owned by Mr. O'Connor will be converted into Common Stock. Upon
completion of the Offering, the portions of the agreement which restrict the
transfer of the Company's securities will be terminated.
Mr. O'Connor's employment with the Company will continue until terminated by
the resignation, death or disability of Mr. O'Connor or by the Board in its
good faith judgment that termination of Mr. O'Connor's employment is in the
best interests of the Company. In the event Mr. O'Connor's employment is
terminated (i) by the Company without cause, (ii) by Mr. O'Connor with good
reason or (iii) as a result of Mr. O'Connor's
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death or disability, until the end of the six-month period commencing on the
date of his termination, the Company shall pay to Mr. O'Connor (or his estate)
his annual base salary and allow Mr. O'Connor to continue to participate in
all of the Company's medical, disability and life insurance plans to the
extent permitted by the Company's insurance carriers at a cost not materially
in excess of the Company's cost for such insurance immediately prior to the
date of termination. In addition, the Company shall have the option to extend
the severance period to the second anniversary of the date of termination,
during which period the Company shall pay to Mr. O'Connor (or his estate) his
annual base salary and allow Mr. O'Connor to continue to participate in all of
the Company's medical, disability and life insurance plans to the extent
permitted by the Company's insurance carriers at a cost not materially in
excess of the Company's cost for such insurance immediately prior to the date
of termination. Mr. O'Connor has agreed not to compete with the Company during
the term of his employment and for six months thereafter and during the
extended period (if any) and has agreed not to solicit any employees or
customers of the Company during the two years following the date of
termination of his employment.
Paul Ingersoll. Mr. Ingersoll is party to a senior management agreement with
the Company dated as of June 4, 1996, as amended. Under the agreement, Mr.
Ingersoll will receive an annual base salary of $120,000, which amount shall
be reviewed (but not reduced) annually by the Company's Chief Executive
Officer with the approval of the Board in its sole discretion. Mr. Ingersoll
will also be entitled to all other benefits as are approved by the Board and
made available to the Company's senior management.
Under the agreement, Mr. Ingersoll purchased 12 shares of Old Common Stock
at a price of $10 per share. In addition, under the agreement, Mr. Ingersoll
agreed to purchase (upon consummation of certain additional investments by
Golder, Thoma, Cressey, Rauner Fund V, L.P. in the Company) up to an
additional 988 shares of Old Common Stock at a price of $10 per share;
provided that Mr. Ingersoll was entitled to purchase all or any portion of
such shares at a price of $10 per share at such earlier time or times as Mr.
Ingersoll determined. Mr. Ingersoll purchased all 988 of such additional
shares in January 1997. All shares of Old Common Stock owned by Mr. Ingersoll
will vest over a five-year period beginning March 1997. In connection with and
immediately prior to the consummation of the Offering, each share of Old
Common Stock owned by Mr. Ingersoll will be converted into Common Stock. Upon
completion of the Offering, the portions of the agreement which restrict the
transfer of the Company's securities will be terminated.
Mr. Ingersoll's employment with the Company will continue until terminated
by the resignation, death or disability of Mr. Ingersoll or by the Board in
its good faith judgment that termination of Mr. Ingersoll's employment is in
the best interests of the Company. In the event Mr. Ingersoll's employment is
terminated (i) by the Company without cause, (ii) by Mr. Ingersoll with good
reason or (iii) as a result of Mr. Ingersoll's death or disability, until the
end of the six-month period commencing on the date of his termination, the
Company shall pay to Mr. Ingersoll (or his estate) his annual base salary and
allow Mr. Ingersoll to continue to participate in all of the Company's
medical, disability and life insurance plans to the extent permitted by the
Company's insurance carriers at a cost not materially in excess of the
Company's cost for such insurance immediately prior to the date of
termination. In addition, the Company shall have the option to extend the
severance period to the second anniversary of the date of termination, during
which period the Company shall pay to Mr. Ingersoll (or his estate) his annual
base salary and allow Mr. Ingersoll to continue to participate in all of the
Company's medical, disability and life insurance plans to the extent permitted
by the Company's insurance carriers at a cost not materially in excess of the
Company's cost for such insurance immediately prior to the date of
termination. Mr. Ingersoll has agreed not to compete with the Company during
the term of his employment and for six months thereafter and during the
extended period (if any) and has agreed not to solicit any employees or
customers of the Company during the two years following the date of
termination of his employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996 and 1997, the Company had no compensation committee or other
committee of the Board performing similar functions. Accordingly, decisions
concerning compensation of executive officers were made by the entire Board.
Other than Kevin Rodgers, there were no officers or employees of the Company
who participated in deliberations concerning such compensation matters.
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401(K) PROFIT SHARING PLAN
The Company maintains a savings plan (the "Savings Plan") qualified under
Section 401(a) and 401(k) of the Internal Revenue Code. Generally, all
employees of the Company in the United States who are at least 21 years of age
and who have completed six months of service are eligible to participate in
the Savings Plan. For each employee who elects to participate in the Savings
Plan and makes a contribution thereto, the Company makes a matching
contribution of 50% of the first 5% of annual compensation contributed. In
addition, the Company may make discretionary profit sharing contributions
under the Savings Plan. The maximum contribution for any participant for any
year is the maximum amount permitted under Internal Revenue Code.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has two standing committees of its Board of Directors: the
Compensation Committee (the "Compensation Committee") and the Audit Committee
(the "Audit Committee"). The Audit Committee, which currently consists of
Messrs. Thoma, Kessinger and Grove, is responsible for making recommendations
to the Board of Directors regarding the selection of independent auditors,
reviewing the results and scope of the audit and other services provided by
the Company's independent accountants and reviewing and evaluating the
Company's audit and control functions. The Compensation Committee, which
currently consists of Messrs. Thoma, Kessinger and St. Clair, makes
recommendations regarding the Incentive Plan and decisions concerning salaries
and incentive compensation for executive officers, key employees and
consultants of the Company.
The Board of Directors may also create other committees, including an
executive committee and a nominating committee.
LONG TERM INCENTIVE PLAN
The Company has established the National Equipment Services, Inc. Long Term
Incentive Plan (the "Incentive Plan"). A maximum of 2,200,000 shares of Common
Stock, subject to adjustment, have been initially authorized for the granting
of stock options under the Incentive Plan. Options granted under the Incentive
Plan may be either "incentive stock options," which qualify for special tax
treatment under the Internal Revenue Code, or nonqualified stock options. The
purposes of the Incentive Plan are to advance the interests of the Company and
stockholders by providing Company employees with an additional incentive to
continue their efforts on behalf of the Company, as well as to attract to the
Company people of experience and ability. The Incentive Plan is intended to
comply with Rule 16b-3 of the Exchange Act.
All officers, directors and other key employees and consultants of the
Company or its subsidiaries are eligible to participate under the Incentive
Plan, as deemed appropriate by the Compensation Committee of the Board of
Directors. Eligible employees will not pay any cash consideration to the
Company to receive the options. The Incentive Plan is administered by the
Compensation Committee of the Board of Directors. The exercise price for
incentive stock options must be no less than the fair market value of the
Common Stock on the date of grant. The exercise price of nonqualified stock
options is not subject to any limitation based upon the then current market
value of the Common Stock. Options will expire no later than the tenth
anniversary of the date of grant. An option holder will be able to exercise
options from time to time, subject to vesting. Options will vest immediately
upon death or disability of a participant and upon certain change of control
events. Upon termination for cause or at will by the Company, the unvested
portion of the options will be forfeited. Subject to the above conditions, the
exercise price, duration of the options and vesting provisions will be set by
the Compensation Committee of the Board of Directors in its discretion.
Prior to consummation of the Offering, the Company expects to grant stock
options to purchase 880,000 shares of Common Stock to certain members of
management, including Messrs. O'Connor and Ingersoll who will each receive
options to purchase 24,000 shares of Common Stock at the initial public
offering price. Such options will vest in five equal installments beginning on
the first anniversary of the grant date. The options are expected to have a
term of ten years.
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PRINCIPAL STOCKHOLDERS
The table below sets forth certain information as of June 15, 1998 regarding
the beneficial ownership of the Common Stock (a) before the Offering but after
giving effect to the Reclassification and the Stock Split and (b) immediately
following the Offering by: (i) each person or entity who beneficially owns
five percent or more of the Common Stock, (ii) each Director and each Named
Executive Officer and (iii) all Directors and executive officers of the
Company as a group. See "Certain Relationships and Transactions--
Reclassification and Stock Split." Unless otherwise stated, each of the
persons named in the table has sole voting and investment power with respect
to the Common Stock beneficially owned by it or him as set forth opposite its
or his name. Beneficial ownership of the Common Stock listed in the table has
been determined in accordance with the applicable rules and regulations
promulgated under the Exchange Act. Unless otherwise indicated in a footnote,
the business address of each person is the Company's corporate address.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED AFTER THE
OFFERING OFFERING(1)
------------------ ---------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------ ---------- ------- ------------ --------
<S> <C> <C> <C> <C>
Golder, Thoma, Cressey, Rauner Fund V,
L.P.(2).............................. 13,820,450 85.7% 13,820,450 61.7%
Kevin Rodgers(3)...................... 1,112,000 7.0 1,112,000 5.0
Dennis O'Connor....................... 278,000 1.7 278,000 1.3
Paul Ingersoll........................ 139,000 * 139,000 *
Carl Thoma(4)......................... 13,820,450 85.7 13,820,450 61.7
William Kessinger(4).................. 13,820,450 85.7 13,820,450 61.7
John Grove............................ -- -- -- --
Ronald St. Clair...................... 55,221 * 55,221 *
All directors and executive officers
as a group
(7 persons)(4)....................... 15,404,671 95.5 15,404,671 68.8
</TABLE>
- --------
* Represents less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Includes 24,231 shares of Common Stock held by GTCR Associates V, a
partnership affiliated with Golder, Thoma, Cressey, Rauner Fund V, L.P.
The address of each of Golder, Thoma, Cressey, Rauner Fund V, L.P. and
GTCR Associates V is 6100 Sears Tower, Chicago, Illinois 60606.
(3) Includes 1,112,000 shares of Common Stock owned by Mr. Rodgers' family
limited partnership, Rodgers Investment Partners, L.P., as to which he
disclaims beneficial ownership.
(4) Includes 13,796,219 shares of Common Stock held by Golder, Thoma, Cressey,
Rauner Fund V, L.P., of which GTCR V, L.P. is the general partner, and
also includes 24,231 shares of Common Stock held by GTCR Associates V.
Each of Messrs. Thoma and Kessinger is a principal of Golder, Thoma,
Cressey, Rauner, Inc., the general partner of GTCR V, L.P. and the
managing general partner of GTCR Associates V, and therefore may be deemed
to share investment and voting control over the shares of Common Stock
held by Golder, Thoma, Cressey, Rauner Fund V, L.P. and GTCR Associates V.
Each of Messrs. Thoma and Kessinger disclaims beneficial ownership of the
shares of Common Stock owned by Golder, Thoma, Cressey, Rauner Fund V,
L.P. and GTCR Associates V. The address of each of these holders is 6100
Sears Tower, Chicago, Illinois 60606.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
RECLASSIFICATION AND STOCK SPLIT
Immediately prior to the consummation of the Offering, each outstanding
share of Old Common Stock will be converted into one share of Common Stock and
each outstanding share of Old Preference Stock will be converted into a number
of shares of Common Stock equal to the sum of (i) the quotient of (x) the
number of shares of Old Common Stock then outstanding multiplied by 10%,
divided by (y) the number of shares of Old Preference Stock then outstanding
multiplied by 90%, plus (ii) a number of shares of Common Stock valued at the
initial public offering price of the Offering (net of underwriting discounts
and commissions and adjusted so that such number represents shares of Common
Stock prior to effecting the Stock Split) equal to the liquidation value and
cumulative yield with respect to such share of Old Preference Stock as of such
date. If the Offering had been consummated on June 15, 1998, the aggregate
liquidation value and cumulative yield with respect to the Old Preference
Stock would have been approximately $25.2 million and $2.9 million,
respectively. Therefore, assuming an initial public offering price of $13.50
per share, each share of Old Preference Stock, on average, would have
converted into approximately 1.028 shares of Common Stock (the
"Reclassification"). Each share of Common Stock will then be split into 139
shares of Common Stock (the "Stock Split"). See "Description of Capital
Stock--Old Preference Stock and Old Common Stock."
CERTAIN LOANS TO EXECUTIVES
The Company loaned $64,000 to Mr. Rodgers, $20,000 to Mr. O'Connor and
$10,000 to Mr. Ingersoll pursuant to promissory notes (the "Executive Notes")
to finance their purchase of the Company's securities. See "Management--
Management Employment Agreements." Each of the Executive Notes is secured by a
pledge of the securities purchased with such Executive Note pursuant to an
Executive Stock Pledge Agreement between the Company and each of Messrs.
Rodgers, O'Connor and Ingersoll. The Executive Notes bear interest at a rate
per annum equal to the applicable federal rate as set forth in Section 1274(d)
of the Internal Revenue Code of 1986, as amended. The principal amount of the
Executive Notes and all interest accrued thereon mature in part on June 4,
2006, with the remainder maturing on January 6, 2007. The Executive Notes may
be prepaid in full or in part at any time.
PROFESSIONAL SERVICES AGREEMENT
The Company has a Professional Services Agreement (the "Professional
Services Agreement") with Golder, Thoma, Cressey, Rauner, Inc. pursuant to
which Golder, Thoma, Cressey, Rauner, Inc. provides financial and management
consulting services to the Company. Under the Professional Services Agreement,
Golder, Thoma, Cressey, Rauner, Inc. receives an annual management fee of
$200,000 (plus reimbursement of out-of-pocket expenses) and a fee of 1% of the
amount of debt or equity capital raised by the Company from any source, for
their assistance in obtaining such capital. For the period from inception
(June 4, 1996) through December 31, 1996, the Company had paid or accrued $0
in fees under the Professional Services Agreement. For the year ended December
31, 1997, the Company had paid or accrued $1,047,238 in fees under the
Professional Services Agreement. The agreement will be terminated upon the
consummation of the Offering, and no fee is payable with respect to the
issuance of Common Stock in the Offering. Messrs. Thoma and Kessinger will
continue to serve as directors of the Company.
STOCKHOLDERS AGREEMENT
In connection with the formation of the Company, the Company and its
stockholders entered into a Stockholders Agreement dated as of June 4, 1996
(the "Stockholders Agreement") which (i) provides for the designation of the
Board of Directors of the Company, (ii) imposes certain restrictions on the
transfer of shares of the Company, (iii) requires the stockholders to take
certain actions upon the approval by a majority of the stockholders in
connection with an initial public offering or a sale of the Company, (iv)
requires the Company to offer to sell shares to the stockholders under certain
circumstances upon authorization of an issuance or sale of additional shares,
and (v) grants certain of the stockholders certain participation rights in
connection with a sale
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<PAGE>
of shares by other stockholders. Upon the completion of the Offering, the
Stockholders Agreement will be terminated.
REGISTRATION AGREEMENT
In connection with the formation of the Company, the Company and its
stockholders entered into a Registration Agreement dated as of June 4, 1996
(the "Registration Agreement"). Pursuant to the Registration Agreement, the
Existing Stockholders are entitled to certain registration rights. Holders of
at least a majority of the shares of Common Stock held by the Existing
Stockholders may require the Company to effect the registration of their
shares of Common Stock from time to time (each, a "Demand Registration"). The
Company will pay all registration expenses in connection with all "short-form"
Demand Registrations and up to four "long-form" Demand Registrations. In
addition, if the Company proposes to register any of its Common Stock under
the Securities Act, whether for its own account or otherwise (each, a "Company
Registration"), the Existing Stockholders are entitled to notice of such
registration and, subject to certain priority provisions, are entitled to
include their shares of Common Stock in such registration with all
registration expenses being paid by the Company. Notwithstanding the
foregoing, the Company will not be obligated to effect a Demand Registration
within six months after the effective date of a prior Demand Registration or
of a Company Registration, and, under certain circumstances, a request may be
delayed by the Company for up to six months (but on no more than one
occasion). The Existing Stockholders have waived their registration rights
under the Registration Agreement in connection with the Offering.
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, the total amount of authorized capital stock of
the Company will consist of 100,000,000 shares of Common Stock, par value
$0.01 per share, held by approximately 20 holders, and 10,000,000 shares of
preferred stock, par value $0.01 per share (the "Preferred Stock"). Upon
completion of the Offering, 22,405,279 shares of Common Stock will be issued
and outstanding and no shares of Preferred Stock will be issued and
outstanding. The discussion herein describes the Company's capital stock, and
the Restated Certificate and By-laws as anticipated to be in effect upon
consummation of the Offering. The following summary of certain provisions of
the Company's capital stock describes all material provisions of, but does not
purport to be complete and is subject to, and qualified in its entirety by,
the Restated Certificate and the By-laws of the Company that are included as
exhibits to the Registration Statement of which this Prospectus forms a part
and by the provisions of applicable law.
The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
OLD PREFERENCE STOCK AND OLD COMMON STOCK
Immediately prior to the Reclassification, the Company's issued and
outstanding common stock consisted of 25,221 shares of Class A Common Stock,
par value $.01 per share (the "Old Preference Stock") and 90,100 shares of
Class B Common Stock, par value $.01 per share (the "Old Common Stock"). Prior
to the Reclassification, the holders of Old Preference Stock and Old Common
Stock were entitled to participate in any distribution (of which there have
been none) made by the Company in the following priority: (i) first, to the
holders of Old Preference Stock, ratably, until the holders of Old Preference
Stock as a class had received, taking into consideration all prior
distributions, a cumulative 10% yield (compounded quarterly) on the $1,000
liquidation value of each share of Old Preference Stock, (ii) second, to the
holders of Old Preference Stock,
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<PAGE>
ratably, until the holders of Old Preference Stock as a class had received,
taking into consideration all prior distributions other than distributions
pursuant to clause (i) above, the aggregate liquidation value of the Old
Preference Stock, and (iii) last, to the holders of Old Preference Stock and
the holders of Old Common Stock, 10% and 90%, respectively, of the balance of
such distribution. On June 15, 1998, the aggregate liquidation value and
cumulative yield on the Old Preference Stock was $25.2 million and $2.9
million, respectively.
Prior to the Reclassification, all holders of Old Common Stock were entitled
to one vote per share, and the holders of Old Preference Stock, as a class,
were entitled to a number of votes equal to 10% of the number of votes
allocable to the Old Preference Stock and Old Common Stock on a combined
basis, with each share of Old Preference Stock being entitled to its pro rata
portion of such allocated number of votes. The holders of Old Preference Stock
and Old Common Stock voted together as a single class.
The successful completion of an initial public offering permits the holders
of Old Preference Stock to require that the Company redeem the aggregate
liquidation value and cumulative yield of the Old Preference Stock. The
holders of the Old Preference Stock have waived their rights to require such
redemption in connection with the Offering, and such rights will be eliminated
in connection with the Reclassification.
RECLASSIFICATION AND STOCK SPLIT
Immediately prior to the consummation of the Offering, in the
Reclassification each outstanding share of Old Common Stock will be converted
into one share of Common Stock and each outstanding share of Old Preference
Stock will be converted into a number of shares of Common Stock equal to the
sum of (i) the quotient of (x) the number of shares of Old Common Stock then
outstanding multiplied by 10%, divided by (y) the number of shares of Old
Preference Stock then outstanding multiplied by 90%, plus (ii) a number of
shares of Common Stock valued at the initial public offering price of the
Offering (net of underwriting discounts and commissions and adjusted so that
such number represents shares of Common Stock prior to effecting the Stock
Split) equal to the liquidation value and cumulative yield with respect to
such share of Old Preference Stock as of such date. If the Offering had been
consummated on June 15, 1998, the aggregate liquidation value and cumulative
yield with respect to the Old Preference Stock would have been approximately
$25.2 million and $2.9 million, respectively. Further assuming an initial
public offering price of $13.50 per share, each share of Old Preference Stock,
on average, would have converted into approximately 1.028 shares of Common
Stock. In the Stock Split, each share of Common Stock will then be split into
139 shares of Common Stock.
COMMON STOCK
After the Reclassification, the issued and outstanding shares of Common
Stock will be, and the shares of Common Stock being offered by the Company
will be upon payment therefor, validly issued, fully paid and nonassessable.
Subject to the prior rights of the holders of any Preferred Stock, the holders
of outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such time and in such amounts as the
Board of Directors may from time to time determine. See "Dividend Policy." The
shares of Common Stock are not convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Common Stock is entitled to one
vote on all matters submitted to a vote of stockholders. There is no
cumulative voting.
The Common Stock has been approved for trading on the New York Stock
Exchange under the symbol "NSV," subject to official notice of issuance.
PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
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<PAGE>
rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of Preferred Stock would reduce the
amount of funds available for the payment of dividends on shares of Common
Stock. Holders of shares of Preferred Stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up
of the Company before any payment is made to the holders of shares of Common
Stock. Under certain circumstances, the issuance of shares of Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or
proxy contest, the assumption of control by a holder of a large block of the
Company's securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in
office, the Board of Directors of the Company, without stockholder approval,
may issue shares of Preferred Stock with voting and conversion rights which
could adversely affect the holders of shares of Common Stock. Upon
consummation of the Offering, there will be no shares of Preferred Stock
outstanding, and the Company has no present intention to issue any shares of
Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board of Directors to be divided
into three classes, as nearly equal in number as possible, serving staggered
terms. Approximately one-third of the Board of Directors will be elected each
year. See "Management." Under the Delaware General Corporation Law, directors
serving on a classified board can only be removed for cause. The provision for
a classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board of Directors
until the second annual stockholders meeting following the date the acquiror
obtains the controlling stock interest. The classified board provision could
have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company and could
increase the likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws
provides that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors or by the Chief Executive Officer of the Company.
Stockholders will not be permitted to call a special meeting or to require the
Board of Directors to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board of
Directors.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board of Directors or by a stockholder who was a stockholder
of record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board of Directors the power to
approve or disapprove stockholder nominations of candidates or proposals
regarding other business to be conducted at a special or annual meeting, the
By-laws may have the effect of precluding the conduct of certain business at a
meeting if the proper procedures are not followed or may discourage or defer a
potential acquiror from conducting a solicitation of proxies to elect its own
slate of directors or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 80% of the total votes eligible to be cast in the election
of directors is required to amend, alter, change or repeal certain of their
provisions. This requirement of a super-majority vote to approve amendments to
the Restated Certification of Incorporation and By-laws could enable a
minority of the Company's stockholders to exercise veto power over any such
amendments.
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CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "business combination" provisions of Section 203 of the Delaware General
Corporation Law. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless (i)
the transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b)
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date
the "business combination" is approved by the Board of Directors and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the "interested stockholder."
A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In
general, an "interested stockholder" is a person or entity who, together with
affiliates and associates, owns (or within three years, did own) 15% or more
of a corporation's voting stock. The statute could prohibit or delay mergers
or other takeover or change in control attempts with respect to the Company
and, accordingly, may discourage attempts to acquire the Company. See "Risk
Factors--Certain Anti-Takeover Effects."
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate of Incorporation will provide that the Company shall
indemnify Directors and officers of the Company to the fullest extent
permitted by such law. The Company anticipates entering into indemnification
agreements with its current Directors and executive officers prior to the
completion of the Offering and any new Directors or executive officers
following such time.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
On July 1, 1997 (the "Borrowing Date"), the Company and its subsidiaries
(collectively, the "Borrowers") entered into a credit agreement (as amended,
the "Credit Facility") with First Union Commercial Corporation, as agent, and
certain other financial institutions. The Credit Facility provides for a
revolving credit facility (with a letter of credit subfacility not to exceed
$1.0 million) to the Borrowers for up to $140.0 million of revolving loans
(based on calculation of a borrowing base which is based on a percentage of
eligible receivables, eligible parts and supplies inventory, eligible rental
equipment and eligible new equipment). Subject to certain restrictions, the
Credit Facility may be used to finance future acquisitions and capital
expenditures and for ongoing working capital and general corporate purposes of
the Company. Outstanding revolving loans under the Credit Facility must be
repaid on the fifth anniversary of the Borrowing Date. Revolving loans made
pursuant to the Credit Facility may be borrowed, repaid and reborrowed,
without premium or penalty, from time to time until the fifth anniversary of
the Borrowing Date, subject to the satisfaction of certain conditions on the
date of any such borrowing. At the Borrowers' option, the interest rate per
annum applicable to the loans under the
53
<PAGE>
Credit Facility will be a fluctuating rate of interest measured by reference
to one or a combination (at the Company's election) of the following: (i) the
Base Rate (as defined in the Credit Facility), plus the applicable borrowing
margin, or (ii) the relevant Eurodollar Rate (as defined in the Credit
Facility), plus the applicable borrowing margin. The applicable borrowing
margin under the Credit Facility will range from 0.50% to 1.25% for Base Rate-
based borrowings and 2.00% to 2.75% for Eurodollar Rate-based borrowings. Both
Base Rate and Eurodollar Rate interest on the Credit Facility are determined
quarterly based on the ratio of Consolidated Funded Indebtedness (as defined
in the Credit Facility) to Consolidated EBITDA (as defined in the Credit
Facility). The Borrowers have agreed to pay certain fees in connection with
the Credit Facility, including (i) letter of credit fees, (ii) agency and
lender's fees and (iii) unused line fees. Unused line fees are payable monthly
at a rate per annum ranging from 0.375% to 0.50% on the undrawn amounts of the
revolving loan commitment under the Credit Facility based on the Leverage
Ratio (as defined in the Credit Facility) of the Company and its subsidiaries.
As of March 31, 1998, the Company was in default under the Credit Facility
with respect to its interest/rental expense to senior debt covenant. This
covenant was eliminated pursuant to an amendment to the Credit Facility that
was entered into in April 1998.
NEW CREDIT FACILITY
On June 30, 1998, the Company entered into a commitment letter (the
"Commitment Letter") with First Union National Bank and First Union Capital
Markets (collectively "First Union") with respect to a new $325.0 million
senior credit facility (the "New Credit Facility") to replace the Credit
Facility. The New Credit Facility will provide to the Company (i) a $100.0
million term loan and (ii) up to $225.0 million of revolving loans (with a
letter of credit subfacility not to exceed $25.0 million), subject to
availability based on certain financial tests including a borrowing base. The
New Credit Facility will be secured by a pledge of the stock of the Company's
subsidiaries and a pledge of all of the Company's and its subsidiaries' other
assets. Subject to certain restrictions, the New Credit Facility will be used
to refinance indebtedness under the Credit Facility, to finance the
acquisition of Falconite, to finance other permitted acquisitions and for
working capital and other general corporate purposes. The New Credit Facility
will terminate and all amounts outstanding will become due and payable in full
five years from the date upon which definitive documentation with respect to
the New Credit Facility is executed. At the Company's option, the interest
rate per annum applicable to the loans under the New Credit Facility will be a
fluctuating rate of interest measured by reference to one or a combination of
the following: (i) the Base Rate (as defined in the Commitment Letter), plus
the applicable borrowing margin or (ii) the relevant LIBOR Rate (as defined in
the Commitment Letter), plus the applicable borrowing margin. The applicable
borrowing margin under the New Credit Facility will range from 0.00% to 1.25%
for Base Rate-based borrowings and 1.25% to 2.50% for LIBOR Rate-based
borrowings. Both Base Rate and LIBOR Rate interest on the New Credit Facility
will be determined quarterly based on the ratio of Total Funded Debt (as
defined in the Commitment Letter) to EBITDA (as defined in the Commitment
Letter). The Company will be obligated to pay certain fees in connection with
the New Credit Facility, including (i) letter of credit fees, (ii) agency and
lender's fees and (iii) unused line fees. Unused line fees will be payable
quarterly at a rate per annum ranging from 0.3125% to 0.50% on the undrawn
amounts of the revolving loan commitment under the New Credit Facility based
on the ratio of Total Funded Debt to EBITDA. The New Credit Facility is
expected to close concurrently with the Offering and the Offering is
conditioned on consummation of the New Credit Facility.
SENIOR SUBORDINATED NOTES
On November 25, 1997, the Company issued $100.0 million aggregate principal
amount of 10% Senior Subordinated Notes due 2004 (the "Old Notes") and related
guarantees pursuant to an Indenture (the "Indenture") dated November 25, 1997,
as supplemented, among the Company, the subsidiary guarantors identified
therein and Harris Trust and Savings Bank, as trustee (the "Note Offering").
The Company has filed a registration statement with the Commission to register
under the Securities Act notes (the "Notes" and, together with the Old Notes,
the "Notes") and related guarantees to be issued in exchange for the Old
Notes. The Notes are general unsecured obligations of the Company,
subordinated in right of payment to all current and future Senior Debt (as
defined in the Indenture). The Notes mature on November 30, 2004. Cash
interest accrues on the Notes at a rate of 10% and is payable semi-annually on
May 30 and November 30 of each year, commencing on May 30, 1998. Pursuant to
the terms of a registration rights agreement the Company executed in
connection with
54
<PAGE>
the offering of the Old Notes, the Company has been paying, and will continue
to pay, additional interest on the Old Notes from April 24, 1998 until the
date such registration statement is declared effective by the Commission. Such
additional interest has accrued and will continue to accrue in an amount equal
to $5,000 per week for the 90-day period beginning April 24, 1998 and will
continue to accrue in an amount increasing by an additional $5,000 per week at
the beginning of each subsequent 90-day period (up to a maximum of $50,000 per
week) until such registration statement is declared effective by the
Commission.
After November 30, 2001, the Notes are redeemable at the Company's option,
in whole or in part, at the prices set forth in the Indenture plus accrued and
unpaid interest, if any, to the redemption date. The Company may also redeem
up to 33% of the Notes on or prior to November 25, 2000 with the net cash
proceeds of a public offering of common stock of the Company. In addition, at
any time on or prior to November 30, 2001, the Company may redeem the Notes
upon the occurrence of or in connection with a Change of Control (as defined
in the Indenture).
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company expects to have 22,405,279
shares of Common Stock outstanding. Of these shares, the 6,000,000 shares of
Common Stock (6,900,000 shares if the Underwriters' over-allotment option is
exercised in full) sold in the Offering will be freely tradeable without
restriction or further registration under the Securities Act, except any such
shares which may be acquired by an "affiliate" of the Company. Under the
Lockup Agreements, the Company and the holders of the remaining outstanding
shares of Common Stock have agreed not to sell, offer to sell, solicit an
offer to buy, contract to sell, grant any option to purchase, or otherwise
transfer or dispose of, any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock, other than
the shares subject to the Underwriters' over-allotment option, without the
prior written consent of Salomon Smith Barney, for a period of 180 days after
the date of this Prospectus, subject to certain limited exceptions. No
prediction can be made as to the effect, if any, that market sales of shares
or the availability of such shares for future sale will have on the market
price of shares of Common Stock prevailing from time to time. The prevailing
market price of the Common Stock after the Offering could be adversely
affected by future sales of substantial amounts of Common Stock by existing
stockholders or the perception that such sales may occur. See "Certain
Relationships and Transactions," "Principal Stockholders" and "Underwriting."
Shares of Common Stock held by affiliates and restricted securities (as
defined in Rule 144) may not be sold unless they are registered under the
Securities Act or are sold pursuant to an applicable exemption from
registration, including the exemption from registration set forth in Rule 144.
Generally, Rule 144 will permit an affiliate or a person who has held
restricted securities for more than one year to sell within any three-month
period a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly trading volume of
such stock during the four calendar weeks preceding such sale, provided that
the Company has either filed certain periodic reports with the Commission or
made publicly available certain information concerning it and provided that
such sales are made in normal "brokers' transactions" or in transactions
directly with a "market maker" without the solicitation of buy orders by the
brokers or such affiliates. A person who is deemed not to be an affiliate of
the Company at any time during the three months preceding a sale and who has
held restricted securities for more than two years may sell such shares under
Rule 144 without regard to the volume limitations described.
The existing stockholders of the Company have certain registration rights
described under "Certain Relationships and Transactions--Registration
Agreement."
The Common Stock has been approved for trading on the New York Stock
Exchange under the symbol "NSV," subject to official notice of issuance.
55
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated , 1998, each of the underwriters named below (the
"Underwriters"), for whom Smith Barney Inc., William Blair & Company, L.L.C.,
Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Montgomery Securities LLC are acting as
the Representatives (the "Representatives"), has severally agreed to purchase,
and the Company has agreed to sell to each Underwriter, shares of Common Stock
which equal the number of shares set forth opposite the name of such
Underwriter below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Smith Barney Inc.........................................
William Blair & Company, L.L.C...........................
Credit Suisse First Boston Corporation...................
Donaldson, Lufkin & Jenrette Securities Corporation......
NationsBanc Montgomery Securities LLC....................
---------
Total................................................ 6,000,000
=========
</TABLE>
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the public offering price set forth on the
cover page of this Prospectus and part to certain dealers at a price that
represents a concession not in excess of $ per share below the public
offering price. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of $ per share to the other Underwriters or to
certain other dealers. After the initial public offering, the public offering
price and such concessions may be changed by the Underwriters. The
Representatives have advised the Company that the Underwriters do not intend
to confirm any sales to accounts over which they exercise discretionary
authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 900,000 additional
shares of Common Stock at the public offering price set forth on the cover
page of this Prospectus less underwriting discounts and commissions. The
Underwriters may exercise such option to purchase additional shares solely for
the purpose of covering over-allotments, if any, incurred in connection with
the sale of the shares offered hereby. To the extent such option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares set forth opposite such Underwriter's name in the preceding
table bears to the total number of shares in such table.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The Company and the holders of the remaining outstanding shares of Common
Stock have agreed not to sell, offer to sell, solicit an offer to buy,
contract to sell, grant any option to purchase, or otherwise transfer or
dispose of, any shares of Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, other than the shares subject to
the Underwriters' over-allotment option, without the prior written consent of
Salomon Smith Barney, for a period of 180 days after the date of this
Prospectus, subject to certain limited exceptions.
56
<PAGE>
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock included in the Offering has been determined by negotiations
between the Company and the Representatives. Among the factors considered in
determining such price were the history of and prospects for the Company's
business and the industry in which it competes, an assessment of the Company's
management and the present state of the Company's development, the past and
present revenues and earnings of the Company, the prospects for growth of the
Company's revenues and earnings, the current state of the economy in the
United States, the current level of economic activity in the industry in which
the Company competes and in related or comparable industries, and currently
prevailing conditions in the securities markets, including current market
valuations of publicly traded companies which are comparable to the Company.
In connection with the Offering and in compliance with applicable law, the
Underwriters may overallot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appears above) and
may effect transactions that stabilize, maintain or otherwise affect the
market price of the Common Stock at levels above those which might otherwise
prevail in the open market. Such transactions may include placing bids for the
Common Stock or effecting purchases of the Common Stock for the purpose of
pegging, fixing or maintaining the price of the Common Stock or for the
purpose of reducing a syndicate short position created in connection with the
Offering. A syndicate short position may be covered by exercise of the option
described above in lieu of or in addition to open market purchases. In
addition, the contractual arrangements among the Underwriters include a
provision whereby, if Smith Barney Inc. purchases Common Stock in the open
market for the account of the underwriting syndicate and the securities
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Stock in question at the cost price
to the syndicate or may recover from (or decline to pay) the Underwriter or
selling group member in question the selling concession applicable to the
securities in question. The Underwriters are not required to engage in any of
these activities and any such activities, if commenced, may be discontinued at
any time.
Smith Barney Inc. and Salomon Brothers Inc have provided investment banking
services and financial advisory services to the Company in the past, including
acting as initial purchasers in the Company's offering of Notes in November
1997, for which Smith Barney Inc. and Salomon Brothers Inc received usual and
customary fees. The Underwriters may, in the future, provide investment
banking services to the Company, for which they will receive compensation.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has provided
investment banking services and financial advisory services to Falconite in
the past and is acting as Falconite's financial advisor in connection with the
sale of Falconite. In connection therewith, DLJ will receive usual and
customary compensation.
Of the shares of Common Stock offered hereby, 300,000 shares have been
reserved (the "Reserved Shares") for sale to certain individuals, including
employees of the Company and members of their families. The Reserved Shares
will be sold at a price per share equal to the public offering price set forth
on the cover page of this Prospectus. The number of shares available to the
general public will be reduced to the extent those persons purchased Reserved
Shares. Any shares not so purchased will be offered in the Offering at the
public offering price set forth on the cover page of this Prospectus.
EXPERTS
The consolidated financial statements of National Equipment Services, Inc.
as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and
the period from inception (June 4, 1996) through December 31, 1996 included in
this Prospectus have been included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The financial statements of Aerial Platforms, Inc. as of January 31, 1997
and February 17, 1997 and for the year ended January 31, 1997 and the
seventeen days ended February 17, 1997 included in this Prospectus have
57
<PAGE>
been included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Lone Star Rentals, Inc. as of December 31, 1995
and 1996 and March 16, 1997 and for each of the two years in the period ended
December 31, 1996 and for the period from January 1, 1997 through March 16,
1997 included in this Prospectus have been included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of BAT Rentals, Inc. as of December 31, 1995 and
1996 and March 31, 1997 and for each of the two years in the period ended
December 31, 1996 and for the three months ended March 31, 1997 included in
this Prospectus have been included in reliance on the report of Price
Waterhouse LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
The financial statements of Sprintank and Sprintank Mobile Storage
(divisions of Sprint Industrial Services, Inc.) as of December 31, 1995 and
1996 and June 30, 1997 and for each of the two years in the period ended
December 31, 1996 and for the six months ended June 30, 1997 included in this
Prospectus have been included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts
in auditing and accounting.
The financial statements of MST Enterprises, Inc. d/b/a Equipco Rentals and
Sales as of October 31, 1995 and 1996 and as of July 17, 1997 and for each of
the two years in the period ended October 31, 1996 and for the period from
November 1, 1996 through July 17, 1997 included in this Prospectus have been
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Work Safe Supply Co., Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997 included in this Prospectus have been included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Genpower Pump & Equipment, Inc. as of December
31, 1997 and for the year then ended included in this Prospectus have been
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Albany Ladder Company, Inc. as of December 31,
1997 and for the year then ended included in this Prospectus have been
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Dragon Rentals (a wholly owned division of The
Modern Group, Inc.) as of December 31, 1996 and 1997 and for the years then
ended included in this Prospectus have been included in reliance on the report
of Lawrence, Blackburn Meek Maxey & Co. P.C., independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Cormier Equipment Corporation as of December 31,
1996 and 1997 and for the three years ended December 31, 1997 included in this
Prospectus have been included in reliance on the report of Albin, Randall &
Bennett, Certified Public Accountants, given on the authority of said firm as
experts in auditing and accounting.
The consolidated financial statements of Falconite, Inc. and subsidiaries as
of December 31, 1997 and for the year then ended included in this Prospectus
have been included in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
58
<PAGE>
The consolidated financial statements of Falconite, Inc. and subsidiaries as
of December 31, 1996 and for each of the years in the two-year period ended
December 31, 1996 included in this Prospectus have been included in reliance
on the report of KPMG Peat Marwick L.L.P., independent accountants, given on
the authority of said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kirkland & Ellis, Chicago, Illinois (a partnership which includes
professional corporations). Certain legal matters will be passed upon for the
Underwriters by Latham & Watkins, New York, New York.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the Common
Stock being offered in the Offering. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are
not necessarily complete; with respect to any such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. For further information about the Company and the securities
offered hereby, reference is made to the Registration Statement and to the
financial statements, schedules and exhibits filed as a part thereof.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file reports and other information with the Commission. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports
and other information filed by the Company with the Commission in accordance
with the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following regional
offices of the Commission: Seven World Trade Center, 13th Floor, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material or any part thereof may also be
obtained by mail from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates or accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
The Company, a corporation organized under the laws of Delaware, has its
principal executive offices located at 1800 Sherman Avenue, Evanston, Illinois
60201; its telephone number is (847) 733-1000.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
Financial Statements -- December 31, 1996, December 31, 1997 and March
31, 1998
Report of Independent Accountants...................................... F-3
Consolidated Balance Sheets............................................ F-4
Consolidated Statements of Operations.................................. F-5
Consolidated Statements of Cash Flows.................................. F-6
Consolidated Statements of Changes in Stockholders' Equity............. F-7
Notes to Consolidated Financial Statements............................. F-8
AERIAL PLATFORMS, INC.
Financial Statements -- January 31, 1997 and February 17, 1997
Report of Independent Accountants...................................... F-17
Balance Sheets......................................................... F-18
Statements of Operations............................................... F-19
Statements of Cash Flows............................................... F-20
Statements of Changes in Stockholder's Equity.......................... F-21
Notes to Financial Statements.......................................... F-22
LONE STAR RENTALS, INC.
Financial Statements -- December 31, 1995 and 1996 and March 16, 1997
Report of Independent Accountants...................................... F-27
Balance Sheets......................................................... F-28
Statements of Operations............................................... F-29
Statements of Cash Flows............................................... F-30
Statements of Changes in Stockholder's Equity.......................... F-31
Notes to Financial Statements.......................................... F-32
BAT RENTALS, INC.
Financial Statements -- December 31, 1995 and 1996 and March 31, 1997
Report of Independent Accountants...................................... F-38
Balance Sheets......................................................... F-39
Statements of Operations............................................... F-40
Statements of Cash Flows............................................... F-41
Statements of Changes in Stockholder's Equity.......................... F-42
Notes to Financial Statements.......................................... F-43
SPRINTANK AND SPRINTANK MOBILE STORAGE (DIVISIONS OF SPRINT INDUSTRIAL
SERVICES, INC.)
Financial Statements -- December 31, 1995 and 1996 and June 30, 1997
Report of Independent Accountants...................................... F-48
Balance Sheets......................................................... F-49
Statements of Operations............................................... F-50
Statements of Cash Flows............................................... F-51
Statements of Changes in Divisional Equity............................. F-52
Notes to Financial Statements.......................................... F-53
MST ENTERPRISES, INC. D/B/A EQUIPCO RENTALS AND SALES
Financial Statements -- October 31, 1995 and 1996 and July 17, 1997
Report of Independent Accountants...................................... F-58
Balance Sheets......................................................... F-59
Statements of Operations............................................... F-60
Statements of Cash Flows............................................... F-61
Statements of Changes in Stockholder's Equity.......................... F-62
Notes to Financial Statements.......................................... F-63
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
WORK SAFE SUPPLY CO., INC.
Consolidated Financial Statements -- December 31, 1995, 1996 and 1997
Report of Independent Accountants...................................... F-68
Consolidated Balance Sheets............................................ F-69
Consolidated Statements of Operations.................................. F-70
Consolidated Statements of Cash Flows.................................. F-71
Consolidated Statements of Changes in Stockholder's Equity............. F-72
Notes to Consolidated Financial Statements............................. F-73
GENPOWER PUMP & EQUIPMENT, INC.
Financial Statements -- December 31, 1997
Report of Independent Accountants...................................... F-77
Balance Sheet.......................................................... F-78
Statement of Operations................................................ F-79
Statement of Changes in Stockholder's Equity........................... F-80
Statement of Cash Flows................................................ F-81
Notes to Financial Statements.......................................... F-82
CORMIER EQUIPMENT CORPORATION
Financial Statements -- December 31, 1995, 1996 and 1997
Independent Auditors' Report........................................... F-87
Balance Sheets......................................................... F-88
Statements of Earnings and Retained Earnings........................... F-89
Statements of Cash Flows............................................... F-90
Notes to Financial Statements.......................................... F-91
DRAGON RENTALS (DIVISION OF THE MODERN GROUP, INC.)
Financial Statements -- December 31, 1996 and 1997
Report of Independent Accountants...................................... F-93
Balance Sheets......................................................... F-94
Statements of Income and Expenses...................................... F-95
Statements of Cash Flows............................................... F-96
Notes to Financial Statements.......................................... F-97
ALBANY LADDER COMPANY, INC.
Financial Statements -- December 31, 1997
Report of Independent Accountants...................................... F-102
Balance Sheet.......................................................... F-103
Statement of Operations................................................ F-104
Statement of Cash Flows................................................ F-105
Statement of Changes in Stockholder's Equity........................... F-106
Notes to Financial Statements.......................................... F-107
FALCONITE, INC. AND SUBSIDIARIES
Consolidated Financial Statements--December 31, 1995, 1996, 1997 and
March 31, 1998
Reports of Independent Accountants..................................... F-111
Consolidated Balance Sheets............................................ F-113
Consolidated Statements of Income...................................... F-114
Consolidated Statements of Shareholders' Equity........................ F-115
Consolidated Statements of Cash Flows.................................. F-116
Notes to Consolidated Financial Statements............................. F-117
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Financial Statements............... F-129
Unaudited Pro Forma Statements of Operations........................... F-130
Unaudited Pro Forma Balance Sheet...................................... F-133
Notes to Unaudited Pro Forma Financial Statements...................... F-134
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity, present fairly, in all material respects, the financial
position of National Equipment Services, Inc. and subsidiaries at December 31,
1996 and December 31, 1997, and the results of its operations and its cash
flows for the period from inception (June 4, 1996) through December 31, 1996
and the year ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
April 1, 1998
F-3
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31,
DECEMBER 31, DECEMBER 31, MARCH 31, 1998
1996 1997 1998 (NOTE 14)
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents... $ 12 $ 35,682 $ 3,773 $ 3,773
Accounts receivable, net of
allowance for doubtful
accounts of $0, $254, $737
and $737, respectively..... -- 8,356 24,095 24,095
Inventory, net.............. -- 2,239 7,158 7,158
Rental equipment, net....... -- 46,801 104,937 104,937
Property and equipment, net. 17 3,012 6,968 6,968
Intangible assets, net...... -- 27,937 86,888 86,888
Loan origination costs, net. -- 6,270 6,139 6,139
Prepaid and other assets,
net........................ 187 840 2,345 2,345
----- -------- -------- --------
Total assets.............. $ 216 $131,137 $242,303 $242,303
===== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Accounts payable............ $ -- $ 2,489 $ 9,647 $ 9,647
Accrued interest............ -- 1,066 3,904 3,904
Accrued expenses and other
liabilities................ 110 2,327 7,938 7,938
Debt........................ -- 98,782 193,954 193,954
----- -------- -------- --------
Total liabilities......... 110 104,664 215,443 215,443
Commitments and contingencies
(Note 10)
STOCKHOLDERS' EQUITY:
Class A Common stock, $0.01
par, 50,000 shares
authorized, 0, 25,011,
25,221 and 0, respectively,
shares issued and
outstanding................. -- 1 1 --
Class B Common stock, $0.01
par, 150,000 shares
authorized, 30,108, 89,900,
90,100 and 0, respectively,
shares issued and
outstanding................. 1 1 1 --
Common stock, $0.01 par
value, 100,000,000 shares
authorized, 16,127,501
shares issued and
outstanding................. -- -- -- 161
Additional paid-in capital... 301 25,663 25,911 25,752
Retained earnings
(accumulated deficit)....... (195) 910 1,049 1,049
Stock subscriptions
receivable.................. (1) (102) (102) (102)
----- -------- -------- --------
Total stockholders'
equity................... 106 26,473 26,860 26,860
----- -------- -------- --------
Total liabilities and
stockholders' equity..... $ 216 $131,137 $242,303 $242,303
===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT NET INCOME PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JUNE 4,
1996) FOR THE FOR THE THREE
THROUGH YEAR ENDED MONTHS ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues............ $ -- $26,398 $1,276 $15,815
Rental equipment sales..... -- 4,186 93 1,742
New equipment sales and
other..................... -- 10,704 950 4,594
------ ------- ------ -------
Total revenues........... -- 41,288 2,319 22,151
------ ------- ------ -------
COST OF REVENUES:
Rental equipment
depreciation.............. -- 5,009 335 2,727
Cost of rental equipment
sales..................... -- 2,935 75 1,037
Cost of new equipment
sales..................... -- 4,872 306 2,187
Other operating expenses... -- 12,899 760 7,549
------ ------- ------ -------
Total cost of revenues... -- 25,715 1,476 13,500
------ ------- ------ -------
Gross profit................ -- 15,573 843 8,651
Selling, general and
administrative expenses.... 333 7,910 783 4,531
Non-rental depreciation and
amortization............... 3 1,476 88 807
------ ------- ------ -------
Operating income (loss)..... (336) 6,187 (28) 3,313
Other income (expense), net. -- 72 -- 77
Interest income (expense),
net........................ 4 (4,336) (262) (3,100)
------ ------- ------ -------
Income (loss) before income
taxes...................... (332) 1,923 (290) 290
Income tax expense
(benefit).................. (137) 818 (135) 151
------ ------- ------ -------
Net income (loss)........... $ (195) $ 1,105 $ (155) $ 139
====== ======= ====== =======
Historical net income per
share (unaudited):
Basic...................... $(0.05) $ 0.09 $(0.02) $ 0.01
Diluted.................... $(0.05) $ 0.08 $(0.01) $ 0.01
Historical weighted average
shares outstanding
(unaudited):
Basic...................... 4,185 12,337 9, 611 12,079
Diluted.................... 4,185 14,124 11,222 16,079
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
INCEPTION
(JUNE 4, FOR THE FOR THE
1996) YEAR THREE MONTHS
THROUGH ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........... $(195) $ 1,105 $ (155) $ 139
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization.............. 3 6,892 423 3,809
Gain on sale of equipment.. -- (1,446) (18) (719)
Changes in operating assets
and liabilities:
Accounts receivable....... -- (1,335) 111 (737)
Inventory................. -- 202 (173) (413)
Prepaid and other assets.. (187) 139 (344) (795)
Accounts payable.......... -- 1,620 (604) 3,229
Accrued expenses and other
liabilities.............. 110 201 330 3,148
----- --------- -------- ---------
Net cash provided by (used
in) operating activities... (269) 7,378 (430) 7,661
----- --------- -------- ---------
INVESTING ACTIVITIES:
Net cash paid for
acquisitions............... -- (68,910) (22,305) (110,086)
Purchases of rental
equipment.................. -- (15,336) (853) (12,385)
Proceeds from sale of rental
equipment.................. -- 4,186 93 1,742
Purchases of property and
equipment.................. (20) (1,473) (122) (159)
Proceeds from sale of
property and equipment..... -- 36 -- 16
----- --------- -------- ---------
Net cash used in investing
activities................. (20) (81,497) (23,187) (120,872)
----- --------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term
debt....................... -- 222,307 19,786 81,154
Payments on long-term debt.. -- (131,119) -- --
Net proceeds from sales of
common stock............... 301 25,263 6,479 248
Payments of loan origination
costs...................... -- (6,662) (396) (100)
----- --------- -------- ---------
Net cash provided by
financing activities....... 301 109,789 25,869 81,302
----- --------- -------- ---------
Net increase (decrease) in
cash and cash equivalents.. 12 35,670 2,252 (31,909)
Cash and cash equivalents at
beginning of period........ -- 12 12 35,682
----- --------- -------- ---------
Cash and cash equivalents at
end of period.............. $ 12 $ 35,682 $ 2,264 $ 3,773
===== ========= ======== =========
SUPPLEMENTAL NON-CASH FLOW
INFORMATION:
Cash paid for interest...... $ -- $ 2,707 $ -- $ --
===== ========= ======== =========
Cash paid for income taxes.. $ -- $ 1,113 $ -- $ --
===== ========= ======== =========
Non cash issuance of stock.. $ 1 $ 101 $ -- $ --
===== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------- ADDITIONAL EARNINGS STOCK TOTAL
CLASS A CLASS B PAID-IN (ACCUMULATED SUBSCRIPTIONS STOCKHOLDERS'
SHARES SHARES CAPITAL DEFICIT) RECEIVABLE EQUITY
------- ------- ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued at
inception
(June 4, 1996)......... $ -- $ 1 $ 301 $ -- $ (1) $ 301
Net loss................ -- -- -- (195) -- (195)
---- --- ------- ------ ----- -------
Balance at December 31,
1996................... -- 1 301 (195) (1) 106
Sale of shares.......... 1 -- 25,362 -- (101) 25,262
Net income.............. -- -- -- 1,105 -- 1,105
---- --- ------- ------ ----- -------
Balance at December 31,
1997................... 1 1 25,663 910 (102) 26,473
---- --- ------- ------ ----- -------
Sale of shares
(unaudited)............ -- -- 248 -- -- 248
Net income (unaudited).. -- -- -- 139 -- 139
---- --- ------- ------ ----- -------
Balance at March 31,
1998 (unaudited)....... $ 1 $ 1 $25,911 $1,049 $(102) $26,860
==== === ======= ====== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Equipment Services, Inc. ("NES") was organized on June 4, 1996
under the laws of Delaware for the purpose of owning and operating equipment
rental facilities by means of acquiring existing businesses. NES is primarily
involved in the rental of equipment to construction and industrial users. NES
operates from locations in Alabama, Georgia, Louisiana, Nevada, Texas and
Virginia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of NES and its
subsidiaries. All intercompany transactions and balances have been eliminated.
FINANCIAL STATEMENT PRESENTATION
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.
INTERIM FINANCIAL DATA
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair statements of financial position and
results of operations for the interim periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less.
INVENTORY
NES's inventories primarily consist of parts and new equipment held for
sale. Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at invoice cost. Depreciation for rental
equipment acquired is computed using the straight-line method over 5 to 15
year useful lives with no salvage value. Accumulated depreciation on rental
equipment was $4,763,000 at December 31, 1997.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
The estimated useful lives for property and equipment range from 5 to 7
years for machinery and equipment, 5 to 7 years for furniture and fixtures and
3 to 5 years for vehicles.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
F-8
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Since inception, NES adopted Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the assets' carrying amounts and related goodwill exceed the
undiscounted cash flows estimated to be generated by those assets. SFAS No.
121 also requires impairment losses to be recorded when the carrying amount of
long-lived assets that are expected to be disposed of exceeds their fair
values, net of disposal costs. SFAS No. 121 did not have a material impact on
NES's financial position or results of operations the period from inception
(June 4, 1996) through December 31, 1996 or year ended December 31, 1997.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings per Share." For the company, SFAS No. 128 will be
effective for the year ended December 31, 1997. SFAS No. 128 simplifies the
standards required under current accounting rules for computing earnings per
share and replaces the presentation of primary earnings per share and fully
diluted earnings per share with a presentation of basic earnings per share
("basic EPS") and diluted earnings per share ("diluted EPS"). Basic EPS
excludes dilution and is determined by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution that could
occur if securities and other contracts to issue common stock were exercised
or converted into common stock. Diluted EPS is computed similarly to fully
diluted earnings per share under current accounting rules. The implementation
of SFAS No. 128 is calculated based on the Company's net income (loss) as
presented on its statement of operations and based on share amounts after
giving effect to the Company's planned exchange of Class A and Class B into
newly established common stock and the split of such shares described in Note
14 and summarized below:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 4, 1996) FOR THE FOR THE THREE MONTHS
THROUGH YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
-------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).......... $ (195) $ 1,105 $ (155) $ 139
====== ======= ======= =======
Weighted average shares of
Class A Common and Class B
Common.................... 30 101 81 115
Basic weighted average
shares:
Total Common Shares after
giving effect to (i) the
exchange of Class A
Common and Class B Common
and (ii) the split....... 4,185 12,337 9,611 12,079
Effect of dilutive
securities
Unvested stock............ -- 1,787 1,611 4,000
------ ------- ------- -------
Diluted weighted average
shares.................... 4,185 14,124 11,222 16,079
====== ======= ======= =======
Basic EPS.................. $(0.05) $ 0.09 $ (0.02) $ 0.01
====== ======= ======= =======
Diluted EPS................ $(0.05) $ 0.08 $ (0.01) $ 0.01
====== ======= ======= =======
</TABLE>
Options to purchase 880,000 shares of Common Stock at the initial public
offering price will be granted to certain members of management prior to
consummation of the Company's initial public offering. The options will vest
over five years from the grant date and will expire ten years from the grant
date. The options were not included in the computation of diluted EPS because
the exercise price of the options equals the market price of the Common Stock
on the date of grant.
F-9
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share presented below was computed under SFAS No. 128
"Earnings per Share" based on the weighted average number of common shares
outstanding during the period after giving retroactive effect to the exchange
of the Company's Class A and Class B common stock to the Company's newly
established common stock, the split of the Company's newly established common
stock, the Company's planned initial public offering of common stock and the
conversion of the Falconite 8% convertible subordinated promissory notes
described in Notes 13 and 14. All common shares and stock options issued have
been included as outstanding for the entire period using the treasury stock
method and the estimated public offering price per share.
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Pro forma net income per share (unaudited):
Basic.............................................. $ 0.33 $ 0.00
Diluted............................................ $ 0.31 $ 0.00
Pro forma weighted average shares outstanding
(unaudited):
Basic.............................................. 21,106 21,366
Diluted............................................ 22,405 22,405
</TABLE>
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The Statement
requires 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. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The
adoption of SFAS No. 130 in the first quarter of 1998 had no impact as the
Company had no items of other comprehensive income in any period presented.
INTANGIBLE ASSETS
Intangible assets consist of the excess cost over acquired net assets
("goodwill") which has been capitalized and is being amortized on a straight
line basis over 40 years. Whenever events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable, NES reviews the
carrying value of goodwill for impairment based on the undiscounted operating
cash flows of the related business unit. Accumulated amortization on goodwill
was $445,000, at December 31, 1997. Non-compete agreements are stated at cost
and amortized over the lives of the agreements.
LOAN ORIGINATION COSTS
Loan origination costs are stated at cost and amortized to interest expense
using the effective interest method over the life of the loan. Amortization
expense related to loan origination costs aggregated $392,000 for the year
ended December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
trade 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 the Senior Subordinated Notes is based on
quoted market prices and approximates the carrying value at December 31, 1997.
The carrying value of bank debt approximates fair value as the interest on the
bank debt is reset every 30 to 90 days to reflect current market rates.
F-10
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject NES to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and NES's geographic dispersion. NES performs credit evaluations of
its customers' financial condition and generally does not require collateral
on accounts receivable. NES maintains an allowance for doubtful accounts on
its receivables based upon expected collectibility. Allowance for doubtful
accounts was $0 and $254,000 at December 31, 1996 and December 31, 1997,
respectively.
RENTAL REVENUES
Rental revenues are recognized ratably over the lease term. Sales revenues
are recognized at the point of delivery.
INCOME TAXES
Provisions are made to record deferred income taxes in recognition of items
reported differently for financial reporting purposes than for federal and
state income tax purposes. NES records deferred income taxes using the
liability method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." The Company and its
subsidiaries will file a consolidated tax return for the year ending December
31, 1997.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, NES has participated in certain
transactions with related parties.
2. ACQUISITIONS
In 1997, NES purchased the following rental equipment companies:
<TABLE>
<CAPTION>
ACQUISITION DATE COMPANY LOCATION PURCHASE PRICE
- ---------------- -------------------------------------- ---------------- --------------
<S> <C> <C> <C>
January 6, 1997......... Brazos Rental & Tool, Inc., Industrial
Crane Maintenance Systems, Inc.
and Safe Load Work Products, Inc. Brazoria, TX $ 5,000,000
February 18, 1997....... Aerial Platforms, Inc. Atlanta, GA $ 4,150,000
March 17, 1997.......... Lone Star Rentals, Inc. Houston, TX $10,950,000
April 1, 1997........... BAT Rentals, Inc. Las Vegas, NV $15,900,000
July 1, 1997............ Sprintank Houston, TX $25,300,000
July 18, 1997........... MST Enterprises, Inc. Harrisonburg, VA $ 6,000,000
</TABLE>
The purchase prices above are subject to a customary purchase price
adjustment mechanism and assumption of certain seller liabilities.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions had been
completed on January 1, 1996 and January 1, 1997, after giving effect to
certain adjustments including increased depreciation and amortization of
property and equipment and other assets and interest expense for acquisition
debt. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which would
have been achieved had these acquisitions been completed as of these dates,
nor are the results indicative of NES's future results of operations.
F-11
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................................... $48,040 $56,858
Operating income............................... 9,012 10,382
Net income..................................... 158 1,143
</TABLE>
3. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
-------------
<S> <C>
New equipment............................................... $1,127
Parts....................................................... 1,200
Contractor supplies......................................... 382
Other....................................................... 20
------
2,729
Less: reserve............................................... (490)
------
$2,239
======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements.......................... $-- $ 190
Machinery and equipment......................... 20 333
Furniture and fixtures.......................... -- 470
Vehicles........................................ -- 2,641
--- ------
20 3,634
Less: accumulated depreciation.................. (3) (622)
--- ------
$17 $3,012
=== ======
</TABLE>
Property and equipment depreciation expense aggregated $3,000 and $656,000
for the period from inception (June 4, 1996) through December 31, 1996 and the
year ended December 31, 1997, respectively.
5. INTANGIBLE ASSETS
Intangible assets consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Non-compete agreements....................................... $ 2,455
Goodwill..................................................... 26,253
Origination costs............................................ 48
-------
28,756
Less: accumulated amortization............................... (819)
-------
$27,937
=======
</TABLE>
Amortization expense aggregated $819,000 for the year ended December 31,
1997.
F-12
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Accrued salaries and benefits................... $110 $ 589
Sales tax payable............................... -- 244
Accrued income taxes............................ -- 333
Accrued property taxes.......................... -- 314
Other........................................... -- 847
---- ------
$110 $2,327
==== ======
</TABLE>
7. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Senior subordinated notes, interest at 10% payable semi-
annually, due November 30, 2004............................ $98,782
Revolving credit facility loans, interest at the federal
funds rate plus 0.5% or prime rate both plus 1.0%, or the
eurodollar rate plus 2.5%, due no later than July 1, 2002.. --
Term loan, interest at the federal funds rate plus 0.5% or
prime rate both plus 1.0%, or the eurodollar rate plus
2.5%, principal payments due quarterly of $625 through June
1, 1998, $875 through June 1, 1999 and $1,125 through June
1, 2001.................................................... --
-------
$98,782
=======
</TABLE>
On November 20, 1997, NES issued $100 million of Senior Subordinated Notes
(the "Notes") at a discount netting proceeds of $98,767,000. NES accretes the
original issue discount over the term of the Notes using the effective
interest method. The Notes mature on November 30, 2004. Interest on the Notes
accrues at a rate of 10% per year and is payable semi-annually in arrears on
May 30 and November 30 commencing on May 30, 1998.
The Notes are redeemable at the option of the Company at any time after
November 30, 2001 at a redemption price of 105% of the principal amount from
November 30, 2001 to November 29, 2002, at 102.5% from November 30, 2002 to
November 29, 2003 and 100% after November 30, 2003, plus accrued and unpaid
interest. The Company may at any time prior to November 30, 2000 on any one or
more occasions redeem up to 33% of the aggregate principal amount of the notes
at a redemption price of 110% or the principal amount plus accrued and unpaid
interest with the net cash proceeds of a public offering of common stock of
NES within 45 days of the closing of such public offering. In addition, at any
time prior to November 30, 2001, the Notes may be redeemed as a whole, at the
option of NES, upon the occurrence of or in connection with a change of
control. Upon certain changes in control, the noteholders will have the right
to require redemption at a cash price of 101% of the principal amount plus
accrued and unpaid interest.
All of the Company's wholly-owned subsidiaries make full, unconditional,
joint and several guarantees of the Notes. The separate financial statements
of each of these wholly-owned subsidiaries are not presented as management
believes they are not individually meaningful for presentation. The Company's
holding company has no operations separate from its investments in these
subsidiaries.
On July 1, 1997, NES entered into a credit facility agreement with First
Union Commercial Corporation (the "Credit Agreement"). The Credit Agreement
provides for a secured revolving line of credit of $100 million and a term
loan of $15 million. Interest accrues at rates of the greater of the annual
Federal Funds Rate plus 0.5% or the prime rate both plus 0.5% to 1.25% based
on NES's leverage ratio or at a rate of LIBOR/(1 - eurodollar
F-13
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reserve percentage). Principal payments for credit facility loans (to be
applied first to the term loan and if necessary to revolving loans) are due
annually at the lesser of 25% of excess cash flow or $1 million. Principal
payments for the term loan are due quarterly at $625,000 for the first four
quarters, $875,000 for the next four quarters and $1,125,000 for the next
eight quarters. Substantially all assets and stock of NES are pledged as
collateral for the credit facility. NES pays commitment fees of 0.375% to 0.5%
on the unused portion of the outstanding line of credit balance on NES's
leverage ratio. The term loan was repaid as of December 31, 1997.
The Indenture for the Notes and the Credit Agreement contain a number of
covenants that, among other things, require NES to maintain certain financial
ratios and set certain limitations on the granting of liens, asset sales,
additional indebtedness, transactions with affiliates, restricted payments,
investments and issuances of stock. NES is in compliance with all covenants.
The average interest rate for the year ended December 31, 1997 was 9.8%. NES
incurred interest expense of $76,000 on borrowings from related parties for
the year ended December 31, 1997.
8. INCOME TAXES
The income tax provision is comprised of current federal and state income
tax expense (benefit) of $(137,100) and $818,000 for the period from inception
(June 4, 1996) through December 31, 1996 and year ended December 31, 1997,
respectively. Deferred tax expense (benefit) for such periods has been
immaterial.
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate of 34% to
income before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 4, 1996) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- -------------
<S> <C> <C>
Federal income taxes......................... $(113) $654
State income taxes, net of federal benefit... (16) 94
Other........................................ (8) 70
----- ----
$(137) $818
===== ====
</TABLE>
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or credits are based on the changes in the deferred income tax assets or
liabilities from period to period.
Deferred taxes have been provided for the temporary differences between the
financial reporting bases and the tax bases of NES's assets and liabilities as
follows (in thousands):
<TABLE>
<S> <C>
Allowances for doubtful accounts.................................. $ 78
Inventory......................................................... 167
Non-compete agreements............................................ 83
Minimum tax credits............................................... 90
Installment sale income........................................... (23)
Property, plant and equipment..................................... (314)
Goodwill.......................................................... (153)
-----
$ (72)
=====
</TABLE>
9. COMMON STOCK
On June 4, 1996, in connection with the formation of NES, NES authorized
25,000 shares of Class A Common Stock (24,250 of which were reserved for
issuance to NES's majority stockholder), par value $0.01, and 150,000 shares
of Class B Common Stock (75,000 of which were reserved for issuance to NES's
majority stockholder), par value $0.01. On October 28, 1997, the authorized
shares of Class A Common Stock were increased to 50,000.
Each calendar quarter, each share of Class A Common is entitled to a yield
in the amount of 10% per year of the sum of such share's unreturned original
cost plus the unpaid yield for all prior quarters. As of December
F-14
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
31, 1997, the unpaid yield on the Class A Common aggregated $1,608,000. Class
A Common stockholders, as a class, are entitled to a number of votes equal to
10% of the number of votes allocable to all Common Stock. Upon any
distribution, Class A Common stockholders are entitled to (i) the unpaid
yield, (ii) any unreturned original cost of the shares and (iii) 10% of any
remaining distribution. Class B Common stockholders are entitled to 90% of any
remaining distribution after payment to the Class A Common stockholders of all
payments under clause (i) and (ii) set forth in the preceding sentence.
Additionally, only in the event of a successful initial public offering can
the Class A Common stockholders require a mandatory redemption of any or all
of the shares attributable to the unpaid yield and original cost of the
shares.
NES may not declare additional distributions or dividends other than the
amounts described above for Class A Common shares, issue any debt securities
containing equity features, sell or dispose of more than 5% of the
consolidated assets of the Company in any transaction or series of related
transactions, acquire an interest in a business, acquire a business outside of
the rental equipment industry, or enter into certain related party
transactions, without the consent of a majority of the Class A Common and
Class B Common stockholders.
Class B Common stock sold to executives of NES vests over a 5 year period.
Unpaid notes receivable of $1,000 and $102,000 as of December 31, 1996 and
December 31, 1997, respectively, from executives of NES for shares of Class B
Common stock are classified as stock subscriptions receivable.
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
NES leases certain facilities, office equipment and vehicles under operating
leases some of which contain renewal options. Rental expense was $660 for the
year ended December 31, 1997.
Future minimum rental commitments as of December 31, 1997 under
noncancelable operating leases are (in thousands):
<TABLE>
<S> <C>
1998............................................................... $ 842
1999............................................................... 567
2000............................................................... 507
2001............................................................... 483
2002............................................................... 181
Thereafter......................................................... 213
------
$2,793
======
</TABLE>
LEGAL MATTERS
NES is party to legal proceedings and potential claims arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of these matters will have no material adverse effect on NES's
financial position, results of operations or cash flows.
11. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing and 401(k) plan (the "Plan") in which
employees over 21 years of age with greater than one-half year of service are
eligible. Under the Plan, NES contributes a discretionary percentage (2.5% for
the year ended December 31, 1997) of each eligible employee's base annual
wages to a trust out of its net profits. In addition, eligible employees can
defer up to 15% of their salary with a partially matching contribution by NES
of 50% of the first 5% of the employee contribution. The employer
contributions vest over a five year period. Contributions by NES to the Plan
were $165,000 for year ended December 31, 1997.
12. RELATED PARTY TRANSACTIONS
Pursuant to a Professional Services Agreement dated January 6, 1997, NES
pays management fees of $200,000 per year and investment fees of 1% of all
debt and equity financings of NES to an affiliate of NES's majority
stockholder, who owns 95.0% of the Class A Common stock and 83% of the Class B
Common stock. Total fees paid during the year ended December 31, 1997 were
$417,000 and fees owed at December 31, 1997 were $630,000.
In connection with several of the acquisitions, NES entered into lease
agreements for certain facilities with employees of NES who were prior owners
of the acquired companies. Amounts due under these leases are included in the
future minimum rental commitments under noncancelable operating leases
schedule in Note 10 above.
F-15
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock subscriptions receivable of $1,000 and $102,000 as of December 31,
1996 and 1997, respectively, relate to notes due from officers of NES related
to purchases of Class B Common Stock and are secured by the purchased Class B
Common shares. Interest on the notes accrues at the federal funds rate and is
payable in full at maturity on June 4, 2006 or upon termination of employment.
Accrued interest on these notes was $0 and $8,000 for the period from
inception (June 4, 1996) through December 31, 1996 and the year ended December
31, 1997, respectively.
13. SUBSEQUENT EVENTS
Subsequent to year end, NES purchased the following rental equipment
companies:
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE COMPANY LOCATION PRICE
---------------- ------- -------- -----------
<C> <S> <C> <C>
January 12, 1998 Genpower Pump and Equipment
Co............................. Deer Park, TX $ 8,000,000
January 16, 1998 Eagle Scaffolding and Equipment
Co............................. Las Vegas, NV $ 3,290,000
January 23, 1998 Grand Hi-Reach, Inc............ Byron Center, MI $ 8,120,000
February 4, 1998 Work Safe Supply Company, Inc.. Grandville, MI $ 7,845,000
March 2, 1998 Dragon Rentals (division of The
Modern Group, Inc.)............ Beaumont, TX $23,000,000
March 4, 1998 Cormier Equipment Corporation.. Oakland, ME $27,500,000
March 30, 1998 Albany Ladder.................. Albany, NY $43,454,000
</TABLE>
The purchase prices above are subject to a customary purchase price
adjustment mechanism and assumption of certain seller liabilities. These
acquisitions will be accounted for under the purchase method based on the
purchase prices. Under the purchase method of accounting NES will allocate the
costs of these acquisitions, as of the respective closing dates, to the assets
acquired and liabilities assumed based on their respective fair values.
The operating results of these acquisitions will be included in NES's
consolidated results of operations from the date of acquisition. The following
pro forma financial information represents the unaudited pro forma results of
operations as if the aforementioned acquisitions had been completed on January
1, 1996 and January 1, 1997, after giving effect to certain adjustments
including increased depreciation and amortization of property and equipment
and intangible assets and interest expense for acquisition debt. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which would have been
achieved had these acquisitions been completed as of these dates, nor are the
results indicative of NES's future results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues........................................ $120,475 $146,000
Operating income................................ 19,234 26,821
Net income...................................... 751 5,439
</TABLE>
Additionally, subsequent to year end, NES entered into a definitive purchase
agreement to acquire Falconite, Inc., a rental equipment company with
operations in nine southern and midwestern states for $171.25 million and
$3.75 million of 8% convertible subordinated promissory notes. This pending
acquisition is planned to close in 1998 in connection with an initial public
offering of the Company's stock.
14. PRO FORMA BALANCE SHEET (UNAUDITED)
In connection with its initial public offering of common stock, the Company
announced its plan to exchange all of its Class A and Class B common stock for
newly established common stock. The Class A and Class B stock will be
converted into 116,025 shares of newly established common stock. Each share of
newly established common stock will then be split into 139 shares of common
stock. The effect of this exchange and split has been reflected in the
unaudited pro forma balance sheet.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Aerial
Platforms, Inc. and the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in stockholder's equity, present
fairly, in all material respects, the financial position of Aerial Platforms,
Inc. at January 31, 1997 and February 17, 1997, and the results of its
operations and its cash flows for the year ended January 31, 1997 and the
seventeen days ended February 17, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
November 4, 1997
F-17
<PAGE>
AERIAL PLATFORMS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
ASSETS:
Cash................................................. $ 213 $ 265
Accounts receivable, net............................. 666 654
Inventory............................................ 72 71
Prepaid and other assets............................. 31 57
Rental equipment, net................................ 1,758 1,752
Property and equipment, net.......................... 149 134
------ ------
Total assets....................................... $2,889 $2,933
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable..................................... $ 75 $ 137
Accrued expenses and other liabilities............... 108 133
Income taxes......................................... 148 142
Debt................................................. 1,243 1,214
------ ------
Total liabilities.................................. 1,574 1,626
Commitments and contingencies (Note 7)
Common stock, $0.01 par, 10,000 shares authorized, 500
shares issued and outstanding........................ 1 1
Paid-in capital....................................... -- --
Retained earnings..................................... 1,314 1,306
------ ------
Total stockholder's equity......................... 1,315 1,307
------ ------
Total liabilities and stockholder's equity......... $2,889 $2,933
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
AERIAL PLATFORMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVENTEEN
YEAR ENDED DAYS ENDED
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
REVENUES:
Rental revenues....................................... $3,385 $127
Rental equipment sales................................ 496 24
New equipment sales................................... 693 66
Other................................................. 172 16
------ ----
Total revenues...................................... 4,746 233
------ ----
COST OF REVENUES:
Rental equipment expenses............................. 697 41
Rental equipment depreciation......................... 257 15
Cost of rental equipment sales........................ 184 19
Cost of new equipment sales........................... 569 59
Direct operating expenses............................. 665 35
------ ----
Total cost of revenues.............................. 2,372 169
------ ----
Gross profit........................................... 2,374 64
Selling, general and administrative expenses........... 1,302 64
Non-rental depreciation and amortization............... 74 8
------ ----
Operating (loss) income................................ 998 (8)
Interest income (expense), net......................... (124) (6)
------ ----
Income (loss) before income taxes...................... 874 (14)
Income tax expense (benefit)........................... 353 (6)
------ ----
Net (loss) income...................................... $ 521 $ (8)
====== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
AERIAL PLATFORMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEVENTEEN
YEAR ENDED DAYS ENDED
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................... $ 521 $ (8)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 331 23
Loss (gain) on sale of equipment.................... (304) 2
Deferred income taxes............................... (118) --
Changes in operating assets and liabilities:
Accounts receivable................................ (231) 12
Inventories........................................ (17) 1
Prepaid and other assets........................... (21) (26)
Accounts payable................................... 22 62
Accrued expenses and other liabilities............. (18) 19
----- ----
Net cash provided by operating activities............ 165 85
----- ----
INVESTING ACTIVITIES:
Purchases of rental equipment........................ (803) (28)
Proceeds from sale of rental equipment............... 496 24
Purchases of property and equipment.................. (12) --
Proceeds from sale of property and equipment......... -- --
----- ----
Net cash used in investing activities................ (319) (4)
----- ----
FINANCING ACTIVITIES:
Proceeds from long-term debt......................... 468 --
Payments on long-term debt........................... (441) (29)
----- ----
Net cash provided by (used in) financing activities.. 27 (29)
----- ----
Net increase (decrease) in cash...................... (127) 52
Cash at beginning of period.......................... 340 213
----- ----
Cash at end of period................................ $ 213 $265
===== ====
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest............................... $ 122 $ 12
===== ====
Cash paid for income taxes........................... $ 398 $ --
===== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
AERIAL PLATFORMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------- TOTAL
STATED PAID-IN RETAINED STOCKHOLDER'S
SHARES VALUE CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 31, 1996........ 500 $ 1 $-- $ 793 $ 794
Net income......................... -- -- -- 521 521
--- --- --- ------ ------
Balance at January 31, 1997........ 500 1 -- 1,314 1,315
Net income (loss).................. -- -- -- (8) (8)
--- --- --- ------ ------
Balance at February 17, 1997....... 500 $ 1 $-- $1,306 $1,307
=== === === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
AERIAL PLATFORMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aerial Platforms, Inc. ("Aerial") is a C corporation primarily involved in
the short-term rental of platform aerial lifts, and to a lesser extent,
selling related new and used equipment. Aerial's principal customers are
construction contractors located in the Atlanta, Georgia area. Aerial operates
from one leased facility located in Norcross (Atlanta), Georgia.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
RENTAL REVENUE
Rental revenue is recognized ratably over the expected lease term.
RENTAL EQUIPMENT
Rental equipment consists of platform aerial lifts and is recorded at cost.
Depreciation for rental equipment acquired is computed using the straight-line
method over an estimated five to seven year useful life with no salvage value.
Accumulated depreciation on rental equipment was approximately $1,960,000 and
$1,947,000 at January 31, 1997 and February 17, 1997, respectively.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets. The
estimated useful lives for property and equipment range from three to five
years for vehicles and delivery equipment, and five to seven years for tools,
yard equipment and furniture and fixtures.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment are disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in the statement of operations.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On February 1, 1996, Aerial adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the assets' carrying amounts exceed the
undiscounted cash flows estimated to be generated by those assets. SFAS No.
121 also requires impairment losses to be recorded when the carrying amount of
long-lived assets that are expected to be disposed of exceed their fair
values, net of disposal costs. Adoption of SFAS No. 121 did not have a
material impact on Aerial's financial position at January 31, 1997 or results
of operations for the year then ended.
F-22
<PAGE>
AERIAL PLATFORMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES
Aerial's inventories of $72,000 and $71,000 at January 31, 1997 and February
17, 1997, respectively, consist primarily of spare parts held for use in
servicing and repairing platform aerial lifts. Inventories are stated at the
lower of cost, determined by the first-in, first-out method, or market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for trade accounts
receivable, accounts payable and accrued expenses and other liabilities
approximate fair value due to the short-term nature of these financial
instruments. The fair value of notes receivable and notes payable is
determined using current interest rates for similar instruments as of February
17, 1997 and approximates the carrying value of these notes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Aerial to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction customers located in one geographical location. Aerial
generally does not require collateral on accounts receivable. Aerial maintains
an allowance for doubtful accounts on its receivables based upon expected
collectibility. Allowance for doubtful accounts was $24,000 and $24,250 at
January 31, 1997 and February 17, 1997, respectively.
ADVERTISING COSTS
Aerial advertises primarily through trade journals and the media.
Advertising costs are expensed as incurred.
INCOME TAXES
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or benefits are based on the changes in the deferred income tax assets or
liabilities from period to period.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
Vehicles and delivery equipment.................. $122 $ 122
Tools and yard equipment......................... 212 196
Furniture and fixtures........................... 33 33
---- -----
367 351
Less: accumulated depreciation................... (218) (217)
---- -----
$149 $ 134
==== =====
</TABLE>
3. PREPAID AND OTHER ASSETS
Prepaid and other assets consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
Officer and employee advances.................... $22 $36
Other............................................ 9 21
--- ---
$31 $57
=== ===
</TABLE>
F-23
<PAGE>
AERIAL PLATFORMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
Sales taxes payable.............................. $ 48 $ 56
Accrued benefit plan contributions............... 53 52
Accrued salaries................................. -- 12
Other............................................ 7 13
---- ----
$108 $133
==== ====
</TABLE>
5. DEBT
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Note payable in monthly installments of $16,850 plus
interest at the prime rate plus 1.5% (prime rate at
January 31, 1997 and February 17, 1997 was 8.25%)
with the final payment due in February 1999. (See
Note 9)............................................. $ 421 $ 404
Notes payable in monthly installments of
approximately $12,062 including interest at the
prime rate plus 1.5% with the final payments due at
varying dates through November 2000. (See Note 9)... 219 214
Note payable in monthly installments of approximately
$6,828 including interest at the prime rate plus
1.5% with final payment due July 1999. (See Note 9). 190 190
Note payable in monthly installments of approximately
$7,780 including interest at the prime rate plus
1.5% with final payment due in September 1999. (See
Note 9)............................................. 219 213
Note payable in monthly installments of approximately
$1,993 including interest at the prime rate plus
1.5% with final payment due in September 2001. (See
Note 9)............................................. 59 58
Note payable in monthly installments of approximately
$4,420 including interest at the prime rate plus 2%
with the final payment due in May 1998. (See Note
9).................................................. 65 65
Notes payable in monthly installments of $4,994
including interest of 10%, 9% and 11%, with the
final payments due in February 1997, July 1999 and
February 1999, respectively. (See Note 9)........... 70 70
------ ------
Total debt......................................... $1,243 $1,214
====== ======
</TABLE>
6. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEVENTEEN DAYS ENDED
JANUARY 31, 1997 FEBRUARY 17, 1997
---------------- --------------------
<S> <C> <C>
CURRENT:
Federal............................ $191 $(5)
State.............................. 34 (1)
DEFERRED:
Federal............................ 109 --
State.............................. 19 --
---- ---
$353 $(6)
==== ===
</TABLE>
F-24
<PAGE>
AERIAL PLATFORMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate of 34% to
income before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEVENTEEN DAYS ENDED
JANUARY 31, 1997 FEBRUARY 17, 1997
---------------- --------------------
<S> <C> <C>
(Loss) income at statutory rate.... $297 $ (5)
Effect of state taxes, net......... 51 (1)
Other.............................. 5 --
---- -----
$353 $ (6)
==== =====
</TABLE>
Deferred tax assets (liabilities) are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 17,
1997 1997
----------- ------------
<S> <C> <C>
Depreciation..................................... $(153) $(153)
Allowance for doubtful accounts.................. 10 10
----- -----
Net deferred tax liability....................... $(143) $(143)
===== =====
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Aerial conducts its operations in leased facilities under an operating lease
which expires in May 1998. Aerial also leases vehicles and certain rental
equipment under cancelable and noncancelable lease agreements which expire at
varying dates through July 2000. Rental expense was $658,000 and $45,000 for
the year ended January 31, 1997 and seventeen days ended February 17, 1997,
respectively.
Future minimum rental commitments as of February 17, 1997 under
noncancelable operating leases are (in thousands):
<TABLE>
<S> <C>
1998................................................................. $118
1999................................................................. 95
2000................................................................. 77
2001................................................................. 20
2002................................................................. --
----
$310
====
</TABLE>
LEGAL MATTERS
Aerial is party to legal proceedings and claims arising in the ordinary
course of its business. In the opinion of management, the ultimate resolution
of these matters will have no material adverse effect on Aerial's financial
position, results of operations or cash flows.
8. EMPLOYEE BENEFIT PLAN
During the year ended January 31, 1995, Aerial established a simplified
employee pension plan covering substantially all employees. Employees meeting
certain age and length of service requirements are eligible to participate.
Employee contributions are permitted up to a maximum of 10% of covered
compensation. There are no required matching contributions by Aerial since
Aerial's contributions are at the discretion of the Board of Directors.
Aerial's contributions were $43,000 and $0 for the year ended January 31, 1997
and the seventeen days ended February 17, 1997, respectively.
F-25
<PAGE>
AERIAL PLATFORMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS
On February 17, 1997, Aerial's sole shareholder sold all of the outstanding
common stock of Aerial to National Equipment Services, Inc. ("NES") in
exchange for a $3,750,000 cash payment (subject to a customary purchase price
adjustment mechanism), a $500,000 promissory note ($350,000 of which is in
consideration for the common stock of Aerial and $150,000 of which is in
consideration for certain non-compete covenants given by the sole shareholder
of Aerial's common stock) and the assumption of certain liabilities and
obligations. Aerial's results of operations are included with NES subsequent
to February 17, 1997.
At such closing, NES paid the remaining principal and accrued interest on
the notes payable to Fidelity National Bank in the amount of $1,219,600.
Additionally, NES purchased all of the leased rental equipment at February 17,
1997 for approximately $1,889,000.
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder of Lone Star
Rentals, Inc. and the Board of Directors of
National Equipment Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in stockholder's equity, present
fairly, in all material respects, the financial position of Lone Star Rentals,
Inc. at December 31, 1995 and 1996 and March 16, 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 ended March 16, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
November 4, 1997
F-27
<PAGE>
LONE STAR RENTALS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 16,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
ASSETS:
Cash...................................... $ 88 $ 89 $ --
Accounts receivable, net.................. 1,338 1,187 1,193
Inventory................................. 338 622 708
Rental equipment, net..................... 7,622 6,952 6,688
Property and equipment, net............... 262 178 165
Prepaid and other assets.................. 446 377 382
------- ------ ------
Total assets............................ $10,094 $9,405 $9,136
======= ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accounts payable.......................... $ 236 $ 408 $ 660
Accrued expenses and other liabilities.... 257 293 274
Debt...................................... 5,481 4,529 4,348
Obligations under capital leases.......... 640 454 410
------- ------ ------
Total liabilities....................... 6,614 5,684 5,692
------- ------ ------
Commitments and contingencies (Note 9)
Stockholder's equity....................... 3,480 3,721 3,444
------- ------ ------
Total liabilities and stockholder's
equity................................. $10,094 $9,405 $9,136
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
LONE STAR RENTALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
-------------- MARCH 16,
1995 1996 1997
------ ------ ------------
<S> <C> <C> <C>
REVENUES:
Rental revenue.................................... $8,324 $8,168 $1,455
Sales of equipment and supplies................... 1,379 1,181 188
------ ------ ------
Total revenues.................................. 9,703 9,349 1,643
------ ------ ------
COST OF REVENUES:
Rental equipment expense.......................... 2,398 2,485 594
Rental equipment depreciation..................... 1,356 1,440 242
Cost of equipment and supplies.................... 1,079 888 119
Direct operating expenses......................... 1,679 1,739 416
------ ------ ------
Total cost of revenues.......................... 6,512 6,552 1,371
------ ------ ------
Gross profit (loss)................................ 3,191 2,797 272
Selling, general and administrative expense........ 1,918 1,988 475
Non-rental depreciation and amortization........... 170 169 26
------ ------ ------
Operating (loss) income............................ 1,103 640 (229)
Other income....................................... 231 271 139
Interest income (expense) net...................... (608) (530) (164)
------ ------ ------
Net income (loss).................................. $ 726 $ 381 $ (254)
====== ====== ======
Pro forma tax provision (benefit) (unaudited):
Income (loss) before income taxes................. $ 726 $ 381 $ (254)
Pro forma provision (benefit) for income taxes.... 254 133 (89)
------ ------ ------
Pro forma net income (loss)....................... $ 472 $ 248 $ (165)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
LONE STAR RENTALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
---------------- MARCH 16,
1995 1996 1997
------- ------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income..................................... $ 726 $ 381 $(254)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 1,526 1,609 268
Gain on sale of equipment..................... (184) (175) --
Changes in operating assets and liabilities:
Accounts receivable.......................... (192) 151 (6)
Inventory.................................... 318 (284) (86)
Prepaid and other assets..................... 20 69 (5)
Accounts payable............................. (71) 172 252
Accrued expenses and other liabilities....... 30 36 (19)
------- ------- -----
Net cash provided by operating activities...... 2,173 1,959 150
------- ------- -----
INVESTING ACTIVITIES:
Purchases of rental equipment.................. (3,019) (1,595) 9
Proceeds from sale of rental equipment......... 1,013 733 --
Purchases of property and equipment............ (51) (6) --
Proceeds from sale of property and equipment... 76 2 --
------- ------- -----
Net cash provided by (used in) investing
activities.................................... (1,981) (866) 9
------- ------- -----
FINANCING ACTIVITIES:
Proceeds from debt............................. 2,871 1,640 --
Payments on debt............................... (2,881) (2,592) (225)
Dividends paid................................. (231) (140) (23)
------- ------- -----
Net cash used in financing activities.......... (241) (1,092) (248)
------- ------- -----
Net increase (decrease) in cash................ (49) 1 (89)
Cash at beginning of period.................... 137 88 89
------- ------- -----
Cash at end of period.......................... $ 88 $ 89 $ --
======= ======= =====
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest......................... $ 607 $ 529 $ 164
======= ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
LONE STAR RENTALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDER'S
EQUITY
-------------
<S> <C>
Balance at December 31, 1994...................................... $2,985
Net income........................................................ 726
Dividends......................................................... (231)
------
Balance at December 31, 1995...................................... 3,480
Net income........................................................ 381
Dividends......................................................... (140)
------
Balance at December 31, 1996...................................... 3,721
Net income........................................................ (254)
Dividends......................................................... (23)
------
Balance at March 16, 1997......................................... $3,444
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Lone Star Rentals, Inc. ("Lone Star") is an S Corporation primarily involved
in the short-term rental of general purpose construction equipment, and to a
lesser extent, selling complementary parts, merchandise and new and used
equipment to commercial and residential construction companies, industrial
enterprises, homeowners and other customers. Lone Star operates from five
separate locations, four of which are in the Houston, Texas metropolitan area
and one of which is in Corpus Christi, Texas. Lone Star's executive offices
are located in Houston, Texas.
RENTAL REVENUES
Rental revenues are recognized upon the earliest occurrence of either the
return of the equipment or the end of one month's rental term. For rental
contracts greater than one month, rental revenues are recognized notably over
the contract period.
INVENTORY
Lone Star's inventories primarily consist of items such as equipment, hand
tools and accessories held for resale. Inventories are stated at the lower of
cost, determined by the first-in, first-out method and replacement value, or
market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using the straight line method over an estimated average
7-year useful life with no salvage value.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight line method over the estimated useful lives of the assets.
The estimated useful lives for property and equipment range from 7 to 25
years for buildings, 3 to 7 years for vehicles, delivery and yard equipment,
and 1 to 7 years for fixtures and leasehold improvements.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for trade 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 notes receivable and notes payable using current interest rates
for similar instruments as of December 31, 1995 and 1996 and March 16, 1997
approximates their carrying value as the underlying instruments include
provisions to adjust interest rates to approximate fair market value.
F-32
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Lone Star to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and Lone Star's geographic dispersion. Lone Star performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable.
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 certain assets and
liabilities, and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
ADVERTISING COSTS
Lone Star advertises primarily through trade journals and the media.
Advertising costs are expensed as incurred.
INCOME TAXES
Lone Star's parent is a subchapter S corporation, taxes are the
responsibility of the individual shareholders of the parent. The pro forma
provision for income taxes approximate what Lone Star's tax provision would be
if subject to income taxes as a C corporation.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, Lone Star has participated in
certain transactions with related parties.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 16,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Equipment............................................. $142 $411 $490
Parts and supplies.................................... 196 211 218
---- ---- ----
$338 $622 $708
==== ==== ====
</TABLE>
F-33
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RENTAL EQUIPMENT
Rental equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 16,
1995 1996 1997
------- ------- ---------
<S> <C> <C> <C>
Air compressors and tools..................... $ 1,479 $ 1,590 $ 1,584
Compaction and concrete....................... 985 919 866
Earth moving equipment........................ 3,913 4,023 3,954
Forklifts, highreach and scaffolding.......... 1,581 1,574 1,365
Generators and lighting....................... 693 620 607
Plumbing and painting......................... 287 273 276
Trenchers and trailers........................ 232 457 455
Pumps......................................... 527 507 510
Welders....................................... 644 570 569
Other......................................... 731 717 719
------- ------- -------
11,072 11,250 10,905
Less: accumulated depreciation................ (3,450) (4,298) (4,217)
------- ------- -------
$ 7,622 $ 6,952 $ 6,688
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
------------ MARCH 16,
1995 1996 1997
----- ----- ---------
<S> <C> <C> <C>
Vehicles and delivery equipment................... $ 303 $ 300 $ 300
Furniture and fixtures............................ 254 268 268
Leasehold improvements............................ 43 43 43
Building improvements............................. 127 127 127
----- ----- -----
727 738 738
Less: accumulated depreciation.................... (465) (560) (573)
----- ----- -----
$ 262 $ 178 $ 165
===== ===== =====
</TABLE>
5. PREPAID AND OTHER ASSETS
Prepaid and other assets consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 16,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Non-compete agreement................................. $438 $363 $350
Other................................................. 8 14 32
---- ---- ----
$446 $377 $382
==== ==== ====
</TABLE>
Lone Star has entered into a non-compete agreement with a former owner which
expires on December 1, 2002. The original cost of $750,000 is being amortized
over a ten year life using the straight line method.
F-34
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 16,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Customer deposits..................................... $ 21 $ 25 $ 30
Sales tax payable..................................... 49 44 24
Payroll tax payable................................... 1 7 --
Accrued property tax payable.......................... 172 173 203
Other................................................. 14 44 17
---- ---- ----
$257 $293 $274
==== ==== ====
</TABLE>
7. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 16,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
CURRENT PORTION OF DEBT:
Floor plan payable Homelite...................... $ 78 $ 14 $ --
Floor plan payable Kubota........................ 11 171 245
Floor plan payable Nations....................... -- 131 123
Floor plan payable Mitsui........................ 19 -- --
Current notes payable Pinemont................... 400 649 649
Current notes payable Texas Commerce............. -- -- --
Current portion of long-term debt................ 2,290 1,725 1,517
------ ------ ------
Total current debt............................. 2,798 2,690 2,534
------ ------ ------
LONG-TERM PORTION OF DEBT:
Notes payable Pinemont Bank...................... 267 133 133
Merchants Park Bank vehicles..................... 22 11 11
Merchants Park Bank building and land............ 6 1 1
Notes payable Case Credit........................ 515 685 685
Notes payable Chicago Pneumatic.................. 56 18 18
Notes payable Ingersoll Rand..................... 115 25 14
Notes payable John Deere......................... 374 252 252
Notes payable Kubota Credit...................... 203 46 46
Notes payable Mitsui............................. 254 177 163
Notes payable Miller Services.................... 121 19 19
Notes payable Orix............................... 214 28 28
Notes payable Jack Fulton........................ 532 444 444
Notes payable Navistar........................... 4 -- --
------ ------ ------
Total long-term debt........................... 2,683 1,839 1,814
------ ------ ------
Total debt..................................... $5,481 $4,529 $4,348
====== ====== ======
</TABLE>
Interest and principal is payable monthly or quarterly at rates ranging from
5.7% to 12%. The note agreements include restrictions as to limitations upon
certain ratios of liabilities to net worth and upon the minimum net worth of
Lone Star. Lone Star is in compliance with covenants in all agreements.
Substantially all rental equipment, property and equipment, and accounts
receivable of Lone Star are pledged as collateral for the bank line of credit
demand notes, and notes related to purchases of certain businesses.
F-35
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On bank notes payable, Lone Star incurred interest expense of $605,000,
$778,000 and $66,000 for the periods ended December 31, 1995 and December 31,
1996 and March 16, 1997, respectively.
Maturities of debt are as follows at March 16, 1997 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $2,534
1998............................................................... 878
1999............................................................... 523
2000............................................................... 287
2001............................................................... 126
------
$4,348
======
</TABLE>
8. OBLIGATIONS UNDER CAPITAL LEASES
Capitalized leases recorded as assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
------------ MARCH 16,
1995 1996 1997
----- ----- ---------
<S> <C> <C> <C>
Compaction and concrete........................... $ 180 $ 180 $ 180
Forklifts, highreach and scaffolding.............. 81 81 81
Trenchers and trailers............................ 254 254 254
Pumps............................................. 245 245 245
Other............................................. 46 46 46
----- ----- -----
806 806 806
Less: accumulated depreciation.................... (127) (249) (270)
----- ----- -----
$ 679 $ 557 $ 536
===== ===== =====
</TABLE>
Obligations under capital leases consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
--------- MARCH 16,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Leases payable AEL/Reli............................... $466 $244 $ 55
Leases payable Associated............................. 73 156 338
Leases payable Bankers Leasing........................ 28 6 --
Leases payable Clark Financials....................... 50 34 14
Leases payable Manifest Group......................... 23 14 3
---- ---- ----
640 454 410
==== ==== ====
Current portion....................................... 267 284 223
---- ---- ----
Long-term portion..................................... $373 $170 $187
==== ==== ====
</TABLE>
Future minimum lease payments as of March 16, 1997 are (in thousands):
<TABLE>
<S> <C>
1997................................................................. $267
1998................................................................. 117
1999................................................................. 51
2000................................................................. 18
Thereafter........................................................... --
----
$453
====
</TABLE>
F-36
<PAGE>
LONE STAR RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Lone Star leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $241,000 and $236,000 for the years ended December 31, 1995 and
1996 respectively, and $49,000 for the period ended March 16, 1997.
Future minimum rental commitments as of March 16, 1997 under non-cancelable
operating leases are (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 192
1998............................................................... 242
1999............................................................... 242
2000............................................................... 242
2001............................................................... 242
Thereafter......................................................... 51
------
$1,211
======
</TABLE>
LEGAL MATTERS
Lone Star is party to legal proceedings and potential claims arising in the
ordinary course of its business. Management believes that the ultimate
resolution of these matters will have no material adverse effect on Lone
Star's financial position, results of operations or cash flows.
10. SUBSEQUENT EVENTS
On March 17, 1997, Lone Star's owner sold substantially all of Lone Star's
assets to NES Acquisition Corp., a wholly owned subsidiary of National
Equipment Services, Inc. for a $10,579,711 cash payment (subject to a
customary purchase price adjustment mechanism), a promissory note in the
principal amount of $500,000 ($350,000 of which is in partial consideration
for such assets and $150,000 of which is in consideration for certain non-
compete covenants by Lone Star's former owner) and the assumption of certain
liabilities and obligations.
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder
of BAT Rentals, Inc. and the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholder's equity and of cash flows, present
fairly, in all material respects, the financial position of BAT Rentals, Inc.
at December 31, 1995 and 1996 and March 31, 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 three months ended March 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of management; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
November 4, 1997
F-38
<PAGE>
BAT RENTALS, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. $ 1,879 $ 1,750 $ 1,609
Accounts receivable, net.................. 1,107 1,322 1,574
Inventory, net............................ 672 645 530
Rental equipment, net..................... 4,434 5,779 5,945
Property and equipment, net............... 1,976 1,855 1,808
Prepaid and other assets.................. 43 153 30
------- ------- -------
Total assets............................ $10,111 $11,504 $11,496
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable.......................... $ 126 $ 36 $ 84
Accrued expenses and other liabilities.... 200 121 216
Debt...................................... 3,191 3,302 2,891
------- ------- -------
Total liabilities....................... 3,517 3,459 3,191
Common stock, $10 par, 1,000 shares
authorized, 700 shares issued and
outstanding.............................. 7 7 7
Other paid-in capital..................... 2 2 2
Retained earnings......................... 7,514 8,965 9,225
Treasury stock............................ (929) (929) (929)
------- ------- -------
Total stockholders' equity.............. 6,594 8,045 8,305
------- ------- -------
Total liabilities and stockholders'
equity................................. $10,111 $11,504 $11,496
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
BAT RENTALS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE
------------------------- MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ ------------- ---
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues................... $ 4,856 $ 6,328 $1,457
Rental equipment sales............ 2,486 2,879 995
New equipment sales............... 4,733 3,547 1,250
Other............................. 378 386 100
------- ------- ------
Total revenues.................. 12,453 13,140 3,802
------- ------- ------
COST OF REVENUES:
Rental equipment expenses......... 80 184 12
Rental equipment depreciation..... 2,059 2,576 707
Cost of rental equipment sales.... 968 1,411 352
Cost of new equipment sales....... 4,052 2,961 1,010
Direct operating expense.......... 1,653 1,623 450
------- ------- ------
Total cost of revenues.......... 8,812 8,755 2,531
------- ------- ------
Gross profit....................... 3,641 4,385 1,271
Selling, general and administrative
expenses.......................... 1,552 1,399 489
Non-rental depreciation and
amortization...................... 116 109 25
------- ------- ------
Operating income................... 1,973 2,877 757
Other income (expense), net........ 29 120 (1)
Interest income (expense), net..... (103) (196) (46)
------- ------- ------
Net income......................... $ 1,899 $ 2,801 $ 710
======= ======= ======
PRO FORMA TAX PROVISION
(UNAUDITED):
Income before income taxes......... $ 1,899 $ 2,801 $ 710
Pro forma provision for income
taxes.............................. 646 952 241
------- ------- ------
Pro forma net income............... $ 1,253 $ 1,849 $ 469
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
BAT RENTALS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE
------------------------- MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................ $ 1,899 $ 2,801 $ 710
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 2,175 2,685 732
Gain on sale of equipment............ (1,527) (1,468) (657)
Changes in operating assets and
liabilities:
Accounts receivable................. (27) (215) (252)
Inventories......................... (42) 26 115
Prepaid and other assets............ 45 (110) 123
Accounts payable.................... 76 (90) 48
Accrued expenses and other
liabilities........................ 110 (79) 95
------- ------- ------
Net cash provided by operating
activities............................ 2,709 3,550 914
------- ------- ------
INVESTING ACTIVITIES:
Purchases of rental equipment......... (3,953) (5,332) (1,211)
Proceeds from sale of rental
equipment............................ 2,486 2,879 995
Purchases of property and equipment... (52) (2) --
Proceeds from sale of property and
equipment............................ -- 14 23
------- ------- ------
Net cash used in investing activities.. (1,519) (2,441) (193)
------- ------- ------
FINANCING ACTIVITIES:
Proceeds from long-term debt.......... 1,303 1,465 --
Payments on long-term debt............ (771) (1,353) (412)
Dividends paid........................ (1,500) (1,350) (450)
------- ------- ------
Net cash used in financing activities.. (968) (1,238) (862)
------- ------- ------
Net increase (decrease) in cash and
cash equivalents...................... 222 (129) (141)
Cash and cash equivalents at beginning
of period............................. 1,657 1,879 1,750
------- ------- ------
Cash and cash equivalents at end of
period................................ $ 1,879 $ 1,750 $1,609
======= ======= ======
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest................ $ 227 $ 244 $ 56
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
BAT RENTALS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- PAID-IN TREASURY RETAINED STOCKHOLDERS'
SHARES STATED VALUE CAPITAL STOCK EARNINGS EQUITY
------ ------------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 700 $ 7 $ 2 $(929) $ 7,115 $ 6,195
Net income.............. -- -- -- -- 1,899 1,899
Dividends............... -- -- -- -- (1,500) (1,500)
--- --- --- ----- ------- -------
Balance at December 31,
1995................... 700 7 2 (929) 7,514 6,594
Net income.............. -- -- -- -- 2,801 2,801
Dividends............... -- -- -- -- (1,350) (1,350)
--- --- --- ----- ------- -------
Balance at December 31,
1996................... 700 7 2 (929) 8,965 8,045
Net income.............. -- -- -- -- 710 710
Dividends............... -- -- -- -- (450) (450)
--- --- --- ----- ------- -------
Balance at March 31,
1997................... 700 $ 7 $ 2 $(929) $ 9,225 $ 8,305
=== === === ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
BAT RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
BAT Rentals, Inc. ("BAT") is an S corporation primarily involved in the
sale, financing and rental of construction equipment to construction
contractors and industrial companies. BAT operates from one facility in Las
Vegas, Nevada.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RENTAL REVENUES
Rental revenues are recognized ratably over the lease term. Sales revenues
are recognized at the point of delivery.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term highly liquid investments with
original maturities of three months or less.
INVENTORY
BAT's inventories primarily consist of parts and new equipment held for
sale. Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using the straight-line and accelerated methods over an
estimated 5 to 7 year useful life with no salvage value.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line and accelerated methods over the estimated useful lives of
the assets.
The estimated useful lives for property and equipment range from 31.5 years
for buildings, 5 to 7 years for machinery and equipment, 5 to 7 years for
furniture and fixtures and 3 to 5 years for vehicles.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 1996, BAT adopted Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, which requires
F-43
<PAGE>
BAT RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the assets' carrying amounts exceed
the undiscounted cash flows estimated to be generated by those assets. SFAS
No. 121 also requires impairment losses to be recorded when the carrying
amount of long-lived assets that are expected to be disposed of, exceed their
fair values, net of disposal costs. Adoption of SFAS No. 121 did not have a
material impact on BAT's financial position at March 31, 1997 or results of
operations for the period then ended.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for trade accounts
receivable, accounts payable and accrued expenses 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 is determined using
current interest rates for similar instruments as of March 31, 1997 and
approximates the carrying value of the debt due to the fact that the
underlying instruments include provisions to adjust note balances and interest
rates to approximate fair market value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject BAT to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and BAT's geographic dispersion. BAT performs credit evaluations of
its customers' financial condition and generally does not require collateral
on accounts receivable. BAT maintains an allowance for doubtful accounts on
its receivables based upon expected collectibility. Allowance for doubtful
accounts was $116,200, $116,200 and $96,300 at March 31, 1997, December 31,
1996 and 1995, respectively.
INCOME TAXES
BAT has elected S corporation status under the U.S. Internal Revenue Code.
Pursuant to this election, BAT's income, deductions and credits are reported
on the income tax returns of BAT's stockholders for federal purposes and,
accordingly, no provision for federal income taxes has been made. Pro forma
income taxes are calculated at a statutory tax rate of 34%.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, BAT has participated in certain
transactions with related parties.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ MARCH 31,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
New equipment....................................... $342 $365 $300
Parts............................................... 418 438 381
Contractor supplies................................. 77 75 76
Other............................................... 7 8 14
---- ---- ----
844 886 771
Less: reserve....................................... (172) (241) (241)
---- ---- ----
Total inventory, net................................ $672 $645 $530
==== ==== ====
</TABLE>
F-44
<PAGE>
BAT RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RENTAL EQUIPMENT
Rental equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
------ ------- ---------
<S> <C> <C> <C>
Rental equipment............................... $9,387 $11,397 $11,545
Less: accumulated depreciation................. (4,953) (5,618) (5,600)
------ ------- -------
Rental equipment, net.......................... $4,434 $ 5,779 $ 5,945
====== ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Land and land improvements...................... $ 807 $ 807 $ 807
Building........................................ 1,336 1,336 1,336
Machinery and shop equipment.................... 60 63 68
Furniture and fixtures.......................... 424 440 442
Vehicles........................................ 910 889 838
------ ------ ------
Total property and equipment, at cost........... 3,537 3,535 3,491
Less: accumulated depreciation.................. (1,561) (1,680) (1,683)
------ ------ ------
Property and equipment, net..................... $1,976 $1,855 $1,808
====== ====== ======
</TABLE>
5. PREPAID AND OTHER ASSETS
Prepaid and other assets consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Receivable from EPA............................... $ -- $ 108 $--
Prepaid insurance................................. 29 31 5
Prepaid advertising............................... 7 7 3
Other............................................. 7 7 22
----- ------ ---
$ 43 $ 153 $30
===== ====== ===
</TABLE>
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ MARCH 31,
1995 1996 1997
---- ---- ---------
<S> <C> <C> <C>
Accrued expenses...................................... $ 72 $ 21 $ 68
Sales tax payable..................................... 52 54 78
Accrued profit sharing................................ -- 46 70
Accrued equipment sales payable....................... 76 -- --
---- ---- ----
$200 $121 $216
==== ==== ====
</TABLE>
F-45
<PAGE>
BAT RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Notes payable, secured by rental equipment,
payable through various dates ending February
2000, interest rates ranging from 7.9% to prime
plus 1%........................................ $1,295 $1,630 $1,428
Notes payable, related party, secured by rental
equipment, with interest ranging from 7.5% to
prime plus 1%.................................. 177 223 188
Notes payable, secured by trust deed on property
and buildings, with interest at prime plus 1%
maturing May 1997.............................. 167 -- --
Notes payable, shareholder, secured by rental
equipment with interest at prime plus 1%,
minimum rate of 9.75%.......................... 328 288 245
Revolving credit line, secured by rental
equipment and inventory, with a limit of
$1,250,000. Interest payable monthly at Bank of
America's reference rate plus 0.65%............ 1,009 814 871
Other contracts payable, secured by rental
equipment and inventory, due upon sale of
collateral or within one year of the date of
purchase if not sold........................... 215 347 159
------ ------ ------
Total debt...................................... $3,191 $3,302 $2,891
====== ====== ======
</TABLE>
BAT's agreement with the bank provides for a secured revolving line of
credit of $1,250,000 maturing no later than May 31, 1997. The bank and senior
note agreements include restrictions as to limitations upon certain ratios of
liabilities to net worth and upon the minimum net worth of BAT. BAT is in
compliance with covenants in all agreements. Substantially all of BAT's assets
are pledged as collateral for the long-term debt.
Maturities of debt are as follows at March 31, 1997 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $1,685
1998............................................................... 800
1999............................................................... 397
2000............................................................... 9
2001............................................................... --
Thereafter......................................................... --
------
$2,891
======
</TABLE>
LEGAL MATTERS
BAT is party to legal proceedings and claims arising in the ordinary course
of its business. Management believes that the ultimate resolution of these
matters will have no material adverse effect on BAT's financial position,
results of operations or cash flows.
F-46
<PAGE>
BAT RENTALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFIT PLANS
BAT sponsors a profit sharing plan (the "Plan") in which employees with
greater than one year of service are eligible. Under the Plan, BAT contributes
15% of each eligible employee's base annual wages to a trust out of its net
profits. Effective January 1, 1997, five percent of the eligible employee's
wages are deposited into a 401(k) plan and the remaining 10% portion is
contributed to a separate profit sharing plan. In addition, eligible employees
can defer up to 10% of their salary with a partially matching contribution by
BAT. The employer contributions vest over a seven year period. Contributions
by BAT to the Plan were $195,100, $198,500 and $0 for the years ended December
31, 1995 and 1996 and the period ended March 31, 1997, respectively.
9. RELATED PARTY TRANSACTIONS
Paul Bronken, President and beneficial owner of a majority of the shares of
BAT, and H. L. Butler, an employee and officer of BAT, loaned the Company
approximately $110,700 and $325,200 during the years ended December 31, 1995
and 1996, respectively, to finance rental equipment purchases. Interest
expense related to these loans was $46,000, $48,200 and $11,200 for the years
ended December 31, 1995 and 1996 and the three months ended March 31, 1997,
respectively.
10. SUBSEQUENT EVENTS
On April 1, 1997, BAT's owner sold substantially all of BAT's assets to BAT
Acquisition Corp., a wholly owned subsidiary of National Equipment Services,
Inc., for a $15.4 million cash payment.
F-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Sprint Industrial Services, Inc. and
the Board of Directors of
National Equipment Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in divisional equity and of cash flows, present
fairly, in all material respects, the financial position of Sprintank and
Sprintank Mobile Storage (divisions of Sprint Industrial Services, Inc.) at
December 31, 1995, December 31, 1996, and June 30, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1995 and 1996
and the six months ended June 30, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
November 4, 1997
F-48
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ --------
<S> <C> <C> <C>
ASSETS:
Cash......................................... $ 14 $ 238 $ 373
Accounts receivable, net..................... 1,922 1,829 2,089
Inventory.................................... -- -- 261
Rental equipment, net........................ 8,118 9,741 10,477
Property and equipment, net.................. 584 607 757
Prepaid expenses and other assets............ 89 131 105
------- ------- -------
Total assets............................... $10,727 $12,546 $14,062
======= ======= =======
LIABILITIES AND DIVISIONAL EQUITY:
Accounts payable............................. $ 201 $ 24 $ 282
Accrued expenses and other liabilities....... 182 263 381
Debt......................................... 7,370 8,987 8,624
------- ------- -------
Total liabilities.......................... 7,753 9,274 9,287
------- ------- -------
Intercompany.................................. 1,382 1,054 837
Commitments and contingencies (Note 8)
Divisional equity............................. 1,592 2,218 3,938
------- ------- -------
Total liabilities and divisional equity.... $10,727 $12,546 $14,062
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------- SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE
1995 1996 30, 1997
------------ ------------ ----------
<S> <C> <C> <C>
REVENUES:
Rental revenues.......................... $7,475 $ 9,172 $5,715
Other income............................. 404 426 327
------ ------- ------
Total revenues......................... 7,879 9,598 6,042
------ ------- ------
COST OF REVENUES:
Rental equipment expenses................ 1,648 1,395 470
Rental equipment depreciation............ 1,376 2,025 1,109
Direct operating expenses................ 257 197 173
------ ------- ------
Total cost of revenues................. 3,281 3,617 1,752
------ ------- ------
Gross profit.............................. 4,598 5,981 4,290
Selling, general and administrative
expenses................................. 2,977 4,333 2,028
Non-rental depreciation and amortization.. 99 145 83
------ ------- ------
Operating income.......................... 1,522 1,503 2,179
Other income (expense), net............... 1 14 (10)
Interest income (expense), net............ (868) (1,037) (553)
------ ------- ------
Net income................................ $ 655 $ 480 $1,616
====== ======= ======
PRO FORMA TAX PROVISION (UNAUDITED):
Income before income taxes............... $ 655 $ 480 $1,616
Pro forma provision for income taxes..... 229 168 566
------ ------- ------
Pro forma net income..................... $ 426 $ 312 $1,050
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------- SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 655 $ 480 $ 1,616
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation...................... 1,475 2,170 1,192
Changes in operating assets and
liabilities:
Accounts receivable.............. (779) 93 (260)
Inventory........................ -- -- (261)
Prepaid expenses and other
assets.......................... 206 (42) 26
Accounts payable................. 166 (177) 258
Accrued expenses and other
liabilities..................... 335 (247) (99)
------- ------- -------
Net cash provided by operating
activities......................... 2,058 2,277 2,472
------- ------- -------
INVESTING ACTIVITIES:
Purchases of rental equipment...... (4,725) (3,716) (1,879)
Purchases of property and
equipment......................... (100) (100) (198)
------- ------- -------
Net cash used in investing
activities.......................... (4,825) (3,816) (2,077)
------- ------- -------
FINANCING ACTIVITIES:
Proceeds from long-term debt....... 2,682 2,768 19
Payments on long-term debt......... -- (631) (883)
Capital contribution............... 161 146 114
Net proceeds from (payments on)
line of credit.................... (80) (520) 500
Dividends paid..................... -- -- (10)
------- ------- -------
Net cash provided by (used in)
financing activities............... 2,763 1,763 (260)
------- ------- -------
Net increase (decrease) in cash..... (4) 224 135
Cash at beginning of period......... 18 14 238
------- ------- -------
Cash at end of period............... $ 14 $ 238 $ 373
======= ======= =======
SUPPLEMENTAL NON-CASH FLOW
INFORMATION:
Cash paid for interest............. $ 658 $ 901 $ 460
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
STATEMENTS OF CHANGES IN DIVISIONAL EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
DIVISIONAL EQUITY
-----------------
<S> <C>
Balance at December 31, 1994.................................. $ 776
Net income.................................................... 655
Capital Contribution.......................................... 161
------
Balance at December 31, 1995.................................. 1,592
Net income.................................................... 480
Capital Contribution.......................................... 146
------
Balance at December 31, 1996.................................. 2,218
Net Income.................................................... 1,616
Capital Contribution.......................................... 114
Dividends..................................................... (10)
------
Balance at June 30, 1997...................................... $3,938
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Sprintank and Sprintank Mobile Storage (divisions of Sprint Industrial
Services, Inc.) ("Sprintank") are primarily involved in the short-term rental
of industrial storage equipment to chemical manufacturing, and refining
industries. At June 30, 1997, Sprintank had seven equipment rental locations
in Texas, Louisiana, and Alabama.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RENTAL REVENUES
Rental revenues are recognized upon the earliest occurrence of either the
return of the equipment or the end of one month's rental term. For rental
contracts greater than one month, rental revenues are recognized ratably over
the contract period.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using the straight-line method over an estimated useful
life with no salvage value. Estimated useful lives of rental equipment ranged
from three to ten years. Accumulated depreciation on rental equipment was
$3,209,000, $4,963,000 and $5,901,000 at December 31, 1995 and 1996 and June
30, 1997, respectively.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. Proceeds
from the disposal and the related net book value of the equipment are
recognized in the period of disposal.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight line method over the estimated useful lives of the assets.
The estimated useful lives for property and equipment range from five to
seven years for vehicles, delivery and shop equipment, and three to ten years
for office furniture and leasehold improvements.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
INVENTORY
Sprintank's inventories primarily consist of items such as tires for
replacement on delivery vehicles and are not for sale or rental. Inventories
are stated at the lower of average cost or market.
F-53
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for trade 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 notes payable and is determined using current interest rates for
similar instruments as of the years ended December 31, 1995 and 1996 and the
period ended June 30, 1997 and approximates the carrying value of these notes
due to the fact that the underlying instruments include provisions to adjust
note balances and interest rates to approximate fair market value.
ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Such estimates and
assumptions include those made regarding the estimated useful lives of
depreciable assets. Actual results could differ from those estimates.
Management believes that its estimates are reasonable.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Sprintank to significant
concentrations of credit risk consist primarily of trade accounts receivable
from industrial customers. Concentrations of credit risk with respect to trade
accounts receivable are limited due to the number of large customers with
recurring rentals. Sprintank performs credit evaluations of its customers'
financial condition and does not require collateral on accounts receivable.
Sprintank maintains an allowance for doubtful accounts on its receivables
based upon expected collectibility. Allowance for doubtful accounts was $0,
$20,000 and $0 at December 31, 1995 and 1996 and June 30, 1997, respectively.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, Sprintank has participated in
certain transactions with related parties during the current and previous
years until acquisition of substantially all of the assets of Sprintank by a
wholly owned subsidiary of National Equipment Services, Inc. (see Note 8). In
the opinion of management, all transactions with related parties have been
conducted at arm's-length.
INCOME TAXES
Sprintank's parent is a subchapter S corporation. Taxes are the
responsibility of the individual shareholders of the parent. The pro forma
provision for divisional income taxes approximates Sprintank's tax provision
on a stand alone basis.
F-54
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. RENTAL EQUIPMENT
Rental equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Trailers....................................... $ 4,774 $ 5,921 $ 6,890
Frac tanks..................................... 4,420 5,669 6,068
Tanks.......................................... 1,097 1,332 1,373
Dewatering boxes............................... 261 448 452
Vacuum boxes................................... 210 442 550
Phase separator................................ 273 274 276
Rolloff boxes.................................. 208 201 253
Other.......................................... 84 417 516
------- ------- -------
11,327 14,704 16,378
Less: accumulated depreciation................. (3,209) (4,963) (5,901)
------- ------- -------
$ 8,118 $ 9,741 $10,477
======= ======= =======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
----- ------ --------
<S> <C> <C> <C>
Vehicles and delivery equipment................... $ 732 $ 881 $1,057
Shop equipment.................................... 55 135 156
Office equipment.................................. 175 46 47
----- ------ ------
962 1,062 1,260
Less: accumulated depreciation.................... (378) (455) (503)
----- ------ ------
$ 584 $ 607 $ 757
===== ====== ======
</TABLE>
4. PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
Prepaid insurance.................................. $ 56 $ 118 $ 73
Other.............................................. 33 13 32
----- ------ ----
$ 89 $ 131 $105
===== ====== ====
</TABLE>
F-55
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
Payroll accruals....................................... $ 10 $ 85 $ 79
Deferred franchise taxes............................... 52 75 187
Taxes payable.......................................... 43 47 59
Accrued interest....................................... 49 42 21
Other.................................................. 28 14 35
---- ---- ----
$182 $263 $381
==== ==== ====
</TABLE>
6. INTERCOMPANY
Interest on intercompany advances between Sprint Industrial Services, Inc.
and Sprintank were imputed at a rate of 12% and is included in interest
expense and treated as contributed capital.
7. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
Intercompany note payable to a related party,
interest 12% for the year ended December 31,
1995............................................. $ 100 $ -- $ --
Notes payable to stockholders, interest at various
rates ranging from 9% to 12%..................... 462 3,230 3,250
Revolving line of credit of $700,000, $1,000,000
and $1,000,000 for December 31, 1995, December
31, 1996 and June 30, 1997, respectively. In
1995, interest is payable monthly at prime plus
2%. For the periods ending December 31, 1996 and
June 30, 1997, interest is payable quarterly at
the bank's prime rate............................ 520 -- 500
Notes payable to a bank, interest and principal
payable monthly or quarterly at rates ranging
from 5.7% to 12% for the periods ending December
31, 1995, December 31, 1996 and June 30, 1997.... 6,192 5,682 4,840
Notes payable--insurance, interest and principal
payable monthly at rates ranging from 7.43% to
8.50% for the periods ending December 31, 1995,
December 31, 1996 and June 30, 1997,
respectively..................................... 96 75 34
------ ------ -------
$7,370 $8,987 $ 8,624
====== ====== =======
</TABLE>
Sprintank's agreement with the bank provided for a secured line of credit of
$700 in 1995, maturing no later than April 30, 1996. At December 31, 1995,
$520 was borrowed against the line of credit. At December 31, 1996, Sprintank
had a secured line of credit for $1,000, maturing no later than April 30,
1997. At December 31, 1996, nothing was borrowed against the line. During
1997, the $1,000 line of credit was amended, extending the maturity date to no
later than April 30, 1998. At June 30, 1997, $500 was borrowed against the
line of credit.
F-56
<PAGE>
SPRINTANK AND SPRINTANK MOBILE STORAGE
(DIVISIONS OF SPRINT INDUSTRIAL SERVICES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The bank note agreements include restrictions as to limitations upon certain
ratios of liabilities to net worth and upon the minimum net worth of
Sprintank. Sprintank is in compliance with covenants in all agreements.
Substantially all rental equipment, property and equipment, and accounts
receivable of Sprintank are pledged as collateral for the bank line of credit,
demand notes, and notes related to purchases of certain businesses.
Sprintank incurred interest expense of $64, $357 and $192 on borrowings from
related parties in the periods ended December 31, 1995, December 31, 1996 and
June 30, 1997, respectively.
On bank notes payable, Sprintank incurred interest expense of $643, $536 and
$247 for the periods ended December 31, 1995, December 31, 1996 and June 30,
1997, respectively.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Sprintank leases certain facilities under operating leases which contain
renewal options and provide for periodic cost of living adjustments. Rental
expense was $96, $87, and $53, for the years ended December 31, 1995 and 1996
and for the period ended June 30, 1997, respectively.
Future minimum rental commitments as of June 30, 1997 under noncancelable
operating leases are (in thousands):
<TABLE>
<S> <C>
1997................................................................. $ 29
1998................................................................. 96
1999................................................................. 82
2000................................................................. 77
2001................................................................. 74
Thereafter........................................................... 287
----
$645
====
</TABLE>
LEGAL MATTERS
Sprintank is not a party to any legal proceedings or claims as of June 30,
1997.
9. SUBSEQUENT EVENTS
On June 30, 1997, Sprintank's owner sold substantially all of Sprintank's
assets to NES Acquisition Corp., a wholly owned subsidiary of National
Equipment Services, Inc., for a $25,256,431 cash payment (subject to a
customary purchase price adjustment mechanism) and the assumption of certain
liabilities and obligations.
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of MST Enterprises, Inc. (d/b/a
Equipco Rentals & Sales) and the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of changes in stockholder's equity, present
fairly, in all material respects, the financial position of MST Enterprises,
Inc. (d/b/a Equipco Rentals & Sales) at October 31, 1995 and 1996, and at July
17, 1997 and the results of its operations and its cash flows for each of the
two years in the period ended October 31, 1996, and for the period from
November 1, 1996 through July 17, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
November 4, 1997
F-58
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JULY 17,
1995 1996 1997
----------- ----------- --------
<S> <C> <C> <C>
ASSETS:
Cash........................................... $ 95 $ 207 $ 84
Accounts receivable, net....................... 523 580 642
Inventory...................................... 186 206 352
Rental equipment net........................... 2,047 2,553 3,007
Property and equipment, net.................... 333 337 221
Prepaid and other assets....................... 153 219 276
------ ------ ------
Total assets................................. $3,337 $4,102 $4,582
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable............................... $ 470 $ 513 $ 384
Accrued expenses and other liabilities......... 241 281 387
Debt........................................... 1,846 2,393 2,396
------ ------ ------
Total liabilities............................ 2,557 3,187 3,167
------ ------ ------
Commitments and contingencies (Note 9)
Common stock, $10 par, 2,500 shares authorized,
1,000 shares issued and outstanding........... 10 10 10
Retained earnings.............................. 770 905 1,405
------ ------ ------
Total stockholders' equity................... 780 915 1,415
------ ------ ------
Total liabilities and stockholders' equity... $3,337 $4,102 $4,582
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------- PERIOD ENDED
OCTOBER 31, OCTOBER 31, JULY 17,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
REVENUES:
Rental revenues.......................... $3,213 $3,605 $2,835
Rental equipment sales................... 552 391 447
New equipment sales...................... 1,581 1,805 1,055
Other.................................... 44 31 32
------ ------ ------
Total revenues......................... 5,390 5,832 4,369
------ ------ ------
COST OF REVENUES:
Rental equipment expenses................ 264 355 141
Rental equipment depreciation............ 934 1,163 890
Cost of rental equipment sales........... 118 181 125
Cost of new equipment sales.............. 1,461 1,232 691
Other direct operating expenses.......... 885 852 712
------ ------ ------
Total cost of revenues................. 3,662 3,783 2,559
------ ------ ------
Gross profit.............................. 1,728 2,049 1,810
Selling, general and administrative
expenses................................. 1,339 1,519 823
Non-rental depreciation and amortization.. 84 123 76
------ ------ ------
Operating income.......................... 305 407 911
Other income (expense), net............... -- (37) 20
Interest income (expense), net............ (160) (143) (94)
------ ------ ------
Income before income taxes................ 145 227 837
Income tax expense........................ 63 92 337
------ ------ ------
Net income................................ $ 82 $ 135 $ 500
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------- PERIOD ENDED
OCTOBER 31, OCTOBER 31, JULY 17,
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................... $ 82 $ 135 $ 500
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................ 1,034 1,294 967
Gain on sale of equipment............... (434) (144) (325)
Changes in operating assets and
liabilities:
Accounts receivable.................... (84) (57) (62)
Inventory.............................. 7 (20) (146)
Prepaid and other assets............... 6 (66) (57)
Accounts payable....................... 13 43 (129)
Accrued expenses and other liabilities. 116 40 106
------ ------ ------
Net cash provided by operating
activities.............................. 740 1,225 854
------ ------ ------
INVESTING ACTIVITIES:
Purchases of rental equipment............ (1,568) (1,820) (1,443)
Proceeds from sale of rental equipment... 609 295 424
Purchases of property and equipment...... (203) (239) --
Proceeds from sale of property and
equipment............................... -- 105 39
------ ------ ------
Net cash used in investing activities.... (1,162) (1,659) (980)
------ ------ ------
FINANCING ACTIVITIES:
Proceeds from long-term debt............. 875 1,465 700
Payments on long-term debt............... (499) (919) (697)
------ ------ ------
Net cash provided by financing
activities.............................. 376 546 3
------ ------ ------
Net increase (decrease) in cash.......... (46) 112 (123)
Cash at beginning of period.............. 141 95 207
------ ------ ------
Cash at end of period.................... $ 95 $ 207 $ 84
====== ====== ======
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest................... $ 172 $ 152 $ 108
====== ====== ======
Cash paid for income taxes............... $ 23 $ 215 $ 300
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------- TOTAL
STATED PAID-IN RETAINED STOCKHOLDERS'
SHARES VALUE CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1994........ 1,000 $10 $-- $ 688 $ 698
Net income......................... -- -- -- 82 82
----- --- --- ------ ------
Balance at October 31, 1995........ 1,000 10 -- 770 780
Net income......................... -- -- -- 135 135
----- --- --- ------ ------
Balance at October 31, 1996........ 1,000 10 -- 905 915
Net income......................... -- -- -- 500 500
----- --- --- ------ ------
Balance at July 17, 1997........... 1,000 $10 $-- $1,405 $1,415
===== === === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-62
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
MST Enterprises, Inc. (d/b/a Equipco Rentals & Sales) ("Equipco") is a C
corporation primarily involved in the short-term rental and sales of general
purpose construction equipment to industrial and construction companies. The
Company operates from one facility in Harrisonburg, Virginia.
FINANCIAL STATEMENT PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RENTAL REVENUES
Rental revenues are recognized as earned over the lease term. Sales revenues
are recognized at the point of delivery.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using accelerated methods over periods approximating five
years.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
accelerated methods ranging from three to five years.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
On January 1, 1996, Equipco adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and Long-Lived Assets to be Disposed of, which requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the assets' carrying amounts exceed the
undiscounted cash flows estimated to be generated by those assets. SFAS No.
121 also requires impairment losses to be recorded when the carrying amount of
long-lived assets that are expected to be disposed of, exceed their fair
values, net of disposal costs. Adoption of SFAS No. 121 did not have a
material impact on Equipco's financial position at July 17, 1997 or results of
operations for the period then ended.
F-63
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
INVENTORY
Equipco's inventories are valued at average costs and consist primarily of
items such as hand tools and accessories held for resale.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for trade 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 notes receivable and notes payable is determined using current
interest rates for similar instruments as of July 17, 1997 and approximates
the carrying value of these notes due to the fact that the underlying
instruments include provisions to adjust note balances and interest rates to
approximate fair market value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Equipco to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and Equipco's geographic dispersion. Equipco performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable. Equipco maintains an allowance for
doubtful accounts on its receivables based upon expected collectibility.
Allowance for doubtful accounts was $40,000, $20,000 and $30,000 at October
31, 1995 and 1996 and July 17, 1997, respectively.
INCOME TAXES
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or benefits are based on the changes in the deferred income tax assets or
liabilities from period to period.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, Equipco has participated in
certain transactions with related parties.
2. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------- JULY 17,
1995 1996 1997
---- ---- --------
<S> <C> <C> <C>
Merchandise.......................................... $199 $224 $382
Less: reserve........................................ (13) (18) (30)
---- ---- ----
Total inventory, net............................... $186 $206 $352
==== ==== ====
</TABLE>
F-64
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RENTAL EQUIPMENT
Rental equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------- JULY 17,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Gross rental equipment......................... $ 4,669 $ 6,098 $ 6,992
Less: accumulated depreciation................. (2,622) (3,545) (3,985)
------- ------- -------
$ 2,047 $ 2,553 $ 3,007
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------ JULY 17,
1995 1996 1997
----- ----- --------
<S> <C> <C> <C>
Vehicles........................................... $ 474 $ 625 $ 509
Computer hardware.................................. 80 52 53
Furniture and fixtures............................. 49 30 28
Leaseholds......................................... 35 34 27
Farm assets........................................ 241 13 --
----- ----- -----
879 754 617
Less: accumulated depreciation..................... (546) (417) (396)
----- ----- -----
$ 333 $ 337 $ 221
===== ===== =====
</TABLE>
5. PREPAID AND OTHER ASSETS
Prepaid and other assets consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER
31,
--------- JULY 17,
1995 1996 1997
---- ---- --------
<S> <C> <C> <C>
Notes receivable....................................... $ 71 $155 $246
Investments............................................ 44 44 --
Prepaid expenses....................................... 38 20 30
---- ---- ----
$153 $219 $276
==== ==== ====
</TABLE>
Notes receivable consists of $95,000 at July 17, 1997 due from a third party
for the sale of non-business assets. Interest on the note accrues at 8%
annually and payment of principal and interest is due quarterly through
September 2003.
Also included in notes receivable is a related party receivable of $55,700
at July 17, 1997. Interest on the note receivable accrues at the IRS blended
rate (5.85% at July 17, 1997). Annual principal installments of $1,899 plus
accrued interest are due through March 1999.
F-65
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------- JULY 17,
1995 1996 1997
----- ----- --------
<S> <C> <C> <C>
Accrued salaries and wages............................. $168 $ 85 $ 55
Other accrued expenses and liabilities................. 73 196 332
---- ---- ----
$241 $281 $387
==== ==== ====
</TABLE>
7. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, JULY
------------- 17,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Notes payable to related parties, due 12/01/96,
interest payable monthly at the Crestar Bank rate
plus 2.0%........................................ $ 490 $ -- $ --
Revolving line of credit, interest payable monthly
at the lessor of prime or 30 day libor plus 1.5%. 1,356 2,393 2,396
------ ------ ------
$1,846 $2,393 $2,396
====== ====== ======
</TABLE>
Equipco's line of credit provides $2,500,000 of available credit at October
31, 1995, October 31, 1996 and July 17, 1997. The line of credit is secured by
substantially all of Equipco's assets.
Maturities of debt are as follows at July 17, 1997 (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 147
1998............................................................... 502
1999............................................................... 390
2000............................................................... 303
2001............................................................... 235
Thereafter......................................................... 819
------
$2,396
======
</TABLE>
8. INCOME TAXES
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------- JULY 17,
1995 1996 1997
---- ----- --------
<S> <C> <C> <C>
CURRENT:
Federal.............................................. $ 71 $73 $294
State................................................ 13 13 52
DEFERRED:
Federal.............................................. (18) 5 (7)
State................................................ (3) 1 (2)
---- --- ----
$ 63 $92 $337
==== === ====
</TABLE>
F-66
<PAGE>
MST ENTERPRISES, INC.
D/B/A EQUIPCO RENTALS & SALES
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate of 34% to
income before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------- JULY 17,
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
(Loss) income at statutory rate........................ $49 $77 $285
Effect of state taxes, net............................. 9 14 51
Other.................................................. 5 1 1
--- --- ----
$63 $92 $337
=== === ====
</TABLE>
Deferred tax liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------- JULY 17,
1995 1996 1997
----- ----- -------
<S> <C> <C> <C>
Inventory reserves..................................... $ 5 $ 7 $12
Allowance for doubtful accounts........................ 16 8 12
--- --- ---
Net deferred tax liability............................. $21 $15 $24
=== === ===
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Equipco leases certain facilities under operating leases on a month-to-month
basis. Rent expense totaled $189,600, $189,600 and $118,500 for the years
ended October 31, 1995 and 1996 and for the period ended July 17, 1997,
respectively.
LEGAL MATTERS
Equipco is party to legal proceedings and claims arising in the ordinary
course of its business. Management believes that the ultimate resolution of
these matters will have no material adverse effect on Equipco's financial
position, results of operations or cash flows.
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution pension plan (the "Plan").
Employees meeting eligibility requirements are automatically enrolled in the
Plan. The Plan does not permit employee contributions and Equipco's
contributions are discretionary as determined by the Board of Directors.
Equipco's contributions to the plan totaled $10,000, $20,000 and $0 for each
of the years ended October 31, 1995 and 1996 and for the period ended July 17,
1997, respectively.
11. SUBSEQUENT EVENTS
On July 18, 1997 Equipco's owner sold all of the outstanding common stock of
Equipco to National Equipment Services, Inc. in exchange for a $5,980,000 cash
payment (subject to a customary purchase price adjustment mechanism).
F-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Work Safe Supply Company, Inc. and the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity, present fairly, in all material respects, the financial
position of Work Safe Supply Company, Inc. and subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
March 4, 1998
F-68
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
ASSETS:
Cash and cash equivalents........................................ $ 666 $ 383
Accounts receivable, net......................................... 2,647 3,279
Inventory, net................................................... 107 345
Rental equipment, net............................................ 1,425 1,983
Property and equipment, net...................................... 324 269
Prepaid and other assets......................................... 27 191
------ ------
Total assets................................................. $5,196 $6,450
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable................................................. $ 288 $ 444
Accrued expenses and other liabilities........................... 157 207
Note payable--shareholder........................................ 798 579
------ ------
Total liabilities............................................ 1,243 1,230
------ ------
Commitments and contingencies (Note 8)
Common stock, $1 par, 50,000 shares authorized, 13,500 shares
issued and outstanding.......................................... 13 13
Retained earnings................................................ 3,940 5,207
------ ------
Total stockholders' equity................................... 3,953 5,220
------ ------
Total liabilities and stockholders' equity................... $5,196 $6,450
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Rental revenues........................................ $5,068 $5,258 $6,385
Rental equipment sales................................. 627 774 891
Other.................................................. 521 538 88
------ ------ ------
Total revenues...................................... 6,216 6,570 7,364
------ ------ ------
COST OF REVENUES:
Rental equipment expenses.............................. 685 753 867
Rental equipment depreciation.......................... 601 683 835
Cost of rental equipment sales......................... 376 464 588
Direct operating expense............................... 1,921 1,915 1,650
------ ------ ------
Total cost of revenues.............................. 3,583 3,815 3,940
------ ------ ------
Gross profit............................................ 2,633 2,755 3,424
Selling, general and administrative expenses............ 2,485 1,084 1,237
Non-rental depreciation................................. 78 115 80
------ ------ ------
Operating income........................................ 70 1,556 2,107
Other income (expense), net............................. (47) (57) 8
Interest income (expense), net.......................... (28) (47) (22)
------ ------ ------
Net income (loss)....................................... $ (5) $1,452 $2,093
====== ====== ======
PRO FORMA TAX PROVISION (UNAUDITED):
Income (loss) before income taxes...................... $ (5) $1,452 $2,093
Pro forma provision (benefit) for income taxes......... (2) 494 712
------ ------ ------
Pro forma net income (loss)............................ $ (3) $ 958 $1,381
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
--------------------
1995 1996 1997
---- ------ ------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $ (5) $1,452 $2,093
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 679 798 915
Gain on sale of equipment.............................. -- -- (51)
Changes in operating assets and liabilities:
Accounts receivable................................... (2) (327) (632)
Inventories........................................... (15) (10) (238)
Prepaid and other assets.............................. (5) 8 (164)
Accounts payable...................................... 69 (21) 156
Accrued expenses and other liabilities................ 106 (763) 50
---- ------ ------
Net cash provided by operating activities................ 827 1,137 2,129
---- ------ ------
INVESTING ACTIVITIES:
Purchases of rental equipment........................... (783) (1,082) (1,277)
Purchases of property and equipment..................... (127) (116) (90)
---- ------ ------
Net cash (used) in investing activities.................. (910) (1,198) (1,367)
---- ------ ------
FINANCING ACTIVITIES:
Proceeds from shareholder loan.......................... 584 43 34
Payments on shareholder loan............................ (296) (98) (253)
Dividends paid.......................................... -- -- (826)
---- ------ ------
Net cash (used) provided in financing activities......... 288 (55) (1,045)
---- ------ ------
Net increase (decrease) in cash and cash equivalents..... 205 (116) (283)
Cash and cash equivalents at beginning of period......... 577 782 666
---- ------ ------
Cash and cash equivalents at end of period............... $782 $ 666 $ 383
==== ====== ======
DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 1 $ 10 $ 3
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------- TOTAL
STATED RETAINED STOCKHOLDERS'
SHARES VALUE EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............... 13,500 $13 $2,493 $2,506
Net loss................................... -- -- (5) (5)
------ --- ------ ------
Balance at December 31, 1995............... 13,500 13 2,488 2,501
Net income................................. -- -- 1,452 1,452
------ --- ------ ------
Balance at December 31, 1996............... 13,500 13 3,940 3,953
Net income................................. -- -- 2,093 2,093
Dividends.................................. -- -- (826) (826)
------ --- ------ ------
Balance at December 31, 1997............... 13,500 $13 $5,207 $5,220
====== === ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Work Safe Supply Company, Inc. (the "Company") is an S corporation involved
in the rental and sale of traffic safety equipment primarily in the State of
Michigan. Operations of the Company are conducted from the corporate
headquarters in Grand Rapids, Michigan and three additional facilities also
located in Michigan.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company and
its subsidiaries. All intercompany transactions and balances have been
eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less.
INVENTORY
Inventory consist primarily of supplies used in the Company's operations.
Inventory are stated at the lower of cost, determined by the first-in, first-
out method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at invoice cost. Depreciation for rental
equipment acquired is computed using straight-line and accelerated methods
over 3 to 5 year useful lives with no salvage value.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at invoice cost. Depreciation is computed
using straight-line and accelerated methods over the estimated useful lives of
the assets.
The estimated useful lives for property and equipment are 31.5 years for
buildings, 5 to 7 years for machinery and equipment, 5 to 7 years for
furniture and fixtures and 3 to 5 years for vehicles.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
F-73
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for cash, trade accounts
receivable, accounts payable and accrued expenses 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 is determined using
current interest rates for similar type instruments and approximates the
carrying value of the debt as of December 31, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction customers. Concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number of customers and
the Company's geographic dispersion. The Company performs credit evaluations
of its customers' financial condition and generally does not require
collateral on accounts receivable. The Company maintains an allowance for
doubtful accounts on its receivables based upon expected collectibility. The
allowance for doubtful accounts was $174,000 and $198,000 at December 31, 1996
and 1997, respectively.
RENTAL REVENUES
Rental revenues are recognized ratably over the lease term. Sales revenues
are recognized at the point of delivery.
INCOME TAXES
The Company has elected S corporation status under the U.S. Internal Revenue
Code. Pursuant to this election, the Company's income, deductions and credits
are reported on the income tax returns of its stockholders for federal
purposes and, accordingly, no provision for federal income taxes has been
made. Pro forma income taxes reflected on the statement of operations have
been calculated at the federal statutory rate of 34%.
RELATED PARTY TRANSACTIONS
The Company has participated in certain transactions with related parties as
disclosed in the notes to these consolidated financial statements.
2. RENTAL EQUIPMENT
Rental equipment consists of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Rental equipment.......................................... $3,415 $4,767
Less: accumulated depreciation............................ (1,990) (2,784)
------ ------
Rental equipment, net..................................... $1,425 $1,983
====== ======
</TABLE>
Depreciation expense on rental equipment totaled $601,000, $683,000 and
$835,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
F-74
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Land.......................................................... $ 7 $ 7
Building...................................................... 110 110
Shop equipment................................................ 160 166
Office equipment.............................................. 77 91
Vehicles...................................................... 450 336
---- ----
Total property and equipment, at cost......................... 804 710
Less: accumulated depreciation................................ (480) (441)
---- ----
Property and equipment, net................................... $324 $269
==== ====
</TABLE>
Depreciation expense on property and equipment totaled $78,000, $115,000 and
$80,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
4. PREPAID AND OTHER ASSETS
Prepaid and other assets consists of the following December 31, (in
thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Notes receivable, related party................................ $-- $120
Other assets................................................... 27 71
--- ----
$27 $191
=== ====
</TABLE>
Notes receivable consists of a non-interest bearing related party receivable
with annual payments of $24,000 due on June 1 of each year, commencing on June
1, 1998.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following at December
31, (in thousands):
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accrued expenses............................................... $ 26 $ 41
Accrued salaries and benefits.................................. 49 57
Accrued state taxes............................................ 61 96
Other liabilities.............................................. 21 13
---- ----
$157 $207
==== ====
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing and 401(k) plan (the "Plan") in which
employees meeting eligibility requirements may elect to participate. Company
contributions to the Plan are discretionary and employee vesting in Company
contributions occur ratably over a six year period. Company contributions
totaled $34,000, $49,000 and $42,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-75
<PAGE>
WORK SAFE SUPPLY COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company has unsecured notes payable due to shareholders totaling
$798,000 and $579,000 at December 31, 1996 and 1997, respectively. The notes
payable are non-interest bearing and payable upon demand. Imputed interest on
the notes payable is calculated using published Applicable Federal Rates (AFR)
in effect during the periods. Imputed interest totaled $34,000, $43,000 and
$34,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Effective March 1997, the Company entered into a lease agreement for office
space with its shareholders on a month-to-month basis for $3,000 per month.
Rent expense under this obligation totaled $36,000 for the year ended December
31, 1997.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered various vehicle and equipment operating leases with
third parties which expire at various dates through January 2001. The Company
has also entered into operating leases with related and third parties for
office space which expire at various dates through December 2000. Rental
expense incurred by the Company related to these leases totaled $69,000,
$97,000 and $111,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Future minimum rental commitments as of December 31, 1997 under
noncancelable operating leases are (in thousands):
<TABLE>
<S> <C>
1998............................................................... $115
1999............................................................... 73
2000............................................................... 29
2001............................................................... 2
-----
$219
=====
</TABLE>
9. SUBSEQUENT EVENTS
On February 15, 1998, the Company's shareholders sold substantially all of
the assets of the Company to National Equipment Services, Inc., for
approximately $7.6 million.
F-76
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Genpower Pump & Equipment, Inc. and the
Board of Directors of
National Equipment Services, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of Genpower Pump &
Equipment, Inc. at December 31, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, 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.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
March 3, 1998
F-77
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash and cash equivalents............................................. $ 20
Accounts receivable, net.............................................. 2,073
Inventory............................................................. 561
Rental equipment, net................................................. 1,920
Property and equipment, net........................................... 192
Deferred tax asset.................................................... 44
------
Total assets........................................................ $4,810
======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................................................... $ 699
Accrued expenses and other liabilities................................ 799
Debt.................................................................. 833
Notes payable--related parties........................................ 176
------
Total liabilities................................................... 2,507
------
Commitments and contingencies (Note 9)
Common stock, $1.00 par value; 1,000,000 shares authorized; 10,000
shares issued and outstanding......................................... 10
Retained earnings...................................................... 3,233
Treasury stock (Note 1)................................................ (940)
------
Total stockholders' equity.......................................... 2,303
------
Total liabilities and stockholders' equity.......................... $4,810
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-78
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES:
Rental revenues....................................................... $ 7,110
Rental equipment sales................................................ 161
New equipment sales................................................... 4,393
Other................................................................. 437
-------
Total revenues...................................................... 12,101
-------
COST OF REVENUES:
Rental equipment expenses............................................. 1,344
Rental equipment depreciation......................................... 560
Cost of rental equipment sales........................................ 111
Cost of new equipment sales........................................... 3,108
Direct operating expenses............................................. 1,519
-------
Total cost of revenues.............................................. 6,642
-------
Gross profit........................................................... 5,459
Selling, general and administrative expenses........................... 2,797
Nonrental depreciation and amortization................................ 37
-------
Operating income....................................................... 2,625
Other income, net...................................................... 13
Interest expense, net.................................................. (103)
-------
Income before income taxes............................................. 2,535
Income tax expense..................................................... 859
-------
Net income............................................................. $ 1,676
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY
COMMON STOCK STOCK
------------- --------------
STATED STATED RETAINED
VALUE SHARES VALUE EARNINGS TOTAL
SHARES ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 10 $ 10 (3) $(940) $1,557 $ 627
Net income.......................... 1,676 1,676
--- ---- ----- ----- ------ ------
Balance at December 31, 1997........ 10 $ 10 (3) $(940) $3,233 $2,303
=== ==== ===== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income............................................................ $1,676
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 597
Gain on sale of equipment............................................ (37)
Changes in operating assets and liabilities:
Accounts receivable................................................. (1,250)
Inventory........................................................... (329)
Prepaid and other assets............................................ (3)
Accounts payable.................................................... 237
Accrued expenses and other liabilities.............................. 389
------
Net cash provided by operating activities.............................. 1,280
------
INVESTING ACTIVITIES:
Purchases of rental equipment......................................... (1,317)
Proceeds from sale of rental equipment................................ 205
Purchases of property and equipment................................... (9)
Proceeds from sale of property and equipment.......................... 8
------
Net cash used in investing activities.................................. (1,113)
------
FINANCING ACTIVITIES:
Proceeds from debt.................................................... 845
Payments on debt...................................................... (1,532)
------
Net cash used in financing activities.................................. (687)
------
Net decrease in cash and cash equivalents.............................. (520)
Cash at beginning of period............................................ 540
------
Cash at end of period.................................................. $ 20
======
SUPPLEMENTAL NONCASH FLOW INFORMATION:
Cash paid for federal income taxes.................................... $ 139
======
Cash paid for interest................................................ $ 123
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Genpower Pump & Equipment, Inc. ("Genpower") is a C Corporation primarily
involved in the short-term rental and sales of pumps, generators, hoses,
fittings and other related equipment to the petrochemical and construction
industries. Genpower operates from nine separate locations along the Texas
Gulf Coast. Genpower's executive offices are located in Deer Park, Texas.
RENTAL REVENUES
Rental revenues are recognized upon the return of the equipment for daily
rentals, after 3 days for weekly rentals or after 17 days for monthly rentals.
For rental contracts greater than one month, rental revenues are recognized
notably over the contract period.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less.
INVENTORY
Genpower's inventories primarily consist of items such as pumps and
generators held for resale and hoses, fittings and other maintenance parts.
Inventories are stated at the lower of cost, determined by the first-in,
first-out method and replacement value or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using the double-declining balance and straight-line
methods over an estimated average seven-year useful life.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the double-declining balance and straight-line methods over the estimated
useful lives of the assets.
The estimated useful lives for property and equipment is seven years for
machinery, five years for vehicles and five to seven years for furniture and
fixtures.
Ordinary maintenance and repairs costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts and any
gains or losses are included in results of operations.
F-82
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the combined balance sheets for trade
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 notes receivable and notes payable using
current interest rates for similar instruments at December 31, 1997
approximates their carrying value as the underlying instruments include
provisions to adjust interest rates to approximate fair market value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Genpower to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and Genpower's geographic dispersion. Genpower performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable. The allowance for doubtful accounts
was $129,132 at December 31, 1997.
TREASURY STOCK
Genpower records its treasury stock using the cost method.
ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities, and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the related reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
ADVERTISING COSTS
Genpower advertises primarily through trade journals. Advertising costs are
expensed as incurred.
INCOME TAXES
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year
in which the differences are expected to reverse. Deferred income tax expenses
or benefits are based on the changes in the deferred income tax assets or
liabilities from period to period.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, Genpower has participated in
certain transactions with related parties.
2. INVENTORY
Inventory consists of the following at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Equipment............................................................ $309
Parts and supplies................................................... 252
----
$561
====
</TABLE>
F-83
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RENTAL EQUIPMENT
Rental equipment consists of the following at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Pumps............................................................ $ 2,053
Air compressors.................................................. 478
Generators....................................................... 259
Engines.......................................................... 159
Lite towers...................................................... 80
Hoses............................................................ 75
Compaction equipment............................................. 64
Pipe plugs....................................................... 34
Forklifts........................................................ 23
Trailers......................................................... 10
-------
3,235
Less--accumulated depreciation................................... (1,315)
-------
$ 1,920
=======
</TABLE>
Depreciation expense for the year ended December 31, 1997 is $560,000.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Vehicles and delivery equipment.................................... $ 368
Furniture and equipment............................................ 33
-----
401
Less--accumulated depreciation..................................... (209)
-----
$ 192
=====
</TABLE>
Depreciation expense for the year ended December 31, 1997 is $6,000.
5. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consists of the following at December
31, 1997 (in thousands):
<TABLE>
<S> <C>
Sales tax payable................................................... $ 18
Payroll tax payable................................................. 27
Federal income tax payable.......................................... 754
----
$799
====
</TABLE>
F-84
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT
<TABLE>
<S> <C>
Debt consists of the following at December 31, 1997 (in
thousands):
Floor plan payable to Honda, secured by rental equipment, finance
charges ranging from 12% to 18%................................. $ 62
Notes payable to Ingersol Rand, secured by rental equipment,
payable through various dates ending December 2000, interest
rate at prime plus 1% payable monthly........................... 176
Notes payable to Gorman-Rupp, secured by rental equipment,
payable through various dates ending March 2000, interest rates
ranging from 8.25% to 9.5% payable monthly...................... 335
Term note payable to a bank, principal payable monthly plus
interest at 9% payable monthly with the final payment due in
February 1999................................................... 208
Revolving line of credit of $500, interest payable monthly plus
interest at 8.5% payable monthly................................ 52
-----
Total debt..................................................... 833
Less--current maturities......................................... (611)
-----
Total long-term debt........................................... $ 222
=====
</TABLE>
The Company also has a revolving line of credit of $1,000,000 with no draws
outstanding at December 31, 1997.
On January 12, 1998, pursuant to the Purchase Agreement, all of the
outstanding debt of the Company was paid off by NES.
Maturities of long-term debt are as follows at December 31, 1997:
<TABLE>
<S> <C>
1998................................................................. $611
1999................................................................. 179
2000................................................................. 43
----
$833
====
</TABLE>
7. INCOME TAXES
The provision for income taxes is comprised of the following at December 31,
1997 (in thousands):
<TABLE>
<S> <C>
Current provision................................................... $892
Deferred credit..................................................... (33)
----
$859
====
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax return of 34% to
income before taxes as a result of nondeductible entertainment expenses.
The deferred income tax assets consists of the increase in allowance for
doubtful accounts, which is not deductible for tax purposes until the accounts
are written off the books.
F-85
<PAGE>
GENPOWER PUMP & EQUIPMENT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Genpower leases certain facilities and vehicles under operating leases which
contain renewal options and provide for periodic cost-of-living adjustments.
Rental expense was $65,083 for the year ended December 31, 1997.
Future minimum rental commitments at December 31, 1997 under noncancelable
operating leases are (in thousands):
<TABLE>
<S> <C>
1998................................................................. $198
1999................................................................. 32
----
$230
====
</TABLE>
LEGAL MATTERS
Genpower is party to legal proceedings and potential claims in the ordinary
course of its business. Management believes that the ultimate resolution of
these matters will have no material adverse effect on Genpower's financial
position, results of operations or cash flows.
9. RELATED PARTY TRANSACTIONS
Genpower entered into an agreement in February 1996 with two of its
stockholders for the acquisition of approximately one-third of its common
stock. Consideration for the stock and a covenant not to compete was $800,000
in cash and subordinated notes payable for $200,000 due and paid in February
1997.
Genpower's stockholders advanced the company $284,603 at June 1997. The
amount payable at December 31, 1997 was $175,996.
Genpower leases its Texas City location from a related party for $1,600 per
month. The Company also provides the services of two employees to the related
party at no charge. Salaries of the employees as of December 31, 1997 were
approximately $66,401.
10. SUBSEQUENT EVENT
On January 12, 1998, Genpower's owners sold all of the outstanding common
stock to NES Acquisition Corp., a wholly-owned subsidiary of National
Equipment Services, Inc. for a $7,614,500 cash payment (subject to a customary
purchase price adjustment mechanism), a promissory note in the principal
amount of $235,500 and the assumption of certain liabilities and obligations.
F-86
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cormier Equipment Corporation:
We have audited the accompanying balance sheets of Cormier Equipment
Corporation as of December 31, 1997 and 1996, and the related statements of
earnings and retained earnings and cash flows for each of the three years in
the period then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
from 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 Cormier Equipment
Corporation as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Albin, Randall & Bennett, Certified Public Accountants
Lewiston, Maine
February 3, 1998
F-87
<PAGE>
CORMIER EQUIPMENT CORPORATION
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................. $ 4,500 $ 4,703
Trade receivables, net of allowance for doubtful
accounts of $82,670 in 1997 and $151,368 in 1996..... 2,208,216 2,152,042
Notes receivable--current portion..................... -0- 39,453
Merchandise inventories............................... 723,366 1,838,379
Prepaid expenses and deposits......................... 32,813 29,814
----------- -----------
Total current assets................................ 2,968,895 4,064,391
----------- -----------
Small tools, net of amortization....................... 1,518 9,548
----------- -----------
Equipment held for rental:
Construction equipment................................ 14,664,968 14,971,691
Less accumulated depreciation......................... 9,519,326 10,106,937
----------- -----------
Net equipment held for rental....................... 5,145,642 4,864,754
----------- -----------
Property and equipment:
Land.................................................. 63,500 63,500
Buildings............................................. 244,818 244,818
Leasehold improvements................................ 321,337 414,641
Transportation equipment.............................. 920,154 958,197
Shop equipment........................................ 109,032 107,104
Office equipment and furniture........................ 306,301 318,118
----------- -----------
1,965,142 2,106,378
Less accumulated depreciation......................... 896,180 1,109,089
----------- -----------
Net property and equipment.......................... 1,068,962 997,289
----------- -----------
Other assets:
Notes receivable, less current portion................ -0- 164,072
Cash surrender value of life insurance................ 2,940 2,440
----------- -----------
Total other assets.................................. 2,940 166,512
----------- -----------
$ 9,187,957 $10,102,494
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable--line of credit.......................... 1,510,616 $3,179,734
Current portion of long-term debt..................... 968,518 434,531
Current portion of capital lease obligations.......... 19,215 39,972
Accounts payable...................................... 606,982 397,809
State income taxes payable............................ 64,684 41,815
Accrued payroll and other expenses.................... 502,551 638,473
----------- -----------
Total current liabilities........................... 3,672,566 4,732,334
----------- -----------
Long-term liabilities:
Long-term debt, less current portion.................. 85,200 635,864
Capital lease obligations, less current portion....... 19,471 7,213
----------- -----------
Total long-term liabilities......................... 104,671 643,077
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock $.10 par value, authorized 2,000,000
shares; 784,000 shares issued; 588,000 and 783,000
shares outstanding in 1997 and 1996.................. 78,400 78,400
Additional paid-in capital............................ 24,416 24,416
Retained earnings..................................... 5,310,414 6,111,355
----------- -----------
5,413,230 6,214,171
Less treasury stock at cost, 196,000 shares in 1997
and 1,000 shares in 1996............................. 2,510 1,487,088
----------- -----------
Total stockholders' equity.......................... 5,410,720 4,727,083
----------- -----------
$ 9,187,957 $10,102,494
=========== ===========
</TABLE>
F-88
<PAGE>
CORMIER EQUIPMENT CORPORATION
STATEMENTS OF EARNINGS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Rental income........................... $11,816,864 $12,092,502 $12,107,635
Sales of equipment and supplies......... 3,822,109 3,915,875 3,519,304
----------- ----------- -----------
15,638,973 16,008,377 15,626,939
----------- ----------- -----------
COST OF REVENUES:
Equipment rental........................ 1,780,180 1,472,319 1,515,490
Depreciation and amortization........... 2,041,570 2,530,942 2,749,382
Equipment and supplies.................. 2,565,979 2,613,244 2,157,968
Other costs and expenses................ 3,852,981 3,968,434 4,066,539
----------- ----------- -----------
10,240,710 10,584,939 10,489,379
----------- ----------- -----------
Gross profit............................. 5,398,263 5,423,438 5,137,560
Operating expenses....................... 2,975,747 3,324,143 3,287,112
----------- ----------- -----------
Operating income......................... 2,422,516 2,099,295 1,850,448
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense, net................... (165,623) (123,341) (302,271)
Gain on sale of fixed assets............ 25,615 20,560 13,404
----------- ----------- -----------
Total other income (expense).......... (140,008) (102,781) (288,867)
----------- ----------- -----------
Earnings before state income taxes....... 2,282,508 1,996,514 1,561,581
State income taxes....................... 41,100 37,620 8,000
----------- ----------- -----------
Net earnings............................. 2,241,408 1,958,894 1,553,581
Retained earnings at beginning of year... 3,568,732 4,549,510 5,310,414
Distributions paid....................... (1,260,630) (1,197,990) (752,640)
----------- ----------- -----------
Retained earnings at end of year......... $ 4,549,510 $ 5,310,414 $ 6,111,355
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
CORMIER EQUIPMENT CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings............................ 2,241,408 1,958,894 $ 1,553,581
Adjustments to reconcile net earnings to
net cash
provided by operating activities:
Depreciation and amortization.......... 2,056,487 2,587,300 2,826,937
(Decrease) increase in allowance for
doubtful accounts..................... (380) 39,248 (68,699)
Gain on sale of fixed assets........... (251,805) (437,914) (620,941)
Decrease in cash surrender value of
life insurance........................ 1,334 -0- 500
Decrease (increase) in operating
assets:
Trade receivables..................... (300,242) (18,154) 124,873
Merchandise inventories............... 262,263 395,007 (1,115,013)
Small tools........................... -0- -0- (8,031)
Prepaid expenses and deposits......... (15,283) (18) 2,999
Increase (decrease) in operating
liabilities:
Accounts payable...................... 401,313 3,690 (209,173)
State income taxes payable............ 12,857 (37) (22,869)
Accrued payroll and other expenses.... 163,865 (143,603) 135,922
---------- ----------- -----------
Net cash provided by operating
activities........................ 4,571,817 4,384,413 2,600,086
---------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of small tools................ (190,525) -0- -0-
Purchase of equipment held for rental... (1,775,301) (1,789,805) (1,450,912)
Purchase of property and equipment...... (323,996) (609,914) (212,440)
Proceeds from sale of fixed assets...... 353,272 539,651 851,632
Loans made.............................. -0- -0- (203,525)
---------- ----------- -----------
Net cash used for investing
activities........................ (1,936,550) (1,860,068) (1,015,245)
---------- ----------- -----------
FINANCING ACTIVITIES:
New borrowings (repayments) on line of
credit................................. (470,000) (189,384) 1,669,118
Principal payments on long-term
liabilities............................ (900,219) (1,148,302) (1,016,538)
Purchase of treasury stock.............. -0- -0- (1,484,578)
Distributions paid...................... (1,260,630) (1,197,990) (752,640)
---------- ----------- -----------
Net cash used for financing
activities........................ (2,630,849) (2,535,676) (1,584,638)
---------- ----------- -----------
Increase (decrease) in cash........ 4,418 (11,331) 203
Cash at beginning of year............... 11,413 15,831 4,500
---------- ----------- -----------
Cash at end of year...................... 15,831 4,500 $ 4,703
========== =========== ===========
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of equipment held for rental... 2,645,458 3,529,079 $2,492,626
Less proceeds from long-term debt....... (927,621) (1,739,274) (1,041,714)
---------- ----------- -----------
Net cash paid for purchase of
equipment held for rental......... 1,717,837 1,789,805 $ 1,450,912
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest.................. 168,767 127,121 $ 273,342
Cash paid for state income taxes........ 28,244 37,657 30,868
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
CORMIER EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Cormier Equipment Corporation (the Company) rents and sells equipment and
supplies to paper and construction industries located primarily in the eastern
United States.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
MERCHANDISE INVENTORIES
Equipment and supplies held for sale are stated at the lower of cost (first-
in, first-out) or market (net realizable value). Certain equipment in
inventory which is rented on an interim basis is stated at cost reduced by a
percentage of rental receipts.
SMALL TOOLS
The Company expensed small tools as purchased in 1997 and 1996. Prior to
1996 small tools were recorded at cost and amortized on a straight-line basis
over twenty-four months. The effect of the new treatment of small tools was to
increase cost of revenues and decrease net earnings by approximately $115,000
in 1996.
EQUIPMENT HELD FOR RENTAL
Construction equipment is stated at cost. Depreciation is computed using
accelerated methods over the estimated lives of the assets.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
estimated service lives of the respective assets using both straight-line and
accelerated methods.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income. Instead, the
stockholders are liable for individual income taxes on their respective share
of the Company's taxable income.
ADVERTISING COSTS
Advertising costs are generally charged to operations in the year incurred
and totaled approximately $29,500, $34,000 and $35,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.
2. NOTES RECEIVABLE
Notes receivable are due from partnerships whose partners are also company
shareholders. The notes, totaling $203,525 at December 31, 1997, provide for
monthly payments, including interest at 8.75%, over a period of five years.
3. INDEBTEDNESS
The Company has a $6,000,000 revolving equipment line of credit of which
$2,820,266 was unused at December 31, 1997. Advances on the credit line are
payable on demand and bear interest at the Wall Street Journal base rate, 8.5%
at December 31, 1997. The credit line is secured by inventory, trade
receivables, machinery and equipment, and furniture and fixtures.
F-91
<PAGE>
CORMIER EQUIPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Installment notes payable with monthly installments
of varying amounts, including interest, secured by
specific equipment and vehicles, certain notes are
with 0% interest, others are with interest ranging
from 6.0% to 8.25%................................. 1,053,718 $1,070,395
Less current portion of long-term debt.............. 968,518 434,531
--------- ----------
85,200 $ 635,864
========= ==========
</TABLE>
Future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998............................................................. $434,531
1999............................................................. 356,712
2000............................................................. 279,152
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
Included in property and equipment are office equipment at a cost of $57,464
and construction equipment at a cost of $43,610 which were acquired under
capital lease agreements. Future minimum lease payments under the capital
leases are as follow:
<TABLE>
<S> <C>
1998............................................................. $39,972
1999............................................................. 7,213
-------
Total minimum lease payments................................... $47,185
=======
</TABLE>
5. LEASE COMMITMENTS
The Company presently leases four of its operating locations under operating
lease agreements with partnerships whose partners are also company
shareholders. These four operating leases and other real estate rental
obligations currently require monthly rental payments of $25,000 with various
provisions for increases and renewals. Rent expense was $274,000, $298,500,
and $318,175, for the years ended December 31, 1995, 1996, and 1997,
respectively.
Minimum future lease obligations are as follows:
<TABLE>
<S> <C>
1998............................................................ $300,015
1999............................................................ 25,885
2000............................................................ 8,325
--------
Total minimum future lease obligations........................ $334,225
========
</TABLE>
6. BENEFIT PLAN
The Company sponsors a 401(k) savings and profit-sharing plan covering
substantially all employees as eligibility requirements are met. The Company
makes payments to the plan, in proportion to voluntary employee contributions.
Employer contributions were $14,442 for 1995, $18,103 for 1996 and $21,215 for
1997.
7. RELATED PARTY TRANSACTIONS
During the normal course of business, the Company rents equipment from the
Walton Company, which has certain common shareholders. Equipment rentals from
Walton Company totaled approximately $356,000 in 1995, $355,000 in 1996 and
$373,000 in 1997.
8. SUBSEQUENT EVENTS
On March 4, 1998, the Company's stockholders sold substantially all of the
assets of the Company for an amount in excess of book value.
F-92
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
The Modern Group, Inc.
Beaumont, Texas
We have audited the accompanying balance sheets of Dragon Rentals (a wholly
owned division of The Modern Group, Inc.--a Texas Corporation) as of December
31, 1996 and 1997, and the related statements of income and expenses, and cash
flows for the years then ended. These financial statements are the
responsibility of the Division'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 Dragon Rentals as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ LAWRENCE, BLACKBURN MEEK MAXEY & CO. P.C.
Beaumont, Texas
March 3, 1998
F-93
<PAGE>
DRAGON RENTALS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents.............................. $ 38,477 $ 46,065
Accounts receivable, net of allowance for doubtful
accounts of $268,000 and $152,000, respectively....... 1,534,297 3,105,747
Accounts receivable-related party...................... 19,000 144,651
Inventory.............................................. 86,150
Merchandise for resale................................. 691,203
Rental equipment, net.................................. 2,286,286 11,718,619
Property and equipment, net............................ 418,221 853,151
Prepaid and other assets............................... 52,709 66,851
---------- -----------
Total assets......................................... $5,040,193 $16,021,234
========== ===========
LIABILITIES:
Accounts payable....................................... $ 219,340 $ 268,489
Revolving line of credit............................... 1,793,774
Accrued interest....................................... 5,215 118,432
Accrued expenses and other liabilities................. 989,693 716,788
Accrued expense-related party.......................... 308,969 25,107
Capital leases payable................................. 86,185
Income tax payable..................................... 36,759
Deferred income taxes.................................. 423,400 635,000
Debt................................................... 1,509,368 9,898,312
---------- -----------
Total liabilities.................................... 3,492,744 13,542,087
---------- -----------
Divisional Equity...................................... 1,547,449 2,479,147
---------- -----------
Total liabilities and divisional equity.............. $5,040,193 $16,021,234
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
DRAGON RENTALS
STATEMENTS OF INCOME AND EXPENSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
---------- -----------
<S> <C> <C>
REVENUES:
Rental revenues....................................... $4,978,701 $ 8,907,284
Other................................................. 1,199,807 1,656,880
---------- -----------
Total revenues...................................... 6,178,508 10,564,164
---------- -----------
COST OF REVENUES:
Rental equipment expenses............................. 3,674,471 4,061,952
Rental equipment depreciation......................... 353,224 844,581
Direct operating expenses............................. 708,751 1,159,865
---------- -----------
Total cost of revenues.............................. 4,736,446 6,066,398
---------- -----------
Gross profit........................................... 1,442,062 4,497,766
Selling, general and administrative expenses........... 869,878 2,165,785
Non-rental depreciation and amortization............... 46,526 59,000
---------- -----------
Operating income....................................... 525,658 2,272,981
Other income (expense), net............................ (102,501) (669,922)
Interest income (expense), net......................... (161,537) (674,811)
---------- -----------
Income before income taxes............................. 261,620 928,248
Income tax expense..................................... 90,641 211,600
---------- -----------
Net income............................................. $ 170,979 $ 716,648
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
DRAGON RENTALS
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income......................................... $ 170,979 $ 716,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 399,920 903,578
Gain on sale of equipment......................... (46,986) (10,878)
Provision for doubtful accounts................... (19,912) 257,562
Changes in operating assets and liabilities:
Accounts receivable............................... (572,619) (1,829,012)
Accounts receivable--related party................ 0 (125,651)
Inventory......................................... (232,490) (86,150)
Merchandise for resale............................ 0 691,203
Prepaid and other assets.......................... (13,181) (14,142)
Accounts payable.................................. 492,074 49,149
Accrued interest.................................. 0 113,217
Accrued expenses and other liabilities............ 289,407 (259,092)
Accrued expenses--related party................... 0 (283,862)
Income tax payable................................ 0 (36,759)
Deferred income taxes............................. (71,337) 211,600
----------- ------------
Net cash provided by operating activities........... 395,855 297,411
----------- ------------
INVESTING ACTIVITIES:
Purchases of rental equipment...................... (749,748) (10,140,812)
Purchases of property and equipment................ (49,000) (689,280)
Proceeds from sale of property and equipment....... 65,221 70,129
----------- ------------
Net cash used in investing activities............... (733,527) (10,759,963)
----------- ------------
FINANCING ACTIVITIES:
Net advances on line of credit..................... 0 1,793,774
Capital contributions.............................. 5,768 0
Proceeds from long-term debt....................... 1,894,367 11,550,621
Payments on long-term debt......................... (1,529,650) (2,960,440)
Proceeds from capital leases....................... 0 120,947
Payments of capital lease obligations.............. 0 (34,762)
----------- ------------
Net cash provided by financing activities........... 370,485 10,470,140
----------- ------------
Net increase in cash and cash equivalents........... 32,813 7,588
Cash and cash equivalents at beginning of period.... 5,664 38,477
----------- ------------
Cash and cash equivalents at end of period.......... $ 38,477 $ 46,065
=========== ============
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest............................. $ 166,034 $ 675,057
=========== ============
Cash paid for income taxes......................... $ 161,978 $ 36,759
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
DRAGON RENTALS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Dragon Rentals (a wholly owned division of The Modern Group, Inc.) engages
primarily in the rental of storage containers to the waste disposal industry
in southeast Texas and southern Louisiana.
ACCOUNTING BASIS
The Division utilizes the accrual method of accounting for financial
statement reporting and the cash method for federal income tax purposes. Under
the accrual method, revenue is recognized when earned instead of when received
and expenses are recognized when incurred instead of when actually paid.
PROPERTY AND DEPRECIATION
Property and equipment are carried at cost. Depreciation is computed on the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. Financial statement depreciation expense was $399,920
and $903,578 for the periods ended December 31, 1996 and 1997, respectively.
INCOME TAX
Deferred income taxes are provided in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Deferred taxes
provided for accumulated temporary differences due to basis differences for
assets and liabilities for financial reporting and income tax purposes. The
Division's temporary differences are due to accelerated depreciation for tax
purposes over financial reporting purposes and the use of the cash method for
federal income tax reporting.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Division establishes an allowance for uncollectible trade accounts
receivable based on historical collection experience and management's
evaluation of collectibility of outstanding accounts receivable. The allowance
for doubtful accounts was $152,600 and $268,000 as of December 31, 1996 and
1997, respectively.
CASH
For purpose of the cash flow statements, cash includes operating funds on
deposit at the bank.
CONCENTRATION OF RISK
The division has deposits in financial institutions that may, from time to
time, exceed the $100,000 federally insured limits.
CONCENTRATIONS OF CREDIT
The Division's services are primarily provided to customers throughout the
Southeast Texas region; mainly within the petro-chemical industry and are
subject to the economic sensitive industry cycles as such.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform with the 1997 financial statement presentation. Such reclassifications
have had no effect on net earnings as previously reported.
F-97
<PAGE>
DRAGON RENTALS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING
The Division has elected to expense advertising costs as incurred.
Advertising expense was $90,944 and $81,264 for the periods ended December 31,
1996 and 1997, respectively.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost or market with costs charged to
jobs determined by the weighted average cost method.
NOTE 2--LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Initial term loan with Wells Fargo Bank, secured
by accounts receivable, general intangibles,
inventory, and equipment and fixtures. The note
is payable in monthly installments of $141,047,
including interest of 1.00% above bank prime,
with a due date of July 19, 2000. $ $9,872,572
Equipment acquisition note with Wells Fargo Bank,
secured by accounts receivable, general
intangibles, inventory, and equipment and
fixtures. The note is payable in monthly
installments of $15,285, including interest of
1.00% above bank prime, with a due date of July
19, 2000. 1,710,852
Note payable for general insurance, secured by
contractor equipment. The note is payable in
monthly installments of $1,063, including
interest, maturing in January, 1999. 13,812
Notes payable to individuals, collateralized by
equipment. The notes are payable in various
installments, including interest from 11.25% to
14.68%, maturing in of before December, 1999. 358,670 97,267
Note payable to Community Bank, collateralized by
equipment. The note is payable in monthly
installments of $38,812, including interest at
10.75%, maturing in April, 1997. 1,125,548
Notes payable to Ford Motor Credit, secured by a
vehicle, payable in monthly installments of
$1,104, including interest at 9.00%, maturing in
November, 1997. 23,222
Note payable to GMAC, secured by a vehicle,
payable in monthly installments of $668,
including interest at 11.75%, maturing in March,
1997............................................ 1,928
---------- ----------
1,509,368 11,694,503
Less amount allocated to manufacturing division.. 1,796,191
---------- ----------
$1,509,368 $9,898,312
========== ==========
</TABLE>
F-98
<PAGE>
DRAGON RENTALS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A schedule of maturities of long-term debt is as follows for the year ended
December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,957,936
1999.......................................................... 1,904,866
2000.......................................................... 7,831,701
2001 and thereafter........................................... 0
-----------
$11,694,503
===========
</TABLE>
NOTE 3--NOTE PAYABLE--ACCOUNTS RECEIVABLE FINANCING:
In accordance with the asset-based financing arrangement, Wells Fargo
(lender) advances funds to the Division upon receipt of the customer account
and reduces the accumulated advances upon collection of the account. Interest
is payable monthly at the prime rate plus 1/2%. The agreement expires on July
19, 2000. The note payable is secured by a general business security agreement
on all assets of the Division. The amount outstanding on this note was
$1,793,774 at December 31, 1997.
NOTE 4--RELATED PARTY TRANSACTIONS:
The Division has identified the following related party transactions with
management and companies in which management has full ownership:
(1) The Division provides personnel and administrative services and
shares certain building expenses with a related company, Modern, Inc. Prior
to August 1, 1997 all personnel and management services cost were borne by
Modern, Inc.
As of December 31, 1997, Modern, Inc. owned Dragon Rentals $125,651.
As of December 31, 1996, Dragon Rentals owed Modern, Inc. $308,969.
(2) At December, 31, 1997 and 1996, Dragon Rentals had a $19,000 note
receivable from Will Crenshaw, the sole shareholder of Modern, Inc., a
related party.
(3) The Division has a lease agreement with Will Crenshaw, sole
shareholder of Modern, Inc., for the rental of yard space to hold
containers when they are not out on rent. At December 31, 1997 the Division
owed accrued rent of $25,000 to Mr. Crenshaw.
NOTE 5--ECONOMIC DEPENDENCE:
Historically, the Division purchased 100% of the waste containers used in
its business from Modern, Inc., a related party. For the years ended December
31, 1996 and 1997, the Division had purchases of $657,500 and $1,864,486,
respectively. However, on July 19, 1997, the Division purchased the
manufacturing facility from Modern, Inc., and from that point forward began
manufacturing the container boxes. This restructuring enabled the Division to
become more efficient by building container boxes at a lessor cost.
NOTE 6--INCOME TAXES:
In accordance with the provisions of Statement of Financial Accounting
Standards No. 109, " Accounting for Income Taxes", the Division has reflected
the tax consequences on future years differences between the tax basis of
assets and liabilities and their financial reporting amounts.
The sources of deferred income taxes and the tax effect of each follows:
<TABLE>
<CAPTION>
1996 1997
-------- -----------
<S> <C> <C>
Accumulated depreciation temporary differences..... $407,287 $ 998,157
Effect of cash method of accounting................ 16,113 699,273
Net operating loss carryforward.................... (1,062,430)
-------- -----------
$423,400 $ 635,000
======== ===========
</TABLE>
F-99
<PAGE>
DRAGON RENTALS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The components of corporate income tax expense are as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Current tax expense...................................... $36,759 $
Deferred tax expense..................................... 53,882 211,600
------- --------
$90,641 $211,600
======= ========
</TABLE>
NOTE 7--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Land improvements.................................. $ 21,668 $ 21,668
Building........................................... 13,458
Machinery and equipment............................ 64,851 155,998
Furniture and fixtures............................. 18,842 31,388
Autos and trucks................................... 587,922 1,053,315
Capital jobs in progress........................... 41,031
--------- ----------
693,283 1,316,858
Accumulated depreciation........................... (275,062) (463,707)
--------- ----------
$ 418,221 $ 853,151
========= ==========
</TABLE>
NOTE 8--RENTAL EQUIPMENT:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Rental Equipment................................. $2,875,021 $12,977,642
Accumulated depreciation......................... (588,735) (1,259,023)
---------- -----------
$2,286,286 $11,718,619
========== ===========
</TABLE>
NOTE 9--OPERATING LEASE OBLIGATIONS:
The Division conducts its operations in southeast Texas and southern
Louisiana from leased facilities with varying terms ranging from one year to
five years. The leases provide for renewal options ranging from four years to
nine years. The Division also has incurred a certain operating lease for
equipment used in its operations. The lease has a term of five years. Future
minimum obligations at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 231,900
1999.......................................................... 229,600
2000.......................................................... 181,500
2001.......................................................... 660,000
2002 and thereafter........................................... 30,000
----------
Total minimum lease payments required....................... $1,333,000
==========
</TABLE>
NOTE 10--CAPITAL LEASE OBLIGATIONS:
During 1997, the Division acquired equipment under the provisions of long-
term leases. For financial reporting purposes, minimum lease payments relating
to the equipment have been capitalized. The leases expire in or before
February, 2000. The leased property under the capital leases as of December
31, 1997 has a cost of $120,947 accumulated amortization of $9,664 and a net
book value of $111,283. Amortization of the leased property is included in
depreciation expense.
F-100
<PAGE>
DRAGON RENTALS
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The future minimum lease payments under the capital leases and the net
present value of the future lease payments at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Total minimum lease payments..................................... $95,952
Less amount representing interest................................ 9,767
-------
Present value of net minimum lease payments...................... $86,185
=======
</TABLE>
NOTE 11--PREPAID AND OTHER ASSETS:
Prepaid and other assets consists of the following at December 31,
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Prepaid insurance........................................ $ 4,699 $21,353
Prepaid real estate taxes................................ 8,482
Deferred charges......................................... 15,970
Other receivable......................................... 9,528 9,528
Rental lease deposits.................................... 30,000 20,000
------- -------
$52,709 $66,851
======= =======
</TABLE>
NOTE 12--ACCRUED EXPENSES AND OTHER LIABILITIES:
Accrued expenses and other liabilities consists of the following at December
31,
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Payable to investors.................................... $721,052 $
Customer deposits....................................... 76,136
Accrued expenses........................................ 77,859 346,814
Accrued franchise tax................................... 8,721
Accrued payroll......................................... 102,458
Accrued sales tax....................................... 105,925 267,517
-------- --------
$989,693 $716,789
======== ========
</TABLE>
NOTE 13--INVENTORY:
Inventory consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Steel............................................................. $18,916
Purchased parts................................................... 56,794
Work in process................................................... 10,440
-------
$86,150
=======
</TABLE>
NOTE 14--SUBSEQUENT EVENTS:
On March 2, 1998 Dragon Rentals was sold to National Equipment Services,
Inc. National Equipment Services Inc. is primarily involved in the rental of
equipment to construction and industrial users from locations in Alabama,
Georgia, Louisiana, Nevada, Texas and Virginia.
F-101
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Albany Ladder Company, Inc. and the Board of Directors
of National Equipment Services, Inc.
In our opinion, the accompanying balance sheet and the related statement of
operations, of cash flows and of changes in stockholder's equity, present
fairly, in all material respects, the financial position of Albany Ladder
Company, Inc. at December 31, 1997, and the results of its operations and its
cash flows in the period then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, 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.
/s/ PRICE WATERHOUSE LLP
Chicago, Illinois
March 31, 1998
F-102
<PAGE>
ALBANY LADDER COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS:
Cash and cash equivalents............................................. $ 87
Marketable securities................................................. 104
Accounts receivable, net.............................................. 5,951
Inventory............................................................. 2,878
Rental equipment, net................................................. 15,116
Property and equipment, net........................................... 2,139
Prepaid and other assets.............................................. 927
-------
Total assets....................................................... $27,202
=======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable...................................................... $ 980
Accrued expenses and other liabilities................................ 1,020
Notes payable--shareholder............................................ 370
Notes payable......................................................... 11,900
-------
Total liabilities.................................................. 14,270
Commitments and contingencies (Note 9)
Common stock:
Class A shares, $100 par, 1,200 shares authorized, 246 shares issued
and outstanding ..................................................... 25
Class B shares, $100 par, 2,000 shares authorized, 941 shares issued
and outstanding ..................................................... 94
Additional paid-in capital............................................. 333
Retained earnings...................................................... 12,391
Unrealized gain on marketable securities available for sale............ 89
-------
Total stockholders' equity......................................... 12,932
-------
Total liabilities and stockholders' equity......................... $27,202
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-103
<PAGE>
ALBANY LADDER COMPANY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES:
Rental revenues....................................................... $18,410
Rental equipment sales................................................ 1,885
New equipment sales................................................... 8,931
Other................................................................. 4,978
-------
Total revenues..................................................... 34,204
-------
COST OF REVENUES:
Rental equipment expenses............................................. 4,800
Rental equipment depreciation......................................... 3,445
Cost of rental equipment sales........................................ 721
Cost of new equipment sales........................................... 7,725
Direct operating expense.............................................. 5,938
-------
Total cost of revenues............................................. 22,629
-------
Gross profit........................................................... 11,575
Selling, general and administrative expenses........................... 7,796
Non-rental depreciation................................................ 640
-------
Operating income....................................................... 3,139
Other income, net...................................................... 117
Interest expense, net.................................................. (846)
-------
Net income............................................................. $ 2,410
=======
PRO FORMA TAX PROVISION (UNAUDITED):
Income before income taxes............................................ $ 2,410
Pro forma provision for income taxes.................................. (964)
Pro forma net income.................................................. $ 1,446
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-104
<PAGE>
ALBANY LADDER COMPANY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income.......................................................... $ 2,410
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation....................................................... 4,085
Gain on sale of equipment.......................................... (987)
Changes in operating assets and liabilities:
Accounts receivable............................................... (1,172)
Inventories....................................................... (92)
Prepaid and other assets.......................................... (483)
Accounts payable.................................................. 262
Accrued expenses and other liabilities............................ 239
--------
Net cash provided by operating activities............................ 4,262
--------
INVESTING ACTIVITIES:
Purchases of rental equipment....................................... (6,516)
Proceeds from sale of rental equipment.............................. 1,885
Purchases of property and equipment................................. (284)
Proceeds from sale of property and equipment........................ 13
--------
Net cash used in investing activities................................ (4,902)
--------
FINANCING ACTIVITIES:
Proceeds from long-term debt........................................ 12,104
Payments on long-term debt.......................................... (10,630)
Dividends paid...................................................... (859)
--------
Net cash provided by financing activities........................... 615
--------
Net increase (decrease) in cash..................................... (25)
Cash at beginning of period......................................... 112
--------
Cash at end of period............................................... $ 87
========
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest.............................................. $ 811
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
ALBANY LADDER COMPANY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- TOTAL
CLASS A CLASS B STATED PAID-IN UNREALIZED RETAINED STOCKHOLDERS'
SHARES SHARES VALUE CAPITAL GAIN EARNINGS EQUITY
------- ------- ------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 246 941 $119 $333 $59 $10,840 $11,351
Net income.............. -- -- -- -- -- 2,410 2,410
Increase in unrealized
gain................... -- -- -- -- 30 -- 30
Dividends............... -- -- -- -- -- (859) (859)
--- --- ---- ---- --- ------- -------
Balance at December 31,
1997................... 246 941 $119 $333 $89 $12,391 $12,932
=== === ==== ==== === ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
ALBANY LADDER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Albany Ladder Company, Inc. (the Company) is primarily engaged in the sale
and rental of lifts, scaffolding, and contractor equipment and operates from
seven locations located in New York, Pennsylvania, and Vermont.
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 the
disclosures 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.
REVENUE RECOGNITION
Rental revenues are recognized ratably over the lease term. Sales revenues
are recognized at the point of delivery.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are short-term highly liquid investments with
original maturities of three months or less.
INVENTORY
The Company's inventories primarily consist of parts and new equipment held
for sale. Inventories are stated at the lower of cost, determined by the
average cost or specific identification method, or market.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment
acquired is computed using the straight-line and accelerated methods over an
estimated 5 to 8 year useful life.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When rental equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts. 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 and cost of equipment sales in the statement of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
The estimated useful lives for property and equipment range from 5 years for
machinery, equipment and automobiles, to 10 years for leasehold improvements.
Ordinary repairs and maintenance costs are charged to operations as
incurred. When property and equipment is disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any
gains or losses are included in results of operations.
F-107
<PAGE>
ALBANY LADDER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets for marketable
securities, trade accounts receivable, accounts payable and accrued expenses
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
is determined using current interest rates for similar instruments and
approximates the carrying value of the debt as of December 31, 1997.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable
from construction and industrial customers. Concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
customers and the Company's geographic dispersion. The Company performs credit
evaluations of its customers' financial condition and generally does not
require collateral on accounts receivable. The Company maintains an allowance
for doubtful accounts on its receivables based upon expected collectibility.
Allowance for doubtful accounts was $372 at December 31, 1997.
INCOME TAXES
The Company has elected S corporation status under the U.S. Internal Revenue
Code. Pursuant to this election, the Company's income, deductions and credits
are reported on the income tax returns of the Company's stockholders for
federal purposes and, accordingly, no provision for federal income taxes has
been made. Pro forma income taxes are calculated at a statutory tax rate of
40%.
2. INVENTORY
Inventory consists of the following at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
New equipment..................................................... $ 693
Parts and supplies................................................ 1,541
Scaffolding and ladders........................................... 525
Other............................................................. 119
------
Total inventory................................................... $2,878
======
</TABLE>
3. RENTAL EQUIPMENT
Rental equipment consists of the following at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Rental equipment................................................. $30,990
Less: accumulated depreciation................................... (15,874)
-------
Rental equipment, net............................................ $15,116
=======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Leasehold improvements............................................ $ 617
Vehicles.......................................................... 3,370
Machinery and shop equipment...................................... 471
Computer equipment................................................ 847
------
Total property and equipment, at cost............................. 5,305
Less: accumulated depreciation.................................... (3,166)
------
Property and equipment, net....................................... $2,139
======
</TABLE>
F-108
<PAGE>
ALBANY LADDER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PREPAID AND OTHER ASSETS
Prepaid and other assets consist of the following at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
Prepaid expenses.................................................... $225
Employee and other receivables...................................... 702
----
$927
====
</TABLE>
6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following at December
31, 1997 (in thousands):
<TABLE>
<S> <C>
Accrued salaries and benefits.................................... $ 388
Sales tax payable................................................ 163
Accrued insurance................................................ 232
Accrued professional fees........................................ 107
Other............................................................ 130
------
$1,020
======
</TABLE>
7. NOTES PAYABLE
Notes payable consist of a secured revolving line of credit of $13,350,000
maturing no later than August 31, 1999. The Company has the right to elect
various interest rate options under the agreement. These options include
floating rates fluctuating with the bank's prime rate and fixed rates for
varying periods fluctuating with published LIBOR or treasury rates. Interest
payments are due monthly. Interest rates in effect at December 31, 1997 were
as follows (dollar amounts in thousands):
<TABLE>
<S> <C>
Interest at 7.31%................................................. $10,025
Interest at 8.25%................................................. 1,875
-------
Total notes payable............................................... $11,900
=======
</TABLE>
The bank agreement includes restrictions as to limitations upon certain
ratios of liabilities to net worth and upon the minimum net worth of the
Company. The Company is in compliance with these covenants. Substantially all
of the Company's assets are pledged as collateral for the long-term debt.
Maturities of debt are as follows at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $ --
1999.............................................................. 11,900
Thereafter........................................................ --
-------
$11,900
=======
</TABLE>
Interest expense on long-term debt for the year ended December 31, 1997 was
$795.
F-109
<PAGE>
ALBANY LADDER COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. NOTES PAYABLE--SHAREHOLDER
Notes payable--shareholder consists of the following at December 31, 1997
(in thousands):
<TABLE>
<S> <C>
Note payable, shareholder, unsecured, due on demand with interest
payable monthly at prime plus 3%.................................. $170
Note payable, shareholder, unsecured, due on demand with interest
payable monthly at prime plus 1%.................................. 200
----
Total notes payable--shareholder............................... $370
====
</TABLE>
Interest expense on shareholder debt for the year ended December 31, 1997
was $39.
9. COMMITMENTS AND CONTINGENCIES
The Company leases office and warehouse space at eight locations. The leases
have varying expiration dates through April 2001, with certain leases
containing extension options. In addition to the monthly rental payments,
these leases also require payment of the related utilities, maintenance, and
real estate taxes for the respective properties.
The Company also leases various vehicles and equipment. The leases have
varying expiration dates through October 2002.
Rental expense totaled $570 for the year ended December 31, 1997.
Future minimum lease obligations are as follows at December 31, 1997 (in
thousands):
<TABLE>
<S> <C>
1998................................................................ $ 404
1999................................................................ 312
2000................................................................ 181
2001................................................................ 67
2002................................................................ 12
-----
$976
=====
</TABLE>
10. EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) profit sharing plan (the "Plan"). Employees
meeting certain age and length of service requirements are eligible to
participate in the Plan. The Company makes contributions varying with the
level of employee participation, up to certain limits. The Company contributed
$157,000 to the plan during the year ended December 31, 1997.
11. SUBSEQUENT EVENTS
On March 30, 1998, the Company's owners sold all of the outstanding Class A
and B shares of common stock to National Equipment Services, Inc. in exchange
for a $28,811,000 cash payment (less a $2,000,000 million reserve).
F-110
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Falconite, Inc.:
We have audited the accompanying consolidated balance sheet of Falconite,
Inc. and subsidiaries (the Company) as of December 31, 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years ended December 31, 1995 and 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Falconite, Inc. and subsidiaries as of December 31, 1996 and the results of
their operations and their cash flows for the years ended December 31, 1995
and 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick L.L.P.
St. Louis, Missouri
February 20, 1997
F-111
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of Falconite, Inc.
We have audited the accompanying consolidated balance sheet of Falconite,
Inc. and Subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, shareholders' 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 consolidated financial position of Falconite,
Inc. and Subsidiaries as of December 31, 1997, and the consolidated results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Louisville, Kentucky
February 6, 1998, except for the information in Note 6
as to which the date is March 23, 1998 and the information in
Note 12 as to which the date is April 1, 1998
F-112
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ------------
1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents........ $ 416,000 $ 820,000 $1,642,000
Trade accounts receivable, less
allowance for doubtful accounts
of $522,000, $431,000 and
$410,000, respectively.......... 7,294,000 9,281,000 8,862,000
Due from affiliated companies and
related parties................. 453,000 -- --
Income taxes receivable.......... 136,000 382,000 374,000
Inventories...................... 1,615,000 1,596,000 2,658,000
Rental equipment, principally
machinery, at cost less
accumulated depreciation of
$12,989,000, $21,489,000 and
24,104,000, respectively........ 81,583,000 107,721,000 112,937,000
Operating property and equipment,
net............................. 7,018,000 10,542,000 11,547,000
Excess of cost over net assets of
purchased businesses, less
accumulated amortization........ 17,059,000 16,279,000 17,069,000
Prepaid and other assets, at cost
less accumulated amortization... 1,884,000 1,447,000 1,137,000
------------ ------------ ------------
$117,458,000 $148,068,000 $156,226,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Trade accounts payable........... $ 13,587,000 $ 2,184,000 $ 1,715,000
Accrued expenses................. 657,000 2,196,000 1,883,000
Accrued interest payable......... 140,000 666,000 715,000
Revolving lines of credit........ 27,152,000 91,416,000 100,762,000
Obligations under capital lease.. 1,600,000 4,093,000 3,886,000
Term debt........................ 31,867,000 4,691,000 3,782,000
Deferred income taxes............ 7,801,000 9,645,000 9,645,000
Due to affiliated companies and
related parties................. 121,000 39,000 35,000
Other liabilities................ 377,000 742,000 571,000
------------ ------------ ------------
Total liabilities.............. 83,302,000 115,672,000 122,994,000
------------ ------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, Falconite, Inc.,
$0.01 par value; authorized,
1,000,000 shares; issued and
outstanding, zero shares........ -- -- --
Common stock, $0.01 par value;
authorized, 50,000,000 shares;
issued and outstanding,
8,330,000 shares................ 83,000 83,000 83,000
Additional paid-in capital....... 20,250,000 20,250,000 20,250,000
Due from affiliated companies and
related parties................. -- (2,144,000) (1,089,000)
Retained earnings................ 13,823,000 14,207,000 13,988,000
------------ ------------ ------------
Total shareholders' equity..... 34,156,000 32,396,000 33,232,000
------------ ------------ ------------
$117,458,000 $148,068,000 $156,226,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-113
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1995 1996 1997 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Equipment rentals...... $23,395,000 $32,883,000 $44,911,000 $ 8,989,000 $12,033,000
New equipment sales.... 4,393,000 4,058,000 4,659,000 868,000 1,474,000
Rental equipment sales. 5,448,000 7,674,000 9,222,000 3,276,000 1,364,000
Sales of parts,
supplies, and
equipment............. 979,000 1,391,000 1,680,000 537,000 736,000
Service revenues and
other income.......... 1,446,000 2,080,000 3,174,000 704,000 1,026,000
----------- ----------- ----------- ----------- -----------
Total revenues....... 35,661,000 48,086,000 63,646,000 14,374,000 16,633,000
----------- ----------- ----------- ----------- -----------
Cost of revenues:
Cost of equipment
rentals, excluding
equipment rental
depreciation.......... 4,651,000 7,332,000 10,284,000 2,259,000 3,238,000
Equipment rental
depreciation.......... 4,437,000 6,823,000 11,114,000 2,373,000 3,367,000
Cost of new equipment
sales................. 3,651,000 3,104,000 4,103,000 755,000 1,251,000
Cost of rental
equipment sales....... 4,332,000 6,697,000 7,582,000 2,516,000 1,097,000
Cost of sales of parts,
supplies, equipment,
and other services.... 1,014,000 1,306,000 1,111,000 285,000 549,000
----------- ----------- ----------- ----------- -----------
Total cost of
revenues............ 18,085,000 25,262,000 34,194,000 8,188,000 9,502,000
----------- ----------- ----------- ----------- -----------
Gross profit........ 17,576,000 22,824,000 29,452,000 6,186,000 7,131,000
Selling, general, and
administrative
expenses............... 5,858,000 9,985,000 15,065,000 2,938,000 4,482,000
Depreciation and
amortization, excluding
equipment rental
depreciation........... 412,000 764,000 2,428,000 576,000 680,000
----------- ----------- ----------- ----------- -----------
Operating income..... 11,306,000 12,075,000 11,959,000 2,672,000 1,969,000
----------- ----------- ----------- ----------- -----------
Other income (expense):
Interest income........ 41,000 32,000 55,000 14,000 21,000
Interest expense....... (3,213,000) (4,330,000) (7,382,000) (1,347,000) (2,201,000)
Non-capitalized
offering costs........ -- -- (1,000,000) -- --
Other, net............. (40,000) 182,000 185,000 4,000 (8,000)
----------- ----------- ----------- ----------- -----------
(3,212,000) (4,116,000) (8,142,000) (1,329,000) (2,188,000)
----------- ----------- ----------- ----------- -----------
Income before income
taxes and minority
interests........... 8,094,000 7,959,000 3,817,000 1,343,000 (219,000)
Income taxes............ 2,893,000 2,328,000 1,859,000 598,000 --
Minority interests...... 1,429,000 1,714,000 -- -- --
----------- ----------- ----------- ----------- -----------
Net income........... $ 3,772,000 $ 3,917,000 $ 1,958,000 745,000 (219,000)
=========== =========== =========== =========== ===========
Pro forma net income
data:
Net income as reported. $ 3,772,000 $ 3,917,000 -- -- --
Pro forma adjustment to
provision for income
taxes................. 124,000 666,000 -- -- --
----------- ----------- ----------- ----------- -----------
Pro forma net income... $ 3,648,000 $ 3,251,000 -- -- --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-114
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS
ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
DUE FROM
FALCONITE, INC. COMBINED COMPANIES' AFFILIATED
COMMON STOCK COMMON STOCK ADDITIONAL COMPANIES TOTAL
----------------- -------------------- PAID-IN AND RELATED RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL PARTIES EARNINGS EQUITY
--------- ------- --------- ---------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... -- -- 14,000 $ 131,000 $ 87,000 -- $ 6,509,000 $ 6,727,000
Common stock issued by
McCurry and Falconite,
Inc.................... -- -- 1,000 1,000 -- -- -- 1,000
Net income.............. -- -- -- -- -- -- 3,772,000 3,772,000
Capital distribution to
shareholder of McCurry
& Falconite Equipment
Company, Inc........... -- -- -- -- -- -- (160,000) (160,000)
--------- ------- -------- ---------- ----------- ----------- ----------- -----------
Balance at January 1,
1996................... -- -- 15,000 $ 132,000 $ 87,000 -- $10,121,000 $10,340,000
Net income.............. -- -- -- -- -- -- 3,917,000 3,917,000
Capital distribution to
shareholder of McCurry
& Falconite Equipment
Company, Inc........... -- -- -- -- -- -- (215,000) (215,000)
Formation of Falconite,
Inc. and
Recapitalization
Agreement transactions. 8,330,000 $83,000 (15,000) (132,000) 20,163,000 -- -- 20,114,000
--------- ------- -------- ---------- ----------- ----------- ----------- -----------
Balance at December 31,
1996................... 8,330,000 83,000 -- -- 20,250,000 -- 13,823,000 34,156,000
Net income.............. -- -- -- -- -- -- 1,958,000 1,958,000
Capital distribution to
shareholder of McCurry
& Falconite Equipment
Company, Inc........... -- -- -- -- -- -- (1,574,000) (1,574,000)
Due from affiliated
companies and related
parties................ -- -- -- -- -- $(2,144,000) -- (2,144,000)
--------- ------- -------- ---------- ----------- ----------- ----------- -----------
Balance at December 31,
1997................... 8,330,000 $83,000 -- -- $20,250,000 $(2,144,000) $14,207,000 $32,396,000
Net loss (unaudited).... -- -- -- -- -- -- (219,000) (219,000)
Due from affiliated
companies and related
parties (unaudited).... -- -- -- -- -- 1,055,000 -- 1,055,000
--------- ------- -------- ---------- ----------- ----------- ----------- -----------
Balance at March 31,
1998 (unaudited)....... 8,330,000 $83,000 -- -- $20,250,000 $(1,089,000) $13,988,000 $33,232,000
========= ======= ======== ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-115
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- -------------------------
1995 1996 1997 1998 1997
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
1Net income (loss).... $ 3,772,000 $ 3,917,000 $ 1,958,000 $ (219,000) $ 745,000
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization......... 4,849,000 7,587,000 13,542,000 4,047,000 2,948,000
Minority interests.... 1,429,000 1,714,000 -- -- --
Provision for losses
on trade accounts
receivable........... 323,000 891,000 297,000 21,000 130,000
Provision for deferred
income taxes......... 2,308,000 2,208,000 1,844,000 -- 270,000
Net gain on sale of
rental equipment and
operating property
and equipment........ (987,000) (978,000) (1,788,000) (288,000) (737,000)
Change in operating
assets and
liabilities, net of
effect of business
acquisitions:
Trade accounts
receivable.......... (2,302,000) (2,139,000) (2,284,000) 398,000 844,000
Due from affiliated
companies and
related parties..... (173,000) (140,000) (1,691,000) 1,056,000 (230,000)
Income taxes
receivable.......... -- (136,000) (246,000) 8,000 --
Inventories.......... 226,000 (989,000) 19,000 (1,061,000) 237,000
Prepaid and other
assets.............. (89,000) (752,000) 420,000 (771,000) (170,000)
Trade accounts
payable, accrued
expenses, and
accrued interest
payable............. 245,000 12,052,000 (9,338,000) (733,000) (5,179,000)
Income taxes payable. (274,000) (33,000) -- -- 328,000
Due to affiliated
companies and
related parties..... (97,000) (240,000) (82,000) (4,000) (15,000)
Other liabilities.... 64,000 299,000 365,000 (171,000) (173,000)
------------ ------------ ------------ ----------- ------------
Net cash provided by
(used in) operating
activities......... 9,294,000 23,261,000 3,016,000 2,283,000 (1,002,000)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Acquisitions of rental
operations, net of
cash acquired........ (451,000) (3,094,000) -- (8,043,000) --
Proceeds from sales of
rental equipment and
operating assets..... 5,622,000 7,936,000 11,419,000 1,532,000 3,314,000
Capital expenditures
for rental equipment. (29,100,000) (41,092,000) (42,552,000) (1,884,000) (20,031,000)
Capital expenditures
for operating
property and
equipment............ (1,829,000) (3,229,000) (5,726,000) (846,000) (2,450,000)
------------ ------------ ------------ ----------- ------------
Net cash used in
investing
activities......... (25,758,000) (39,479,000) (36,859,000) (9,241,000) (19,167,000)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Net borrowings under
revolving lines of
credit............... 7,899,000 12,746,000 64,264,000 8,935,000 31,673,000
Proceeds form issuance
of term debt......... 33,261,000 22,100,000 15,559,000 5,000 4,881,000
Principal payments on
term debt and
obligations under
capital lease........ (25,190,000) (18,039,000) (44,002,000) (1,160,000) (16,401,000)
Proceeds from issuance
of common stock...... 1,000 -- -- -- --
Capital distributions
to shareholders...... (160,000) (215,000) (1,574,000) -- --
Capital distributions
to minority
shareholder.......... (160,000) (216,000) -- -- --
------------ ------------ ------------ ----------- ------------
Net cash provided by
financing
activities......... 15,651,000 16,376,000 34,247,000 7,780,000 20,153,000
------------ ------------ ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... (813,000) 158,000 404,000 822,000 (16,000)
Cash and cash
equivalents at
beginning of year..... 1,071,000 258,000 416,000 820,000 416,000
------------ ------------ ------------ ----------- ------------
Cash and cash
equivalents at end
year.................. $ 258,000 $ 416,000 $ 820,000 $ 1,642,000 $ 400,000
============ ============ ============ =========== ============
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for:
Interest.............. $ 3,227,000 $ 4,319,000 $ 6,857,000 $ 2,152,000 $ 1,369,000
Income taxes.......... 912,000 505,000 382,000 -- --
NONCASH FINANCING
ACTIVITIES:
Refinancings of term
debt................. -- 8,346,000 -- -- 8,346,000
Purchase of equipment
with capital leases.. 1,119,000 296,000 3,376,000 450,000 556,000
Reduction in term debt
due to sale of
property............. 1,123,000 -- -- -- --
Term debt entered into
for purchases of
businesses and
covenants not to
compete.............. 150,000 450,000 -- -- --
Loan costs funded by
debt................. -- -- 384,000 -- --
Noncash consideration
for acquisitions of
minority interest.... -- 20,287,000 -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-116
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A) PRINCIPLES OF CONSOLIDATION:
Falconite, Inc. (Falconite or the Company) was formed on December 31, 1996
when the shareholders of Falconite Equipment, Inc. (Falconite Equipment),
formerly known as Falconite, Inc., M&M Properties, Inc., d/b/a M&M Equipment
Company (M&M Equipment), and McCurry and Falconite Equipment Company, Inc.
(M&F Equipment) entered into a Recapitalization Agreement. Pursuant to the
terms of the Recapitalization Agreement, the shareholders of Falconite
Equipment, M&M Equipment, and M&F Equipment exchanged their common shares for
common shares of Falconite (the Recapitalization). The exchange of shares was
accounted for at historical basis for the controlling shareholders of
Falconite and at fair market value for the minority interests in M&M Equipment
and M&F Equipment.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. Prior to formation of the Company, the
historical financial statements of Falconite Equipment, M&M Equipment, and M&F
Equipment were combined for financial reporting purposes. For purposes of
these financial statements, the 1996 and 1997 consolidated financial
statements and the 1995 combined financial statements will be referred to as
consolidated financial statements. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
The consolidated statements of income reflect the 49% minority interest
through December 31, 1996 for M&M Equipment and M&F Equipment when the
remaining interests were purchased by Falconite.
In January 1990, M&M Equipment was formed by two shareholders of Falconite
Equipment and a third party. Subsequent to its formation, M&M Equipment was
considered an entity under common control as the controlling shareholders of
Falconite Equipment owned 51% of M&M Equipment. The combined financial
statements for the year ended December 31, 1995 reflect the 49% minority
interest.
In October 1993, Falconite Equipment acquired a 70% ownership of Erzinger
Equipment Co. (Erzinger). Subsequently, on September 10, 1996, Falconite
Equipment acquired the remaining 30% of Erzinger. The minority interest is
reflected through September 10, 1996. For the period September 10, 1996
through December 31, 1996, Erzinger is accounted for as a wholly owned
subsidiary of Falconite Equipment.
In March 1995, a shareholder of Falconite Equipment and the minority
shareholder of M&M Equipment created a Subchapter S corporation, M&F
Equipment. M&F Equipment has been operated as a branch of M&M Equipment since
its inception. The consolidated financial statements reflect the operations of
M&F Equipment since inception and reflect the minority shareholder's interest
in M&F Equipment through December 31, 1996. On December 31, 1996, as part of
the Recapitalization, the Subchapter S Corporation election was terminated.
The consolidated balance sheets are presented in an unclassified format, as
management believes it more accurately reflects its operations and presents
its financial position on a basis comparable to other companies in its
industry.
B) DESCRIPTION OF BUSINESS:
Falconite, an Illinois corporation, through its wholly owned subsidiaries,
is engaged primarily in a single-industry segment--the rental, sales, and
service of cranes, other lift equipment, and smaller equipment ranging from
pumps and generators to larger equipment such as backhoes and forklifts.
Falconite's operations are based in certain southern and midwestern states.
C) CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.
F-117
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
D) INVENTORIES:
Inventories consist of parts, supplies and small tools. Inventories are
stated at cost. Cost is determined using the first-in, first-out method.
E) RENTAL EQUIPMENT AND OPERATING PROPERTY AND EQUIPMENT:
Rental equipment and operating property and equipment are stated at cost.
Rental equipment and operating property and equipment under capital leases are
stated at the present value of future minimum lease payments at the inception
of the lease.
Depreciation is calculated on the straight-line method over the estimated
useful lives of the assets. Prior to January 1, 1997, M&M Equipment assigned a
salvage value of 25% to its rental equipment purchases, whereas Falconite
Equipment did not provide for a salvage value on its rental equipment.
Equipment held under capital leases and leasehold improvements are amortized
on the straight-line basis over the shorter of the lease term or estimated
useful life of the asset.
Amortization of assets under capital leases is included in depreciation
expense. Prior to January 1, 1997, depreciation expense was computed over the
following useful lives in years:
<TABLE>
<CAPTION>
FALCONITE M&M
EQUIPMENT EQUIPMENT
--------- ---------
<S> <C> <C>
Rental equipment:
Cranes.............................................. 10-15 10
Lift equipment...................................... 10 10
Other heavy equipment............................... 7 7
Miscellaneous....................................... 2-5 5-7
Operating equipment:
Buildings........................................... 45 --
Other buildings and leasehold improvements.......... 20-40 39
Vehicles............................................ 5 5
Furniture and fixtures.............................. 5 5-7
Computer equipment.................................. 3 5-7
</TABLE>
Rental equipment acquired subsequently to January 1, 1997 is being
depreciated using the straight-line method, after giving effect to an
estimated salvage value as follows:
<TABLE>
<CAPTION>
USEFUL LIFE SALVAGE
TYPE OF EQUIPMENT IN YEARS VALUE
----------------- ----------- -------
<S> <C> <C>
Large (28 tons and greater) cranes.................... 15 25%
Small (less than 28 tons) cranes...................... 10 10
Large lifts........................................... 10 10
Small lifts........................................... 7 10
Forklifts............................................. 7 10
Dirt moving........................................... 7 10
Other small equipment................................. 5 10
Vehicles and trailers................................. 5 --
</TABLE>
The change in depreciation policy did not have a material effect on the
consolidated financial statements.
Equipment reported under the classification of "rental equipment," although
primarily utilized within the rental aspect of the business, is available for
sale in the ordinary course of business and is recorded at the lower of cost,
net of accumulated depreciation, or market. Rental equipment sold by the
Company is sold "as is."
F-118
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F) EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES:
Excess of cost over net assets of purchased businesses (goodwill) is
amortized on a straight-line basis over the expected periods to be benefited,
generally 5 to 30 years. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through the undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected future operating cash flows
on a discounted basis.
G) INCOME TAXES:
Income taxes are accounted for under the asset and liability method.
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 and operating losses and tax credit carryforwards. 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. 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.
Prior to January 1, 1997, M&F Equipment had elected S corporation status in
accordance with the provisions of Subchapter S of the Internal Revenue Code.
Pursuant to this election, the taxable income of M&F Equipment was reported in
the federal and state income tax returns of the shareholders. Accordingly, a
provision for federal and state income taxes that is payable by an S
corporation has not been reflected in the accompanying consolidated financial
statements. The pro forma income tax adjustment included on the consolidated
statements of income represents federal income tax expense that would have
been incurred had M&F Equipment been a C corporation.
H) ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company determines the allowance for doubtful accounts by reserving
specific trade accounts receivable and providing an estimate based on the
aging of the trade receivables. The Company recognized bad debt expense of
$323,000, $891,000 and $297,000 for the years ended December 31, 1995, 1996
and 1997, respectively. The Company writes off trade receivables when
considered uncollectible.
I) USE OF ESTIMATES:
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions relating to the reporting of assets and liabilities and the
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.
J) CONCENTRATIONS OF RISKS:
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The Company places its cash with high quality
financial institutions in amounts that from time to time exceed federally
insured limits. No losses have been incurred on such deposits.
Falconite's customers are primarily concentrated in the construction and
manufacturing industries and are dependent on those industries. Management
believes it has addressed this concentration by expanding its operations
throughout certain southern and midwestern states. Falconite performs ongoing
credit evaluations of
F-119
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
its customers' financial condition but does not require collateral to support
customer receivables. In certain instances, Falconite may file a mechanic's
lien to protect its interest.
K) REVENUE RECOGNITION:
Equipment rental and delivery charge revenue is recognized when earned.
New and used equipment sales and revenues from the sale of parts and
supplies are recognized when title passes to the purchaser usually at the time
of delivery or pickup. When equipment is sold, the cost consists of actual
costs in the case of new equipment and the net book value in the case of used
equipment.
Revenue associated with repairs and maintenance of equipment owned or rented
by customers is recognized when earned. Fees for repairs and maintenance on
equipment owned by customers of the Company are either paid by the customer or
reimbursed to the Company under the original manufacturer's warranty
agreement. Revenue associated with the warranty work is recognized when
earned.
L) DEFERRED COSTS:
Debt issuance costs are amortized to interest expense over the term of the
related debt, utilizing the interest method. Debt issuance costs are included
in prepaid and other assets.
Falconite had deferred costs of approximately $427,000 as of December 31,
1996, in connection with a planned initial public offering that was in
process. These costs as well as $573,000 of costs incurred during 1997 have
been written off during the current year.
M) INTERIM FINANCIAL DATA:
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair statements of financial position and
results of operations for the interim periods.
2. ACQUISITIONS:
In December 1995, Falconite Equipment acquired the assets of a rental
company located in Calvert City, Kentucky. This acquisition was accounted for
under the purchase method, with the operating results being included within
the consolidated financial statements since the date of the acquisition. The
total purchase price was approximately $585,000, for which Falconite
recognized total goodwill of approximately $100,000 which is being amortized
on a straight-line basis over a five-year period.
In September 1996, Falconite purchased the 30% minority interest of Erzinger
for approximately $875,000 in cash, a note payable, certain assets of
Erzinger, and entered into covenants not to compete for $450,000. The
covenants not to compete are being amortized on a straight-line basis over the
life of the agreements, two years. The acquisition was accounted for using the
purchase method, with the operating results of Erzinger included in the
consolidated operating results since the date of the original acquisition. The
operating results have been adjusted to reflect the minority shareholder's
interest in the operating results for the respective periods disclosed. Total
goodwill of $543,000 is being amortized on a straight-line basis over a five-
year period.
In November 1996, M&M Equipment acquired various pieces of rental equipment
from a rental company in Tallahassee, Florida for $653,000. The total purchase
price was $1,053,000 which included $400,000 in covenants not to compete.
Covenants not to compete are being amortized over three years.
In December 1996, Falconite Equipment acquired the assets of another rental
company in Calvert City, Kentucky. This acquisition was accounted for under
the purchase method, with the operating results being included in the
consolidated financial statements since the date of acquisition. The total
purchase price was $300,000, for which Falconite Equipment recognized total
goodwill of approximately $86,000. Goodwill for this acquisition is being
amortized on a straight-line basis over a five-year period.
F-120
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1996, Falconite Equipment acquired 100% of the outstanding
common stock of a rental company with locations in Fort Campbell, Kentucky and
Clarksville, Tennessee. This acquisition was accounted for under the purchase
method, with the operating results being included in the consolidated
financial statements since the date of acquisition. The total purchase price
was $985,000, for which Falconite Equipment recognized total goodwill of
approximately $286,000, which is being amortized on a straight-line basis over
a five-year period.
As part of the Recapitalization, on December 31, 1996, Falconite purchased
the 49% minority interest in M&M Equipment by exchanging 1,225,000 shares of
its common stock. The 49% minority interest in M&M Equipment's net assets
acquired were recorded at their estimated fair market value of $20,080,000
whereas the remaining 51% was recorded at the historical cost of such assets.
The excess of the purchase price over the fair market value of the net assets
acquired of $16,178,000 was recorded as goodwill, and is being amortized on a
straight-line basis over its expected useful life of 30 years.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company estimates the fair value of financial instruments using quoted
market prices when available, or fair values which are based on estimates
using present value or other valuation techniques. Those techniques are
significantly affected by the assumption used, including the discount rate and
estimates of future cash flows. In that regard the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instrument.
The use of different market assumptions and estimation methodologies may have
a material effect on the estimated fair value amounts. The aggregate fair
value amounts referred to do not represent the underlying value of Falconite.
Because of their relatively short maturities, generally the estimated fair
values of the Company's financial instruments approximate their carrying
amounts on the consolidated balance sheets. The estimated fair value of term
debt with adjustable rates approximate their carrying amounts. For fixed rate
instruments, the estimated fair values are calculated using a discounted cash
flow calculation that applies current incremental borrowing rates for similar
types of arrangements. At December 31, 1996 and 1997, there were no material
differences between the carrying amount and the fair value of term debt.
4. OPERATING PROPERTY AND EQUIPMENT, NET:
Operating property and equipment, net at December 31, 1996 and 1997 consist
of the following:
<TABLE>
<CAPTION>
1996 1997
---------- -----------
<S> <C> <C>
Land, buildings and leasehold improvements......... $1,608,000 $ 5,002,000
Transportation equipment........................... 6,044,000 5,820,000
Furniture, fixtures and equipment.................. 871,000 2,120,000
---------- -----------
8,523,000 12,942,000
Less accumulated depreciation and amortization..... 1,505,000 2,400,000
---------- -----------
$7,018,000 $10,542,000
========== ===========
</TABLE>
5. LEASES:
Falconite is party to several operating leases for transportation equipment
and certain office and warehouse facilities that expire at various times
through the year 2003. These leases require Falconite to pay all executory
costs such as maintenance and insurance. Rental expense for operating leases
for the years ended December 31, 1995, 1996 and 1997 was $303,000, $396,000
and $571,000, respectively.
F-121
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the above, Falconite leases various facilities and equipment
from its shareholders. The facility leases are on varying terms ranging from
one year to ten years. Management believes these lease arrangements reflect
those that could be obtained from a third party. Total rent expense associated
with these leases for the years ended December 31, 1995, 1996 and 1997 was
$278,000, $689,000 and $629,000, respectively.
Future minimum lease payments under operating leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
YEAR
ENDING OPERATING
DECEMBER 31, LEASES
------------ ----------
<S> <C>
1998......................................................... $1,396,000
1999......................................................... 1,065,000
2000......................................................... 818,000
2001......................................................... 681,000
2002......................................................... 466,000
Thereafter................................................... 1,260,000
----------
Total minimum lease payments.................................. $5,686,000
==========
</TABLE>
Falconite has capitalized certain rental and transportation equipment under
various lease agreements. The book value of these leased assets is included in
the recorded amounts for rental equipment and operating property and
equipment.
A schedule of future minimum lease payments under capital leases at December
31, 1997 consisted of the following:
<TABLE>
<CAPTION>
YEAR
ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998......................................................... $2,957,000
1999......................................................... 648,000
2000......................................................... 375,000
2001......................................................... 252,000
2002......................................................... 136,000
----------
Total minimum lease payments.................................. 4,368,000
Less amount representing imputed interest..................... 275,000
----------
Present value of minimum payments............................. $4,093,000
==========
</TABLE>
F-122
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. REVOLVING LINES OF CREDIT AND TERM DEBT:
Term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Notes payable with Nations Bank of Tennessee,
N.A., with monthly principal and interest
payments of $30,368 maturing in 2002; interest
stated at LIBOR (8.47% at December 31, 1997)
plus 2.5%...................................... -- $3,362,000
Various notes payable, with varying monthly
principal and interest payments; interest rates
ranging from 7.0% to 9.75% at December 31,
1997, with maturities ranging from January 1,
1998 to September 30, 2002..................... $15,472,000 1,329,000
Various notes payable with Southwest Bank of St.
Louis, with monthly payments of principal and
interest; interest rates ranging from prime
(8.25% at December 31, 1996) plus .75% to 10%.. 8,346,000 --
Notes payable with Citizens Bank & Trust, with
monthly payments of principal and interest at
prime (8.25% at December 31, 1996),
collateralized by a guarantee of the majority
shareholder.................................... 6,850,000 --
Notes payable with GE Capital, with monthly
principal and interest payments of $11,217;
interest at the 30 days' commercial paper rate
(5.41% at December 31, 1996) plus 2.08%........ 1,088,000 --
Note payable with the Kentucky Development
Finance Authority, with monthly principal and
interest payments of $2,660 maturing in 2000;
interest stated at a fixed rate of 5.06%,
collateralized by real estate.................. 111,000 --
----------- ----------
$31,867,000 $4,691,000
=========== ==========
</TABLE>
Annual maturities of term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................... $1,238,000
1999........................................................... 389,000
2000........................................................... 348,000
2001........................................................... 185,000
2002........................................................... 109,000
Thereafter..................................................... 2,422,000
----------
Total........................................................ $4,691,000
==========
</TABLE>
The Citicorp Facility is comprised of a revolving line of credit extended to
Falconite Equipment and M&M Equipment. The total amount of credit available
under the Citicorp Facility is limited to a borrowing base equal to the lesser
of (i) $100 million, of which $2 million is available as a swingline
subfacility; or (ii) a formula based on accounts receivable, parts inventory,
transportation equipment owned by the Company and rental and resale equipment
inventory. The obligations of Falconite Equipment and M&M Equipment under the
Citicorp Facility are collateralized by substantially all of the assets of
Falconite Equipment and M&M Equipment. The Citicorp Facility has financial
covenants regarding tangible net worth, debt ratios and debt coverage. The
Company was not in compliance with certain loan provisions at December 31,
1997, but received waivers from the lender for these violations, effectively
through the term of the facility, on March 23, 1998. The Citicorp Facility
also contains covenants and provisions that restrict, among other things,
Falconite Equipment's and
F-123
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
M&M Equipment's ability to: (i) incur liens on its property; (ii) engage in
certain sales of assets; (iii) merge or consolidate with or acquire another
person or engage in other fundamental changes; (iv) engage in certain
transactions with affiliates; and (v) commit to make capital expenditures in
excess of certain preset limits. The Citicorp Facility provides for certain
events of default. At December 31, 1997, the principal amount outstanding
under the Citicorp Facility was $81,900,000, and the interest rate on such
borrowings was 8.1875% (30 day LIBOR plus 2.5%). At December 31, 1997, $9.6
million of additional borrowings were available to Falconite Equipment and M&M
Equipment under the Citicorp Facility. The obligations of Falconite Equipment
and M&M Equipment under the Citicorp Facility are guaranteed by the Company,
certain subsidiaries of the Company, Ralph W. McCurry and Michael A.
Falconite.
The Deutsche Facility is comprised of a line of credit, which amount is
determined at Deutsche's sole discretion, extended to M&M Equipment for the
purchase of equipment from certain designated manufacturers. The obligations
of M&M Equipment under the Deutsche Facility are collateralized by all of M&M
Equipment's inventory and equipment manufactured by such designated
manufacturers, including all accounts, rights, instruments and proceeds
arising from such inventory and equipment. The Deutsche Facility has financial
covenants and provisions regarding tangible net worth and debt ratios. The
Company was not in compliance with certain loan provisions at December 31,
1997, but received waivers from the lender for these violations, effectively
through the term of the facility, on March 23, 1998. The obligations of M&M
Equipment under the Deutsche Facility are guaranteed by Falconite Equipment,
Ralph W. McCurry and Wanda R. McCurry. At December 31, 1997, the principal
amount outstanding under the Deutsche Facility was $9,516,000, and the
interest rate on such borrowings was 9.5%.
7. INCOME TAXES:
Income tax expense consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
Year ended December 31, 1995:
Federal................................ $565,000 $2,011,000 $2,576,000
State and local........................ 20,000 297,000 317,000
-------- ---------- ----------
$585,000 $2,308,000 $2,893,000
======== ========== ==========
Year ended December 31, 1996:
Federal................................ $196,000 $2,006,000 $2,202,000
State and local........................ (76,000) 202,000 126,000
-------- ---------- ----------
$120,000 $2,208,000 $2,328,000
======== ========== ==========
Year ended December 31, 1997:
Federal................................ $ 13,000 $1,598,000 $1,611,000
State and local........................ 2,000 246,000 248,000
-------- ---------- ----------
$ 15,000 $1,844,000 $1,859,000
======== ========== ==========
</TABLE>
Income tax expense for the years ended December 31, 1996 and 1997 differed
from the amounts computed by applying the federal income tax rate of 34% to
income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense....... $2,752,000 $2,706,000 $1,298,000
Increased (reduction) in income taxes
resulting from:
Nontaxable M&F Equipment income..... (124,000) (666,000) --
State and local income taxes, net of
federal income tax benefit......... 209,000 84,000 164,000
Amortization........................ -- -- 349,000
Other, net.......................... 56,000 204,000 48,000
---------- ---------- ----------
$2,893,000 $2,328,000 $1,859,000
========== ========== ==========
</TABLE>
F-124
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
From the time of its inception, March 20, 1995, through December 31, 1996,
M&F Equipment was taxed as an S corporation under Subchapter S of the Internal
Revenue Code. The pro forma income tax adjustments included on the
consolidated statements of income represent federal income tax expense that
would have been required had M&F Equipment been a C corporation. M&F
Equipment's undisturbed earnings of $1,574,000 were distributed in September
1997.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Trade accounts receivable, principally due
to allowance for doubtful accounts........ $ 195,000 $ 161,000
Alternative minimum tax credit
carryforwards............................. 1,713,000 1,713,000
Net operating loss carryforwards........... 1,402,000 4,168,000
Sales tax accruals......................... -- 223,000
Inventory obsolescence reserves............ 175,000 56,000
Other...................................... 175,000 205,000
------------ ------------
Net deferred tax assets.................. 3,660,000 6,526,000
Deferred tax liability:
Rental and operating property and
equipment, principally due to difference
in depreciation........................... (11,461,000) (16,171,000)
------------ ------------
Net deferred tax liability............... $ (7,801,000) $ (9,645,000)
============ ============
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $11.1 million which are available
to offset future federal taxable income through the year 2011. The net
operating loss carryforwards are primarily attributable to M&M Equipment and
may be subject to certain limitations. The Company expects to pursue certain
tax planning strategies that management believes make it more likely than not
that the Company will recover the tax benefit of the net operating loss
carryforwards.
In addition, as of December 31, 1997, the Company had alternative minimum
tax credit carryforwards of approximately $1,713,000 which are available to
reduce future federal regular income taxes, if any, over an indefinite period.
8. EMPLOYEE BENEFIT PLANS:
Prior to August 1, 1997, Falconite Equipment had a discretionary profit-
sharing plan covering substantially all of its employees. Profit-sharing
expense was funded through annual contributions to the plan. There were no
contributions to the plan during 1996 and 1997. Falconite Equipment also
contributes to a union-administered pension plan as required. Falconite
Equipment's contributions to these plans for the years ended December 31,
1995, 1996 and 1997 totaled $71,000, $45,000 and $105,000, respectively.
Falconite Equipment could, under certain circumstances, be liable for unfunded
vested benefits or other expenses of jointly administered union plans. At this
time, Falconite has not established any liabilities because withdrawal from
these plans is not probable.
M&M Equipment has a discretionary 401(k) plan covering substantially all of
its employees. Plan expense is funded through annual contributions. For the
years ended December 31, 1995, 1996 and 1997, M&M Equipment contributions
totaled $38,000, $60,000 and $86,000, respectively. As of July 1, 1997,
Falconite has a discretionary 401(k) plan covering substantially all of its
employees. For the year ended December 31, 1997, Falconite contributions
totaled $70,000.
F-125
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS:
The individual companies included in the consolidated financial statements
enter into various related party transactions with affiliated companies and
shareholders of the individual companies.
A summary of receivables/payables included in the consolidated balance sheet
as of December 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Due from affiliated companies and related parties:
Note receivable--officer.......................... $ 77,000 $ 101,000
Note receivable--majority shareholder............. 332,000 483,000
Due from F&F Leasing.............................. 44,000 16,000
Due from E&F Leasing.............................. -- 200,000
Due from M&F Investments.......................... -- 1,344,000
-------- ----------
$453,000 $2,144,000
======== ==========
Due to affiliated companies and related parties:
Due to F&F Leasing................................ $ 42,000 --
Notes payable--majority shareholder............... 79,000 $ 39,000
-------- ----------
$121,000 $ 39,000
======== ==========
</TABLE>
A summary of expenses included in the consolidated statements of income for
the years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Building rent expense paid to affiliates and
related parties:
Rent paid to F&F Leasing.................. $ 63,000 $200,000 $137,000
Rent paid to an officer................... 30,000 30,000 --
Rent paid to M&F Investments.............. 13,000 122,000 247,000
Rent paid to the minority shareholder of
M&M...................................... 22,000 -- --
Rent paid to E&F Leasing.................. 27,000 188,000 246,000
-------- -------- --------
$155,000 $540,000 $630,000
======== ======== ========
Equipment rent expense paid to F&F Leasing.. $123,000 $149,000 --
======== ======== ========
Interest expense paid to director........... $ 19,000 $ 11,000 $ 5,000
======== ======== ========
Management fee paid to officers:
From M&M Equipment........................ $ 28,000 $ 28,000 --
From Erzinger............................. 31,000 36,000 --
-------- -------- --------
$ 59,000 $ 64,000 --
======== ======== ========
</TABLE>
Falconite Equipment and M&M Equipment lease buildings from affiliated
companies for which the companies pay monthly rental to the affiliated
companies pursuant to various lease agreements. Falconite Equipment leased its
Erzinger facility from E&F Leasing, a related party, through July 31, 1996 for
approximately $24,000 a month. Effective August 1, 1996, the monthly rental
was reduced to $15,000 retroactive to January 1, 1996, such that no rent
expense was incurred in August or September 1996. The ongoing agreed-upon
monthly rent will be $17,500 per month.
F-126
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
Department of Revenue Notifications
During 1995, Falconite Equipment received a notification from the Illinois
Department of Revenue asserting deficiencies in Illinois' use taxes for the
period from July 1989 to May 1995. The asserted deficiencies, which totaled
approximately $520,000 plus interest and penalties, result from Falconite
Equipment's rental of equipment to customers within the State of Illinois and
complexities of how use taxes should be calculated. Falconite Equipment is in
the process of challenging the asserted deficiencies.
During 1996, Falconite Equipment received a notification from the Tennessee
Department of Revenue asserting certain deficiencies in Tennessee sales tax
for the period from 1991 to 1996. The sales tax liability was settled during
1997 for $307,000
Management, after consultation with counsel, believes the ultimate outcome
of the alleged deficiencies will not result in a material impact on Falconite
Equipment's consolidated financial position, results of operations or cash
flows although resolution in any year or quarter could be material to the
results of operations or cash flows for that period. Accrued expenses have
been recorded within the range of management's best estimate of the probable
loss.
Government and Environmental Regulations
Falconite and its operations are subject to various federal, state, and
local laws and regulations governing, among other things, worker safety, air
emissions, water discharge, and the generation, handling, storage,
transportation, treatment, and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for the costs
of removal or remediation of certain hazardous or toxic substances located on,
in or emanating from, such property, as well as related costs of investigation
and property damage. Such laws often impose such liability without regard to
whether the owner or lessee knew of, or was responsible for, the presence of
such hazardous or toxic substances. In addition, Falconite dispenses petroleum
products from above-ground storage tanks located at certain rental locations
that it owns or leases. Falconite maintains an environmental compliance
program that includes the implementation of required technical and operational
activities designed to minimize the potential for leaks and spills, the
maintenance of records, and the regular testing and monitoring of tank
systems. Falconite also uses hazardous materials such as solvents to clean and
maintain its rental equipment fleet. In addition, Falconite generates and
disposes waste such as used motor oil, radiator fluid, and solvents, and may
be liable under various federal, state, and local laws for an environmental
contamination at facilities where its waste is or has been disposed. While
there can be no assurance that the Company's operations have been operated in
compliance with governmental regulations, in the opinion of management, the
ultimate disposition of any matters, that may arise, will not have a material
adverse effect on Falconite's consolidated financial position, results of
operations or cash flows although resolution in any year or quarter could be
material to the results of operations or cash flows for that period.
Legal Proceedings
Falconite is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
Falconite's consolidated financial position, results of operations or cash
flows although resolution in any year or quarter could be material to the
results of operations or cash flows for that period.
Commitments for Capital Expenditures
Falconite has outstanding firm commitments for capital expenditures of
approximately $549,000 at December 31, 1997. The commitments relate to the
purchasing of additional rental equipment and the replacement of older lease
fleet assets.
F-127
<PAGE>
FALCONITE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Workers' Compensation
Falconite is fully insured, subject to varying deductibles, for workers'
compensation claims in substantially all states in which it operates. In the
remaining states, Falconite provides for workers' compensation claims through
incurred loss retrospective policies. Management believes any potential
liability for estimated claims, including the effect of any retroactive
premium adjustments, is immaterial.
11. BUSINESS AND CREDIT CONCENTRATIONS:
Falconite engages in the rental of equipment to a variety of industrial and
construction customers which are significantly impacted by the U.S. economy as
well as the regional and local economies. Management believes diversifying
into other states reduces the impact of events or conditions in a particular
region, such as regional slowdowns, adverse weather and other factors. In
addition, Falconite's operating results may be adversely affected by increases
in interest rates that may lead to a decline in economic activity while
simultaneously resulting in higher interest payments by Falconite under its
variable rate credit facilities.
Most of Falconite's customers are located in a four-state area: Kentucky,
Tennessee, Alabama and Missouri. No single customers accounted for more than
1% of Falconite's consolidated sales in 1996 and 1997, and no trade account
receivable from any customer exceeded $289,000 at December 31, 1997. Falconite
estimates an allowance for doubtful accounts based on the creditworthiness of
its customers as well as general economic conditions. Consequently, an adverse
change in those factors could affect management's estimate of its bad debts.
12. SUBSEQUENT EVENTS:
In January 1998, the Company purchased the assets of Genequip, Inc., an
equipment rental company with locations in Louisville and Lexington, Kentucky
and Indianapolis, Indiana. The total purchase price was $10,037,000 and was
accounted for using the purchase method.
On April 1, 1998, the Company's owners entered into a definitive and binding
agreement to sell all of the outstanding shares of common stock to National
Equipment Services, Inc. in exchange for $62,000,000 in cash and $3,750,000 of
subordinated promissory notes which bear interest at 8%.
F-128
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC.
INTRODUCTION TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
National Equipment Services, Inc. (the "Company") was founded in June 1996
to acquire and integrate equipment rental companies. In 1997, the Company
acquired six businesses in separate transactions. In 1998, the Company
acquired seven businesses in separate transactions and has a definitive
agreement to acquire Falconite concurrent with the closing of the Company's
initial public offering (the "Offering"). The Offering is conditioned on the
acquisition of Falconite and consummation of the New Credit Facility. While
the Acquired Businesses (Acquired Businesses herein defined to mean (i) all of
the 13 acquired businesses and (ii) Falconite, Inc., which the Company has a
definitive agreement to acquire) were or will be acquired at various dates
during 1997 and 1998, the following unaudited pro forma statements of
operations are presented as if all such acquisitions, the Offering and certain
borrowings under the New Credit Facility had occurred on January 1, 1997. The
following unaudited pro forma balance sheet gives effect to such transactions
as if they had occurred on March 31, 1998.
The unaudited pro forma financial statements have been derived from Company
(the Company herein defined to include the Acquired Businesses) prepared
financial information (and, when applicable, includes adjustments to conform
fiscal periods to calendar periods), the audited and unaudited Financial
Statements and notes thereto of certain of the Acquired Businesses for certain
periods and the audited and unaudited Financial Statements and notes thereto
of the Company since inception, which Financial Statements appear elsewhere in
this Prospectus.
The unaudited pro forma financial statements have been prepared for
comparative purposes only and do not purport to be indicative of the results
which would have been achieved had the Acquired Businesses been purchased, the
Offering been consummated and certain borrowings under the New Credit Facility
been made as of the assumed dates, nor are the results indicative of the
Company's future results.
F-129
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------------
EQUIPCO WORK GRAND
THE AERIAL BAT RENTALS & LONE STAR SAFE EAGLE CORMIER DRAGON HI-
COMPANY PLATFORMS RENTALS SALES RENTALS SPRINTANK SUPPLY GENPOWER SCAFFOLDING EQUIPMENT RENTALS REACH
------- --------- ------- --------- --------- --------- ------ -------- ----------- --------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenues. $26,398 $ 406 $1,457 $2,180 $1,455 $5,715 $6,385 $7,110 $1,067 $12,107 $8,907 $5,568
Rental equipment
sales........... 4,186 51 995 332 188 -- 891 161 -- 960 -- 953
New equipment
sales and other. 10,704 237 1,350 877 -- 327 88 4,830 612 2,685 1,657 1,108
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total revenues... 41,288 694 3,802 3,389 1,643 6,042 7,364 12,101 1,679 15,752 10,564 7,629
Cost of Revenues:
Rental equipment
depreciation.... 5,009 47 707 710 242 1,109 835 560 80 2,742 844 885
Cost of rental
equipment sales. 2,935 34 352 97 119 -- 588 111 -- 339 -- 636
Cost of new
equipment sales. 4,872 180 1,010 570 -- -- -- 3,108 23 391 -- 334
Other operating
expenses........ 12,899 277 462 641 1,010 643 2,517 2,863 776 6,925 5,222 3,125
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Total cost of
revenues......... 25,715 538 2,531 2,018 1,371 1,752 3,940 6,642 879 10,397 6,066 4,980
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Gross profit
(loss)........... 15,573 156 1,271 1,371 272 4,290 3,424 5,459 800 5,355 4,498 2,649
Selling, general
and
administrative
expenses......... 7,910 249 489 684 475 2,028 1,237 2,797 327 3,241 2,166 1,534
Non-rental
depreciation and
amortization..... 1,476 8 25 33 26 83 80 37 -- 250 59 107
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Operating income
(loss)........... 6,187 (101) 757 654 (229) 2,179 2,107 2,625 473 1,864 2,273 1,008
Other income
(expense), net... 72 -- (1) 20 139 (10) 8 13 8 -- (670) 14
Interest expense,
net.............. 4,336 16 46 73 164 553 22 103 33 302 675 462
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Income (loss)
before income
taxes............ 1,923 (117) 710 601 (254) 1,616 2,093 2,535 448 1,562 928 560
Income tax
expense
(benefit)........ 818 (6) -- 240 -- -- -- 859 -- 8 212 --
------- ----- ------ ------ ------ ------ ------ ------ ------ ------- ------ ------
Net income
(loss)........... $ 1,105 $(111) $ 710 $ 361 $ (254) $1,616 $2,093 $1,676 $ 448 $ 1,554 $ 716 $ 560
======= ===== ====== ====== ====== ====== ====== ====== ====== ======= ====== ======
<CAPTION>
ALBANY PRO
LADDER FALCONITE ADJUSTMENTS(B) FORMA
------- --------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues. $18,410 $44,911 $ 4,227 $146,303
Rental equipment
sales........... 1,885 9,222 2,910 22,734
New equipment
sales and other. 13,909 9,513 1,694 49,591
------- --------- --------------- -----------
Total revenues... 34,204 63,646 8,831 218,628
Cost of Revenues:
Rental equipment
depreciation.... 3,445 11,114 763 (c) 29,092
Cost of rental
equipment sales. 721 7,582 2,561 16,075
Cost of new
equipment sales. 7,725 4,103 1,579 23,895
Other operating
expenses........ 10,738 11,395 (187)(d) 59,306
------- --------- --------------- -----------
Total cost of
revenues......... 22,629 34,194 4,716 128,368
------- --------- --------------- -----------
Gross profit
(loss)........... 11,575 29,452 4,115 90,260
Selling, general
and
administrative
expenses......... 7,796 15,065 (4,324)(e) 41,674
Non-rental
depreciation and
amortization..... 640 2,428 4,417 (f) 9,669
------- --------- --------------- -----------
Operating income
(loss)........... 3,139 11,959 4,022 38,917
Other income
(expense), net... 117 (815) 1,422 (g) 317
Interest expense,
net.............. 846 7,327 12,406 (h) 27,364
------- --------- --------------- -----------
Income (loss)
before income
taxes............ 2,410 3,817 (6,962) 11,870
Income tax
expense
(benefit)........ -- 1,859 991 (i) 4,981
------- --------- --------------- -----------
Net income
(loss)........... $ 2,410 $ 1,958 $(7,953) $ 6,889(j)
======= ========= =============== ===========
</TABLE>
(See Notes to Unaudited Pro Forma Financial Statements)
F-130
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS(A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
---------------------------------------------------------------------------------------------------------------
EQUIPCO LONE WORK
THE AERIAL BAT RENTALS STAR SAFE EAGLE CORMIER DRAGON GRAND
COMPANY PLATFORMS RENTALS & SALES RENTALS SPRINTANK SUPPLY GENPOWER SCAFFOLDING EQUIPMENT RENTALS HI-REACH
------- --------- ------- ------- ------- --------- ------ -------- ----------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rentals
revenues........ $1,276 $ 406 $1,457 $ 854 $1,455 $2,572 $ 107 $1,465 $277 $2,299 $1,758 $1,059
Rental equipment
sales........... 93 51 995 185 188 -- 23 40 -- 173 -- 197
New equipment
sales and other. 950 237 1,350 358 -- 147 2 1,245 145 626 294 228
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Total revenues... 2,319 694 3,802 1,397 1,643 2,719 132 2,750 422 3,098 2,052 1,484
Cost of Revenues:
Rental equipment
depreciation.... 335 47 707 266 242 545 105 111 20 654 173 233
Cost of rental
equipment sales. 75 34 352 58 119 -- 15 28 -- 61 -- 123
Cost of new
equipment sales. 306 180 1,010 227 -- -- -- 700 6 110 -- 64
Other operating
expenses........ 760 277 462 263 1,010 289 41 605 199 1,487 1,069 525
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Total cost of
revenues......... 1,476 538 2,531 814 1,371 834 161 1,444 225 2,312 1,242 945
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Gross profit
(loss)........... 843 156 1,271 583 272 1,885 (29) 1,306 197 786 810 539
Selling, general
and
administration
expenses......... 783 249 489 352 475 913 203 575 83 621 443 302
Non-rental
depreciation and
amortization..... 88 8 25 27 26 41 15 7 -- 60 12 30
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Operating income
(loss)........... (28) (101) 757 204 (229) 931 (247) 724 114 105 355 207
Other income
(expense), net... -- -- (1) 1 139 (5) (4) 4 -- -- (117) --
Interest expense,
net.............. 262 16 46 34 164 249 5 15 8 39 118 122
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Income (loss)
before income
taxes............ (290) (117) 710 171 (254) 677 (256) 713 106 66 120 85
Income tax
expense
(benefit)........ (135) (6) -- 74 -- -- -- 238 -- 4 27 --
------ ----- ------ ----- ------ ------ ----- ------ ---- ------ ------ ------
Net income
(loss)........... $ (155) $(111) $ 710 $ 97 $ (254) $ 677 $(256) $ 475 $106 $ 62 $ 93 $ 85
====== ===== ====== ===== ====== ====== ===== ====== ==== ====== ====== ======
<CAPTION>
ALBANY PRO
LADDER FALCONITE ADJUSTMENTS(B) FORMA
------- --------- --------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rentals
revenues........ $3,333 $8,989 $ 989 $28,296
Rental equipment
sales........... 436 3,276 727 6,384
New equipment
sales and other. 2,455 2,109 412 10,558
------- --------- --------------- -----------
Total revenues... 6,224 14,374 2,128 45,238
Cost of Revenues:
Rental equipment
depreciation.... 800 2,373 642 (c) 7,253
Cost of rental
equipment sales. 189 2,516 640 4,210
Cost of new
equipment sales. 1,196 755 395 4,949
Other operating
expenses........ 2,180 2,544 (64)(d) 11,647
------- --------- --------------- -----------
Total cost of
revenues......... 4,365 8,188 1,613 28,059
------- --------- --------------- -----------
Gross profit
(loss)........... 1,859 6,186 515 17,179
Selling, general
and
administration
expenses......... 1,748 2,938 (914)(e) 9,260
Non-rental
depreciation and
amortization..... 166 576 1,273 (f) 2,354
------- --------- --------------- -----------
Operating income
(loss)........... (55) 2,672 156 5,565
Other income
(expense), net... 18 4 103 (g) 142
Interest expense,
net.............. 208 1,333 4,222 (h) 6,841
------- --------- --------------- -----------
Income (loss)
before income
taxes............ (245) 1,343 (3,963) (1,134)
Income tax
expense
(benefit)........ -- 598 (1,275)(i) (475)
------- --------- --------------- -----------
Net income
(loss)........... $ (245) $ 745 $(2,688) $ (659)(j)
======= ========= =============== ===========
</TABLE>
(See Notes to Unaudited Pro Forma Financial Statements)
F-131
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (A)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------------------------------------------
-----------------------------------------------
WORK
THE SAFE EAGLE CORMIER DRAGON GRAND ALBANY PRO
COMPANY SUPPLY SCAFFOLDING EQUIPMENT RENTALS HI-REACH LADDER FALCONITE ADJUSTMENTS FORMA
------- ------ ----------- --------- ------- -------- ------ --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenues.. $15,815 $ 24 $54 $1,770 $1,871 $ 336 $4,612 $12,033 $ -- $36,515
Rental equipment
sales............ 1,742 -- -- 257 -- 30 449 1,364 -- 3,842
New equipment
sales and other.. 4,594 23 31 900 125 28 3,537 3,236 -- 12,474
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Total revenues.... 22,151 47 85 2,927 1,996 394 8,598 16,633 -- 52,831
Cost of revenue:
Rental equipment
depreciation..... 2,727 23 5 376 160 47 877 3,367 (99)(c) 7,483
Cost of rental
equipment sales.. 1,037 -- -- 52 -- 21 146 1,097 -- 2,353
Cost of new
equipment sales.. 2,187 13 1 441 -- -- 1,918 1,800 -- 6,360
Other operating
expenses......... 7,549 61 29 1,170 989 282 2,816 3,238 (162)(d) 15,972
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Total cost of
revenues.......... 13,500 97 35 2,039 1,149 350 5,757 9,502 (261) 32,168
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Gross profit...... 8,651 (50) 50 888 847 44 2,841 7,131 261 20,663
Selling, general
and administrative
expenses.......... 4,531 60 12 429 410 129 2,486 4,482 (1,226)(e) 11,313
Non-rental
depreciation and
amortization...... 807 28 -- 39 11 7 160 680 740 (f) 2,472
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Operating income
(loss)............ 3,313 (138) 38 420 426 (92) 195 1,969 747 6,878
Other income
(expense), net.... 77 -- 12 -- (126) 2 58 (8) -- 15
Interest expense,
net............... 3,100 46 3 90 127 19 216 2,180 1,060 (h) 6,841
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Income (loss)
before income
taxes............. 290 (184) 47 330 173 (109) 37 (219) (313) 52
Income tax
expense........... 151 -- -- -- -- -- -- -- (130)(i) 21
------- ----- --- ------ ------ ----- ------ ------- ------ -------
Net income (loss). $ 139 $(184) $47 $ 330 $ 173 $(109) $ 37 $ (219) $ (183) $ 31 (j)
======= ===== === ====== ====== ===== ====== ======= ====== =======
</TABLE>
(See Notes to Unaudited Pro Forma Financial Statements)
F-132
<PAGE>
PRO FORMA BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------------------------------
THE PRO
COMPANY(K) FALCONITE(K) ADJUSTMENTS(L) FORMA
---------- ------------ -------------- --------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.... $ 3,773 $ 1,642 $(3,257)(i) $ 2,158
Accounts receivable, net..... 24,095 8,862 -- 32,957
Inventory, net............... 7,158 2,658 -- 9,816
Rental equipment, net........ 104,937 112,937 (7,301)(ii) 210,573
Property and equipment, net.. 6,968 11,547 2,150 (iii) 20,665
Intangible assets, net....... 86,888 17,069 41,574 (iv) 145,531
Loan origination costs, net.. 6,139 -- 1,867 (v) 8,006
Prepaid and other assets,
net......................... 2,345 1,511 -- 3,856
-------- -------- ------- --------
Total assets............... $242,303 $156,226 $35,033 $433,562
======== ======== ======= ========
LIABILITIES
Accounts payable............. $ 9,647 $ 1,715 $ -- $ 11,362
Accrued interest............. 3,904 715 -- 4,619
Accrued expenses and other
liabilities................. 7,938 12,134 -- 20,072
Debt......................... 193,954 108,430 (9,625)(vi) 292,759
-------- -------- ------- --------
Total liabilities.......... 215,443 122,994 (9,625) 328,812
Stockholders' equity......... 26,860 33,232 44,658 (vii) 104,750
-------- -------- ------- --------
Total liabilities and
stockholders' equity...... $242,303 $156,226 $35,033 $433,562
======== ======== ======= ========
</TABLE>
(See Notes to Unaudited Pro Forma Financial Statements)
F-133
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(a) For the Company, results for the year ended December 31, 1997 and for the
three months ended March 31, 1997 represent actual historical 1997
results, including results for the Acquired Businesses purchased in the
related 1997 period from the date of acquisition. Results for the Company
for the three months ended March 31, 1998 represent actual historical
results for the Company, including results for the Acquired Businesses
purchased in the first quarter of 1998 from the date of acquisition. For
the Acquired Businesses, results for the year ended December 31, 1997 and
for the three months ended March 31, 1997, represent combined historical
results for (i) the Acquired Businesses purchased in the related 1997
period prior to the date of acquisition and (ii) the Acquired Businesses
purchased or to be purchased in 1998. For the Acquired Businesses, results
for the three months ended March 31, 1998 represent combined historical
results for (i) the Acquired Businesses purchased in the first quarter of
1998 prior to the date of acquisition and (ii) Falconite.
(b) In each of the following items, reflects the elimination of a location
not purchased from Cormier Equipment as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
<S> <C> <C>
Rental revenues.................................. $ 130 $100
New equipment sales and other.................... 21 17
----- ----
Total revenues................................... 151 117
Rental equipment depreciation.................... 81 60
Other operating expenses......................... 102 50
----- ----
Total cost of revenues........................... 183 110
----- ----
Gross profit (loss).............................. (32) 7
Selling, general and administrative expenses..... 72 41
Non-rental depreciation and amortization......... 1 1
----- ----
Operating loss................................... $(105) $(35)
===== ====
</TABLE>
In addition, reflects the acquisition of GenEquip, Inc., a business acquired
by Falconite, Inc. in January 1998 as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
<S> <C> <C>
Rental revenues.................................... $4,357 $1,089
Rental equipment sales............................. 2,910 728
New equipment sales and other...................... 1,715 429
------ ------
Total revenues..................................... 8,982 2,246
Rental equipment depreciation...................... 1,583 396
Cost of rental equipment sales..................... 2,561 640
Cost of new equipment sales........................ 1,578 395
Other operating costs.............................. 1,664 416
------ ------
Total cost of revenues............................. 7,386 1,847
------ ------
Gross profit....................................... 1,596 399
Selling, general and administrative expenses....... 1,221 305
Non-rental depreciation and amortization........... 107 27
------ ------
Operating income................................... 268 67
Other income, net.................................. 59 15
Interest income, net............................... 23 6
------ ------
Income before income taxes......................... $ 350 $ 88
====== ======
</TABLE>
F-134
<PAGE>
(c) Pursuant to SEC reporting requirements, rental equipment depreciation has
been derived utilizing the rental equipment asset values of each of the
Acquired Businesses at the time of their acquisition rather than utilizing
values of rental equipment assets actually held by each of the Acquired
Businesses the period presented. Reflects the impact on rental equipment
depreciation resulting from the application of the Company's depreciation
policy rather than those of the former owners of the Acquired Businesses.
In addition, reflects the change in rental equipment depreciation
resulting from the write-up or write-down of rental equipment assets to
fair value arising from purchase accounting. In addition, reflects the
increase in rental equipment depreciation resulting from the purchase of
equipment referred to in note (e) below.
(d) Reflects the elimination of lease expense resulting from the termination
of certain rental equipment leases which occurred with the purchase of
the underlying equipment. Also reflects the rent expense resulting from
the Company's current lease terms as compared to lease terms entered into
by former owners. In addition, reflects the increase in rent expense and
corresponding decrease in depreciation expense and real estate tax
expense resulting from the Company leasing rather than owning certain
related facilities and, conversely, the decrease in rent expense and
corresponding increase in depreciation expense and real estate tax
expense resulting from the termination of certain facility leases which
occurred with the purchase of the underlying facility by the Company.
Also, reflects the decrease in rent expense resulting from the
termination of certain facility leases.
(e) Reflects the decrease resulting from differentials between the
compensation levels of former owners of the Acquired Businesses and the
terms of the employment agreements entered into between certain of the
former owners and the Company. The employment agreements provide for
bonuses to be paid based on increased future earnings. Compensation
amounts presented reflect bonuses due based on current operating results.
Additional bonuses would be due if increased earnings levels are achieved.
(f) Pursuant to SEC reporting requirements, non-rental depreciation has been
derived utilizing the property, plant and equipment values of each of the
Acquired Businesses at the time of their acquisition, rather than
utilizing values of property, plant and equipment actually held by each of
the Acquired Businesses in the period presented. Reflects the decrease in
non-rental depreciation resulting from the application of the Company's
depreciation policy rather than those of the former owners of the Acquired
Businesses. In addition, reflects the increase in non-rental depreciation
resulting from the write-up of property, plant and equipment to fair value
arising from purchase accounting. Also reflects amortization of goodwill
calculated on a goodwill life of 40 years and amortization of non-compete
agreements calculated on their contract terms of two to five years, in
each case specifically related to the purchases of the Acquired
Businesses. The pro forma adjustments consist of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------
1997 1997 1998
------------ ------ ----
<S> <C> <C> <C>
Non-rental depreciation......................... $1,159 $ 312 $220
Amortization of goodwill........................ 2,702 759 477
Amortization of non-compete agreements.......... 556 202 43
------ ------ ----
$4,417 $1,273 $740
====== ====== ====
</TABLE>
(g) Reflects discontinuation and elimination of unrelated businesses
previously operated and related charges incurred by the former owners of
certain of the Acquired Businesses.
(h) Reflects increased interest expense at the Company's borrowing rate under
the New Credit Facility on the indebtedness resulting from the purchase of
Falconite after giving effect to the partial repayment of the New Credit
Facility with $3,257 of cash on hand at the Acquired Businesses purchased
or to be purchased on or after March 31, 1998 and the borrowing of $3,085
under the New Credit Facility to fund certain potential purchase price
adjustments in connection with the Acquired Businesses purchased in 1998.
(i) Reflects the income tax rate that would have been in effect if the
Acquired Businesses had been combined and subject to a federal statutory
rate of 34% and the applicable state statutory rate for each of the
Acquired Businesses throughout the periods presented.
F-135
<PAGE>
(j) Unaudited pro forma earnings per share has been computed based on the
weighted average number of common shares outstanding during the period,
after giving effect to the Reclassification, the Stock Split, the Offering
and the conversion of the 8% convertible subordinated promissory notes to
be issued in connection with the acquisition of Falconite, but without
giving effect to shares issuable upon exercise of outstanding options
because they are not dilutive. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") allows
entities to choose between a new fair value based method of accounting for
employee stock options or similar equity instruments and the current
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to
account for employee stock options or similar equity instruments under APB
No. 25 must make pro forma disclosures of net income and earnings per
share as if the fair value method of accounting has been applied. The
Company has elected APB No. 25, and will provide pro forma disclosure of
net income and earnings per share, as applicable, in the notes to future
consolidated financial statements. Had pro forma compensation cost for the
Company's stock-based compensation plans been determined based on the pro
forma fair value at the assumed grant date for awards under those plans
consistent with the method of SFAS 123, the Company's pro forma net income
and net income per share would have been as follows for the year ended
December 31, 1997 and the three month periods ended March 31, 1997 and
1998:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED
ENDED MARCH 31,
DECEMBER 31, --------------
1997 1997 1998
------------ ------- ------
<S> <C> <C> <C>
Net income.................................. $6,317 $ (802) $ (116)
Basic earnings per share.................... $ 0.29 $(0.04) $(0.01)
Diluted earnings per share.................. $ 0.28 $(0.04) $(0.01)
</TABLE>
The pro forma fair value of the options was estimated on the assumed date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: dividend yield of 0%, expected volatility of
30%, risk free interest rates of 5.67% and expected lives of 5 years.
(k) Represents the actual historical balance sheets as of March 31, 1998 of
the Company and Falconite.
(l) The following are adjustments to the aforementioned balance sheets:
(i) Reflects the use of the cash on hand at the Acquired Businesses
purchased or to be purchased on or after March 31, 1998 of $3,257.
(ii) Reflects the write-down of rental equipment as part of purchase
accounting related to the residual value in excess of fair value.
(iii) Reflects the write-up of property and equipment to fair value as part
of purchase accounting.
(iv) Reflects $41,174 of goodwill representing the excess of the purchase
price over the fair value of net assets acquired. In addition,
reflects $400 of noncompete agreements entered into by the Company and
certain selling shareholders.
(v) Reflects the incremental loan origination costs related to the New
Credit Facility.
(vi) Reflects the use of the cash on hand at the Acquired Businesses
purchased or to be purchased on or after March 31, 1998 of $3,257 and
the elimination of Falconite indebtedness, partially offset by
additional borrowings under the New Credit Facility, and the borrowing
of $3,085 under the New Credit Facility to fund certain potential
purchase price adjustments in connection with the Acquired Businesses
purchased in 1998.
(vii) Reflects the cash proceeds from the Offering of $81,000 and the
mandatory conversion at the initial public offering price of $3,750
of 8% subordinated promissory notes to be issued in connection with
the Falconite acquisition, net of estimated Offering cost of $6,860
and the elimination of equity of Falconite of $33,232.
F-136
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Dilution.................................................................. 14
Selected Pro Forma Financial Data......................................... 15
Selected Historical Financial Data........................................ 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business.................................................................. 35
Management................................................................ 42
Principal Stockholders.................................................... 48
Certain Relationships and Transactions.................................... 49
Description of Capital Stock.............................................. 50
Description of Certain Indebtedness....................................... 53
Shares Eligible for Future Sale........................................... 55
Underwriting.............................................................. 56
Experts................................................................... 57
Legal Matters............................................................. 59
Additional Information.................................................... 59
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 SHARES
[LOGO OF NATIONAL EQUIPMENT SERVICES, INC. APPEARS HERE]
NATIONAL EQUIPMENT SERVICES, INC.
COMMON STOCK
PROSPECTUS
SALOMON SMITH BARNEY
WILLIAM BLAIR & COMPANY
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NATIONSBANC MONTGOMERY SECURITIES LLC
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of estimated expenses, to be paid solely by the
Company, of the issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 101,775
NASD filing fee............................................... 30,500
New York Stock Exchange original listing fee.................. 168,600
Blue Sky fees and expenses (including attorneys' fees and
expenses).................................................... 10,000
Printing expenses............................................. 650,000
Accounting fees and expenses.................................. 600,000
Transfer agent's fees and expenses............................ 10,000
Legal fees and expenses....................................... 350,000
Miscellaneous expenses........................................ 79,125
----------
Total..................................................... $2,000,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person is or was an officer, director, employee or agent of
such corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the corporation's best interests and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his or her
conduct was illegal. A Delaware corporation may indemnify any persons who are,
or are threatened to be made, a party to any threatened, pending or completed
action or suit by or in the right of the corporation by reason of the fact
that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorney's fees) actually and
reasonably incurred by such person in connection with the defense or
settlement of such action or suit, provided such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
corporation's best interests except that no indemnification is permitted
without judicial approval if the officer or director is adjudged to be liable
to the corporation. Where an officer or director is successful on the merits
or otherwise in the defense of any action referred to above, the corporation
must indemnify him or her against the expenses which such officer or director
has actually and reasonably incurred.
Section 145 further provides that the indemnification provisions of Section
145 shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office. The certificate of incorporation of the Company provides
that, to the fullest extent permitted by the General Corporation Law of the
State of Delaware, no director of the corporation shall be liable to the
corporation or its stockholders for monetary damages arising from a breach of
fiduciary duty owed to the corporation of its stockholders.
II-1
<PAGE>
Article V of the by-laws of the Company provides that any person who was or
is a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that he or she, or a person of whom he or
she is the legal representative, is or was a director or officer of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee, fiduciary or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified
and held harmless by the corporation to the fullest extent to which it is
empowered to do so unless prohibited from doing so by the General Corporation
Law of the State of Delaware, as may be amended (but only to the extent such
amendment permits the corporation to provide broader indemnification rights
than were permitted prior to such amendment) against expense, liability and
loss (including attorneys' fees actually and reasonably incurred by such
person in connection with such proceeding) and such indemnification shall
continue as to an indemnitee who has ceased to a be a director, officer,
employee or agent and shall inure to the benefit of the indemnitee's heirs,
executors and administrators, provided that, such person shall be indemnified
only (subject to certain limited exceptions) in connection with a proceeding
initiated by such person only if such proceeding was authorized by the board
of directors of the corporation. The right to indemnification of such person
shall be a contract right and shall include the right to be paid expenses
incurred in defending any proceeding in advance of its final disposition.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him or her and incurred
by him or her in any such capacity, arising out of his or her status as such,
whether or not the corporation would otherwise have the power to indemnify him
or her under Section 145.
Article V of the by-laws of the Company further provides that such
corporation may purchase and maintain insurance on its own behalf and on
behalf of any person who is or was a director, officer, employee, fiduciary,
or agent of such corporation or was serving at the request of such corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him or her and incurred by him or her in any such capacity, whether or
not the corporation would have the power to indemnify such person against such
liability under Article V of its by-laws. All of the directors and officers of
the Company are covered by insurance policies maintained and held in effect by
such corporation against certain liabilities for actions taken in such
capacities, including liabilities under the Securities Act of 1933.
The Company has agreed to indemnify and hold harmless Mr. Grove against all
expense, liability and loss reasonably incurred or suffered by Mr. Grove in
connection with any allegation that his membership on the Board conflicts with
or breaches the terms of a noncompetition covenant to which Mr. Grove is a
party.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the Company's inception, the Company has sold and issued the following
unregistered securities:
(1) In June 1996, the Company sold 30,000 shares of Class B Common Stock
("Class B Common Shares") for a cash purchase price of $300,000 to Golder,
Thoma, Cressey, Rauner Fund IV, L.P. in connection with the formation of
the Company.
(2) In June 1996, the Company sold an aggregate of 108 Class B Common
Shares to Kevin Rodgers and Paul Ingersoll for an aggregate purchase price
of $1,080 in connection with the formation of the Company. Such executives
purchased such shares with promissory notes due in June 2006.
(3) In January 1997, the Company sold 1,550 shares of Class A Common
Stock ("Class A Common Shares") and 45,000 Class B Common Shares to Golder,
Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of $1,550,000
and $450,000, respectively, in connection with the Company's acquisition of
Industrial Hoist.
(4) In January 1997, the Company sold an aggregate of 10,892 Class B
Common Shares to Kevin Rodgers, Dennis O'Connor and Paul Ingersoll for an
aggregate purchase price of $108,920 in connection with the Company's
acquisition of Industrial Hoist. Such executives purchased such shares with
promissory notes due in June 2007.
II-2
<PAGE>
(5) In January 1997, the Company sold 97 Class A Common Shares and 300
Class B Common Shares to James Kowalik and Michael Wolverton for a cash
purchase price of $97,000 and $3,000, respectively, in connection with the
Company's acquisition of Industrial Hoist Services. Messrs. Kowalik and
Wolverton are the former owners of Industrial Hoist Services.
(6) In February 1997, the Company sold 1,200 Class A Common Shares to
Golder, Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of
$1,200,000 in connection with the Company's acquisition of Aerial
Platforms.
(7) In February 1997, the Company issued 97 Class A Common Shares and 300
Class B Common Shares to Carter Wilson (having aggregate value at the time
of $100,000) as partial consideration for the stock of Aerial Platforms.
Mr. Wilson is the former owner of Aerial Platforms.
(8) In March 1997, the Company sold 3,000 Class A Common Shares to
Golder, Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of
$3,000,000 in connection with the Company's acquisition of Lone Star
Rentals.
(9) In March 1997, the Company sold 97 Class A Common Shares and 300
Class B Common Shares to James Horsley for a cash purchase price of $97,000
and $3,000, respectively, in connection with the Company's acquisition of
Lone Star Rentals. Mr. Horsley is the former owner of Lone Star Rentals.
(10) In April 1997, the Company sold 5,000 Class A Common Shares to
Golder, Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of
$5,000,000 in connection with the Company's acquisition of BAT Rentals.
(11) In July 1997, the Company sold 10,000 Class A Common Shares to
Golder, Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of
$10,000,000 in connection with the Company's acquisition of Sprintank.
(12) In July 1997, the Company sold an aggregate of 485 Class A Common
Shares and 1,500 Class B Common Shares to Joseph Swinbank, Donald Poarch,
James O'Neil, Sammy Sorsby and J.D. Cox for an aggregate cash purchase
price of $485,000 and $15,000, respectively, in connection with the
Company's acquisition of Sprintank. Messrs. Swinbank and Poarch are the
former owners of Sprintank. Messrs. O'Neil, Sorsby and Cox are senior
managers of Sprintank.
(13) In July 1997, the Company sold 3,000 Class A Common Shares to
Golder, Thoma, Cressey, Rauner Fund V, L.P. for a cash purchase price of
$3,000,000 in connection with the Company's acquisition of Equipco Rentals
and Sales.
(14) In July 1997, the Company issued an aggregate of 145.5 Class A
Common Shares and 450 Class B Common Shares to Marc Trubitz, Suellen
Trubitz, Randall Brevard, Linda Sue Hughes and Donald Stewart (having an
aggregate value at the time of $200,000) as partial consideration for
noncompetition covenants entered into by such persons in connection with
the Company's acquisition of Equipco Rental and Sales. Mr. and Mrs. Trubitz
are the former owners of Equipco Rental and Sales. Messrs. Brevard and
Stewart and Ms. Hughes are senior managers of Equipco Rentals and Sales.
(15) In July 1997, the Company sold 194 Class A Common Shares and 600
Class B Common Shares to James Horsley for a cash purchase price of
$194,000 and $6,000, pursuant to an agreement previously entered into with
Mr. Horsley in connection with the Company's acquisition of Lone Star
Rentals.
(16) In October 1997, the Company sold 97 Class A Common Shares and 300
Class B Common Shares to Ronald St. Clair for a cash purchase price of
$97,000 and $3,000, respectively, in connection with Mr. St. Clair's
appointment to the Company's board of directors.
(17) In October 1997, the Company issued 48.5 Class A Common Shares and
150 Class B Common Shares to William Lear (having an aggregate value at the
time of $50,000) as partial compensation for services rendered to the
Company by Mr. Lear.
(18) In November 1997, the Company issued $100,000,000 aggregate
principal amount of 10% Senior Subordinated Notes due 2004 (the "Notes") to
Smith Barney Inc., First Union Capital Markets Corp. and Salomon Brothers
Inc, who immediately resold the Notes to qualified institutional buyers in
a transaction exempt under Rule 144A.
(19) In March 1998, the Company sold 210 Class A Common Shares and 200
Class B Common Shares to Joseph Cormier for a cash purchase price of
$210,000 and $40,000, respectively, in connection with the Company's
acquisition of Cormier Equipment. Mr. Cormier is the former owner of
Cormier Equipment.
The above-described transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act as transactions
not involving any public offering.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S> <C>
1.1 Form of Underwriting Agreement among the Company, Smith
Barney Inc., William Blair & Company, L.L.C., Credit
Suisse First Boston Corporation, Donaldson Lufkin &
Jenrette Securities Corporation and NationsBanc Montgomery
Securities LLC.*
2.1 Stock Purchase Agreement dated as of April 1, 1998 by and
among the Company, Falconite, Inc. and the stockholders of
Falconite, Inc. (1)
3.1(i) Certificate of Incorporation of the Company. (1)
3.1(ii) Certificate of Amendment dated January 3, 1997 to
Certificate of Incorporation of the Company. (1)
3.1(iii) Certificate of Amendment dated October 28, 1997 to
Certificate of Incorporation of the Company. (1)
3.1(iv) Form of Restated Certificate of Incorporation of the
Company.*
3.2(i) By-laws of the Company. (1)
3.2(ii) Form of Restated By-laws of the Company.*
4.1(i) Indenture dated November 25, 1997 by and among the
Company, the Subsidiary Guarantors named therein and
Harris Savings and Trust Company, as trustee. (1)
4.1(ii) Supplemental Indenture dated April 1, 1998 by and among
NES East Acquisition Corp., NES Michigan Acquisition
Corp., Albany Ladder Company, Inc., and Harris Savings and
Trust Company, as trustee. (1)
4.2 Forms of Series A and Series B 10% Senior Subordinated
Notes (contained in Exhibit 4.1(i) as Exhibit A thereto). (1)
4.3 Form of Subsidiary Guarantee (contained in Exhibit 4.1(i)
as Exhibit D thereto). (1)
4.4 Registration Rights Agreement dated as of November 25,
1997 among the Company, Aerial Platforms, Inc., NES
Acquisition Corp., BAT Acquisition Corp., MST Enterprises,
Inc. and the Initial Purchasers. (1)
4.5 Purchase Agreement dated as of November 20, 1997 among the
Company, Aerial Platforms, Inc., NES Acquisition Corp.,
BAT Acquisition Corp., MST Enterprises, Inc. and the
Initial Purchasers. (1)
4.6(i) Credit Agreement dated July 1, 1997 by and among the
Company, Aerial Platforms, Inc., NES Acquisition Corp.,
BAT Acquisition Corp., certain financial institutions and
First Union Commercial Corporation, as Agent. (1)
4.6(ii) First Amendment to Credit Agreement dated as of July 18,
1997 by and among the Company, Aerial Platforms, Inc., NES
Acquisition Corp., BAT Acquisition Corp., MST Enterprises,
Inc., certain financial institutions and First Union
Commercial Corporation, as Agent. (1)
4.6(iii) Second Amendment to Credit Agreement and Consent dated as
of October 29, 1997 by and among the Company, Aerial
Platforms, Inc., NES Acquisition Corp., BAT Acquisition
Corp., MST Enterprises, Inc., certain financial
institutions and First Union Commercial Corporation, as
Agent. (1)
4.6(iv) Borrower Joinder Agreement dated as of July 18, 1997 by
and among the Company, MST Enterprises, Inc. and First
Union Commercial Corporation, as Agent. (1)
4.6(v) Third Amendment to Credit Agreement and Consent by and
among the Company, NES Acquisition Corp., BAT Acquisition
Corp., NES Michigan Acquisition Corp., NES East
Acquisition Corp, Albany Ladder Company, Inc., certain
financial institutions and First Union Commercial
Corporation, as Agent. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
4.7 Pledge Agreement dated as of July 18, 1997 by and among
the Company, Aerial Platforms, Inc., NES Acquisition
Corp., BAT Acquisition Corp., MST Enterprises, Inc. and
First Union Commercial Corporation, as Agent for certain
Lenders referred to therein. (1)
4.8 Security Agreement dated as of July 18, 1997 by and among
the Company, Aerial Platforms, Inc., NES Acquisition
Corp., BAT Acquisition Corp., MST Enterprises, Inc. and
First Union Commercial Corporation, as Agent for certain
Lenders referred to therein. (1)
4.9 Form of certificate representing shares of Common Stock of
the Company.*
5.1 Opinion and consent of Kirkland & Ellis.*
10.1(i) Professional Services Agreement dated as of June 4, 1996
by and between the Company and Golder, Thoma, Cressey,
Rauner Fund IV, L.P. (1)
10.1(ii) Amendment No. 1 to Professional Services Agreement dated
as of December 31, 1996 between the Company and Golder,
Thoma, Cressey, Rauner Fund IV, L.P. (1)
10.2 Purchase Agreement dated as of June 4, 1996 between the
Company and Golder, Thoma, Cressey, Rauner Fund IV, L.P. (1)
10.3(i) Stockholders Agreement dated as of June 4, 1996 by and
between the Company, Golder, Thoma, Cressey, Rauner Fund
IV, L.P. and certain Executives named therein. (1)
10.3(ii) Amendment No. 1 to Stockholders Agreement dated December
31, 1996 by and among the Company, Golder, Thoma, Cressey,
Rauner Fund IV, L.P. and certain Executives named therein. (1)
10.4(i) Registration Agreement dated as of June 4, 1996 between
dated as of June 4, 1996 between the Company and Golder,
Thoma, Cressey, Rauner Fund IV, L.P. and certain
Executives named therein. (1)
10.4(ii) Amendment No. 1 to Registration Agreement dated as of
December 31, 1996 by and among the Company, Golder, Thoma,
Cressey, Rauner Fund IV, L.P. and certain Executives named
therein. (1)
10.5(i) Senior Management Agreement dated as of June 4, 1996
between the Company and Kevin Rodgers.** (1)
10.5(ii) Amendment No. 1 to Senior Management Agreement dated
December 31, 1996 between the Company and Kevin Rodgers.** (1)
10.6(i) Senior Management Agreement dated as of June 4, 1996
between the Company and Paul Ingersoll.** (1)
10.6(ii) Amendment No. 1 to Senior Management Agreement dated
December 31, 1996 between the Company and Paul
Ingersoll.** (1)
10.7 Senior Management Agreement dated as of December 31, 1996
between the Company and Dennis O'Connor.** (1)
10.8 Executive Stock Pledge Agreement dated as of June 4, 1996
between the Company and Kevin Rodgers. (1)
10.9 Executive Stock Pledge Agreement dated as of June 4, 1996
between the Company and Paul Ingersoll. (1)
10.10 Executive Stock Pledge Agreement dated as of December 31,
1996 between the Company and Dennis O'Connor. (1)
10.11 Promissory Note dated as of January 6, 1997 by Kevin
Rodgers in favor of the Company in the principal amount of
$63,232. (1)
10.12 Promissory Note dated as of January 6, 1997 by Paul
Ingersoll in favor of the Company in the principal amount
of $9,880. (1)
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S> <C>
10.13 Promissory Note dated as of January 6, 1997 by Dennis
O'Connor in favor of the Company in the principal amount
of $19,760. (1)
10.14 Securities Transfer Agreement dated as of December 31,
1996 by and among the Company, Golder, Thoma, Cressey,
Rauner Fund IV, L.P., Golder, Thoma, Cressey, Rauner Fund
V, L.P., Kevin Rodgers, Paul Ingersoll and Dennis
O'Connor. (1)
10.15 Asset Purchase Agreement dated as of January 6, 1997 by
and among NES Acquisition Corp., Industrial Crane
Maintenance Systems, Inc., Brazos Rental & Tool, Inc.,
Safe Work Load Products, Inc. and certain stockholders of
the Sellers referred to therein. (1)
10.16 Stock Purchase Agreement dated as of February 18, 1997 by
and among Aerial Platforms, Inc., Carter B. Wilson and the
Company. (1)
10.17 Asset Purchase Agreement dated as March 17, 1997 by among
NES Acquisition Corp., Lone Star Rentals, Inc. and James
Horsley. (1)
10.18 Asset Purchase Agreement dated as of April 1, 1997 by and
among, BAT Acquisition Corp., BAT Rentals, Inc. and Paul
B. Bronken. (1)
10.19 Asset Purchase Agreement dated as of July 1, 1997 by and
among NES Acquisition Corp., Sprint Industrial Services,
Inc., Joseph B. Swinbank and Donald Poarch. (1)
10.20 Stock Purchase Agreement dated as of July 18, 1997 by and
among MST Enterprises, Inc., the stockholders of MST
Enterprises, Inc. and National Equipment Services, Inc. (1)
10.21 Asset Purchase Agreement dated as of January 16, 1998 by
and among McNabb Enterprises, Inc., the stockholders of
McNabb Enterprises, Inc. and BAT Acquisition Corp. (1)
10.22 Asset Purchase Agreement dated as of January 23, 1998 by
and among NES Michigan Acquisition Corp., Grand Hi-Reach,
Inc. and Allen Baker. (1)
10.23 Stock Purchase Agreement dated as of January 12, 1998 by
and among Genpower Pump & Equipment Co., Inc., the
stockholders of Genpower Pump & Equipment Co., Inc. and
the Company. (1)
10.24 Asset Purchase Agreement dated as of February 4, 1998 by
and among NES Michigan Acquisition Corp., Work Safe Supply
Co., Inc., Dan J. Babcock and Kathy Babcock. (1)
10.25 Asset Purchase Agreement dated as of March 2, 1998 by and
among The Modern Group, Inc., the Stockholders of The
Modern Group, Inc., Southeast Texas Intermediary, Inc. and
NES Acquisition Corp. (1)
10.26 Asset Purchase Agreement dated as of February 9, 1998 by
and between Cormier Equipment Corporation and NES
Acquisition Corp. (1)
10.27 Assignment and Assumption Agreement dated as of March 4,
1998 by and among NES Acquisition Corp. and NES East
Acquisition Corp. (1)
10.28 Lease dated January 6, 1997 by and between ES&L Service
and NES Acquisition Corp. (1)
10.29 Lease Agreement dated as of May 30, 1990 by and between
Weeks Super Partnership, LTD and Aerial Platforms, Inc. (1)
10.30 Lease Agreement dated as of March 17, 1997 by and between
James Horsley and NES Acquisition Corp. relating to 3440
Red Bluff Road, Pasadena, Texas. (1)
10.31 Lease dated as of April 1, 1997 by and between BAT
Rentals, Inc. and BAT Acquisition Corp. (1)
10.32 Lease Agreement dated as of July 18, 1997 by and between
March S. Trubitz, Suellen Trubitz and MST Enterprises,
Inc. (1)
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S> <C>
10.33 Stock Purchase Agreement dated as of March 9, 1998 by and
among the Company, Albany Ladder Company, Inc. and the
stockholders of Albany Ladder Company, Inc. (1)
10.34 Commitment Letter Agreement dated June 30, 1998 among the
Company, First Union National Bank and First Union Capital
Markets.
10.35 National Equipment Services, Inc. 1998 Long-Term Equity
Incentive Plan.*, **
11.1 Statement re computation of per share earnings. Not
required because the relevant computations can be clearly
determined from the material contained in the financial
statements included herein.
12.1 Statement re computation of ratios.
21.1 Subsidiaries of the Company. (1)
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Albin, Randall & Bennett.
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of KPMG Peat Marwick L.L.P.
23.5 Consent of Lawrence, Blackburn Meek Maxey & Co. P.C.
23.6 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1(i) Powers of Attorney of Kevin Rodgers, Dennis O'Connor, Carl
Thoma, William Kessinger and Ronald St. Clair.*
24.1(ii) Power of Attorney of John Grove.*
27.1 Financial Data Schedule.
</TABLE>
- --------
*Filed previously.
**Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-43553).
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule I--National Equipment Services, Inc. (Parent Company Only)--
Condensed Financial Information of Registrant.
Schedule II--National Equipment Services, Inc. and Subsidiaries--Valuation
and Qualifying Accounts and Reserves.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
(3) It will provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
<PAGE>
SCHEDULE I
NATIONAL EQUIPMENT SERVICES, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................... $ 12 $ 34,789
Property and equipment, net........................ 17 87
Investment in subsidiaries......................... -- 86,504
Loan origination costs, net........................ -- 6,270
Prepaid and other assets, net...................... 187 222
----- --------
Total assets..................................... $ 216 $127,872
===== ========
LIABILITIES:
Accounts payable................................... $ -- $ 1,140
Accrued interest................................... -- 1,057
Accrued expenses and other liabilities............. 110 420
Debt............................................... -- 98,782
----- --------
Total liabilities................................ 110 101,399
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY:
Class A Common stock, $0.01 par, 50,000 shares
authorized, 0 and 25,011 shares issued and
outstanding, respectively......................... -- 1
Class B Common stock, $0.01 par, 150,000 shares
authorized, 30,108 and 89,900 shares issued and
outstanding, respectively......................... 1 1
Additional paid-in capital......................... 301 25,663
Retained earnings (accumulated deficit)............ (195) 910
Stock subscriptions receivable..................... (1) (102)
----- --------
Total stockholders' equity....................... 106 26,473
----- --------
Total liabilities and stockholders' equity....... $ 216 $127,872
===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-1
<PAGE>
SCHEDULE I
NATIONAL EQUIPMENT SERVICES, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 4, 1996) FOR THE YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
Equity in net income of subsidiaries................ $ -- $2,060
Selling, general and administrative expenses........ 333 1,352
Non-rental depreciation and amortization............ 3 54
----- ------
Operating income (loss)............................. (336) 654
Other income, net................................... -- 1,155
Interest income (expense), net...................... 4 (704)
----- ------
Income (loss) before income taxes................... (332) 1,105
Income tax benefit.................................. (137) --
----- ------
Net income (loss)................................... $(195) $1,105
===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-2
<PAGE>
SCHEDULE I
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
(PARENT COMPANY ONLY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 4, 1996) FOR THE YEAR
THROUGH ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................ $(195) $ 1,105
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................. 3 447
Undistributed equity income in subsidiaries.... -- (2,060)
Changes in operating assets and liabilities:
Prepaid and other assets..................... (187) (72)
Accounts payable............................. -- 1,140
Accrued expenses and other liabilities....... 110 1,367
----- ---------
Net cash provided by (used in) operating
activities................................ (269) 1,927
----- ---------
INVESTING ACTIVITIES:
Net cash paid for acquisitions................... -- (68,994)
Investment in subsidiaries....................... -- (15,450)
Purchases of property and equipment.............. (20) (88)
----- ---------
Net cash used in investing activities...... (20) (84,532)
----- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt..................... -- 222,307
Payments on long-term debt....................... -- (123,526)
Net proceeds from sales of common stock.......... 301 25,263
Payments of loan origination costs............... -- (6,662)
----- ---------
Net cash provided by financing activities.. 301 117,382
----- ---------
Net increase in cash and cash equivalents.......... 12 34,777
Cash and cash equivalents at beginning of period... -- 12
----- ---------
Cash and cash equivalents at end of period......... $ 12 $ 34,789
===== =========
SUPPLEMENTAL NON-CASH FLOW INFORMATION:
Cash paid for interest........................... $ -- $ 2,707
===== =========
Cash paid for income taxes....................... $ -- $ 1,113
===== =========
Non-cash issuance of stock....................... $ 1 $ 101
===== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-3
<PAGE>
SCHEDULE I
NATIONAL EQUIPMENT SERVICES, INC.
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED TOTAL
--------------- ADDITIONAL EARNINGS STOCK STOCK-
CLASS A CLASS B PAID-IN (ACCUMULATED SUBSCRIPTIONS HOLDERS'
SHARES SHARES CAPITAL DEFICIT) RECEIVABLE EQUITY
------- ------- ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Shares issued at
inception (June 4,
1996).................. $-- $ 1 $ 301 $ -- $ (1) $ 301
Net loss................ -- -- -- (195) -- (195)
---- ---- ------- ----- ----- -------
Balance at December 31,
1996................... -- 1 301 (195) (1) 106
Sale of shares.......... 1 -- 25,362 -- (101) 25,262
Net income.............. -- -- -- 1,105 -- 1,105
---- ---- ------- ----- ----- -------
Balance at December 31,
1997................... $ 1 $ 1 $25,663 $ 910 $(102) $26,473
==== ==== ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-4
<PAGE>
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
National Equipment Services, Inc. ("NES") was organized on June 4, 1996
under the laws of Delaware for the purpose of owning and operating equipment
rental facilities by means of acquiring existing businesses. NES is primarily
involved in the rental of equipment to construction and industrial users. NES
operates from locations in Alabama, Georgia, Louisiana, Nevada, Texas and
Virginia.
FINANCIAL STATEMENT PRESENTATION
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT
Since inception, NES adopted Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the assets' carrying amounts and related goodwill exceed the
undiscounted cash flows estimated to be generated by those assets. SFAS No.
121 also requires impairment losses to be recorded when the carrying amount of
long-lived assets that are expected to be disposed of exceeds their fair
values, net of disposal costs. SFAS No. 121 did not have a material impact on
NES's financial position or results of operations for the period from
inception (June 4, 1996) through December 31, 1996 or year ended December 31,
1997.
REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. The Statement
requires 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. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Statement is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The
adoption of SFAS No. 130 in the first quarter of 1998 had no impact as the
Company had no items of other comprehensive income in any period presented.
LOAN ORIGINATION COSTS
Loan origination costs are stated at cost and amortized to interest expense
using the effective interest method over the life of the loan. Amortization
expense related to loan origination costs aggregated $392,000 for the year
ended December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash,
trade 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 the Senior Subordinated Notes is based on
quoted market prices and approximates the carrying value at December 31, 1997.
The carrying value of bank debt approximates fair value as the interest on the
bank debt is reset every 30 to 90 days to reflect current market rates.
S-5
<PAGE>
INCOME TAXES
Provisions are made to record deferred income taxes in recognition of items
reported differently for financial reporting purposes than for federal and
state income tax purposes. NES records deferred income taxes using the
liability method in accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. The Company and its
subsidiaries will file a consolidated tax return for the year ended December
31, 1997.
RELATED PARTY TRANSACTIONS
As disclosed in these financial statements, NES has participated in certain
transactions with related parties.
2. ACQUISITIONS
In 1997, NES purchased the following rental equipment companies:
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE COMPANY LOCATION PRICE
----------------- ----------------------------- ---------------- -----------
<C> <S> <C> <C>
January 6, 1997 Brazos Rental & Tool, Inc.,
Industrial Crane Maintenance
Systems, Inc., and Safe Load
Work Products, Inc. Brazoria, TX $ 5,000,000
February 18, 1997 Aerial Platforms, Inc. Atlanta, GA $ 4,150,000
March 17, 1997 Lone Star Rentals, Inc. Houston, TX $10,950,000
April 1, 1997 BAT Rentals, Inc. Las Vegas, NV $15,900,000
July 1, 1997 Sprintank Houston, TX $25,300,000
July 18, 1997 MST Enterprises, Inc. Harrisonburg, VA $ 6,000,000
</TABLE>
The purchase prices above are subject to a customary purchase price
adjustment mechanism and assumption of certain seller liabilities.
The following pro forma financial information represents the unaudited pro
forma results of operations as if the aforementioned acquisitions had been
completed on January 1, 1996 and January 1, 1997, after giving effect to
certain adjustments including increased depreciation and amortization of
property and equipment and other assets and interest expense for acquisition
debt. These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations which would
have been achieved had these acquisitions been completed as of these dates,
nor are the results indicative of NES's future results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revenues....................................... $48,040 $56,858
Operating income............................... 9,012 10,382
Net income..................................... 158 1,143
</TABLE>
S-6
<PAGE>
3. DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Senior subordinated notes, interest at 10% payable semi-
annually, due November 30, 2004............................ $98,782
Revolving credit facility loans, interest at the federal
funds rate plus 0.5% or prime rate both plus 1.0%, or the
eurodollar rate plus 2.5%, due no later than July 1, 2002.. --
Term loan, interest at the federal funds rate plus 0.5% or
prime rate both plus 1.0%, or the eurodollar rate plus
2.5%, principal payments due quarterly of $625 through June
1, 1998, $875 through June 1, 1999 and $1,125 through June
1, 2001.................................................... --
-------
$98,782
=======
</TABLE>
On November 20, 1997, NES issued $100 million of Senior Subordinated Notes
(the "Notes") at a discount netting proceeds of $98,767,000. NES accretes the
original issue discount over the term of the Notes using the effective
interest method. The Notes mature on November 30, 2004. Interest on the Notes
accrues at a rate of 10% per year and is payable semi-annually in arrears on
May 30 and November 30 commencing on May 30, 1998.
The Notes are redeemable at the option of the Company at any time after
November 30, 2001 at a redemption price of 105% of the principal amount from
November 30, 2001 to November 29, 2002, at 102.5% from November 30, 2002 to
November 29, 2003 and 100% after November 30, 2003, plus accrued and unpaid
interest. The Company may at any time prior to November 30, 2000 on any one or
more occasions redeem up to 33% of the aggregate principal amount of the Notes
at a redemption price of 110% of the principal amount plus accrued and unpaid
interest with the net cash proceeds of a public offering of common stock of
NES within 45 days of the closing of such public offering. In addition, at any
time prior to November 30, 2001, the Notes may be redeemed as a whole, at the
option of NES, upon the occurrence of or in connection with a change of
control. Upon certain changes in control, the noteholders will have the right
to require redemption at a cash price of 101% of the principal amount plus
accrued and unpaid interest.
All of the Company's wholly-owned subsidiaries make full, unconditional,
joint and several guarantees of the notes. The separate financial statements
of each of these wholly-owned subsidiaries are not presented as management
believes they are not individually meaningful for presentations.
On July 1, 1997, NES entered into a credit facility agreement with First
Union Commercial Corporation (the "Credit Agreement"). The Credit Agreement
provides for a secured revolving line of credit of $100 million and a term
loan of $15 million. Interest accrues at rates of the greater of the annual
Federal Funds Rate plus 0.5% or the prime rate both plus 0.5% to 1.25% based
on NES's leverage ratio or at a rate of LIBOR/(1- eurodollar reserve
percentage) plus 2.0% to 2.75% based on NES's leverage ratio. Principal
payments for credit facility loans (to be applied first to the term loan and
if necessary to revolving loans) are due annually at the lesser of 25% of
excess cash flow or $1 million. Principal payments for the term loan are due
quarterly at $625,000 for the first four quarters, $875,000 for the next four
quarters and $1,125,000 for the next eight quarters. Substantially all assets
and stock of NES are pledged as collateral for the credit facility. NES pays
commitment fees of 0.375% to 0.5% on the unused portion of the outstanding
line of credit balance based on NES's leverage ratio. The term loan was repaid
as of December 31, 1997.
The Indenture for the Notes and the Credit Agreement contain a number of
covenants that, among other things, require NES to maintain certain financial
ratios and set certain limitations on the granting of liens, assets sales,
additional indebtedness, transactions with affiliates, restricted payments,
investments and issuances of stock. NES is in compliance with all covenants.
S-7
<PAGE>
The average interest rate for the year ended December 31, 1997 was 9.8%. NES
incurred interest expense of $76,000 on borrowings from related parties for
the year ended December 31, 1997.
4. INCOME TAXES
The income tax provision is comprised of current federal and state income
tax benefit of $(137,100) for the period from inception (June 4, 1996) through
December 31, 1996. Deferred tax benefit for this period was immaterial.
The provision for income taxes differs from the amount of income tax
determined by applying the U.S. statutory federal income tax rate of 34% to
income before income taxes as a result of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(JUNE 4, 1996) FOR THE
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
Federal income taxes.......................... $(113) $654
State income taxes, net of federal benefit.... (16) 94
Other......................................... (8) 70
----- ----
$(137) $818
===== ====
</TABLE>
For the year ended December 31, 1997, the income tax provision was recorded
at the subsidiary level.
5. COMMON STOCK
On June 4, 1996, in connection with the formation of NES, NES authorized
25,000 shares of Class A Common stock (24,250 of which were reserved for
issuance to NES's majority stockholder), par value $0.01, and 150,000 shares
of Class B Common stock (75,000 of which were reserved for issuance to NES's
majority stockholder), par value $0.01. On October 28, 1997, the authorized
shares of Class A Common stock were increased to 50,000.
Each calendar quarter, each share of Class A Common is entitled to a yield
in the amount of 10% per year of the sum of such share's unreturned original
cost plus the unpaid yield for all prior quarters. As of December 31, 1997,
the unpaid yield on the Class A Common aggregated $1,608,000. Class A Common
stockholders, as a class, are entitled to a number of votes equal to 10% of
the number of votes allocable to all Common Stock. Upon any distribution,
Class A Common stockholders are entitled to (i) the unpaid yield, (ii) any
unreturned original cost of the shares and (iii) 10% of any remaining
distribution. Class B Common stockholders are entitled to 90% of any remaining
distribution after payment to the Class A Common stockholders of all payments
under clauses (i) and (ii) set forth in the preceding sentence. Additionally,
only in the event of a successful initial public offering can the Class A
Common stockholders require a mandatory redemption of any or all of the shares
attributable to the unpaid yield and original cost of the shares.
NES may not declare additional distributions or dividends other than the
amounts described above for Class A Common shares, issue any debt securities
containing equity features, sell or dispose of more than 5% of the
consolidated assets of the Company in any transaction or series of related
transactions, acquire an interest in a business, acquire a business outside of
the rental equipment industry, or enter into certain related party
transactions, without the consent of a majority of the Class A Common and
Class B Common stockholders.
Class B Common stock sold to executives of NES vests over a 5 year period.
Unpaid notes receivable of $1,000 and $102,000 as of December 31, 1996 and
December 31, 1997, respectively, from executives of NES for shares of Class B
Common stock are classified as stock subscriptions receivable.
S-8
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
NES is party to legal proceedings and potential claims arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of these matters will have no material adverse effect on NES's
financial position, results of operations or cash flows.
7. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing and 401(k) plan (the "Plan") in which
employees over 21 years of age with greater than one-half year of service are
eligible. Under the Plan, NES contributes a discretionary percentage (2.5% for
the year ended December 31, 1997) of each eligible employee's base annual
wages to a trust out of its net profits. In addition, eligible employees can
defer up to 15% of their salary with a partially matching contribution by NES
of 50% of the first 5% of the employee contribution. The employer
contributions vest over a five year period. Contributions to the Plan were
made by the Company's subsidiaries.
8. RELATED PARTY TRANSACTIONS
Pursuant to a Professional Services Agreement dated January 6, 1997, NES
pays management fees of $200,000 per year and investment fees of 1% of all
debt and equity financings of NES to an affiliate of NES's majority
stockholder, who owns 95.0% of the Class A Common stock and 83% of the Class B
Common stock. Total fees paid during the year ended December 31, 1997 were
$417,000 and fees owed at December 31, 1997 were $630,000.
In connection with several of the acquisitions, NES entered into lease
agreements for certain facilities with employees of NES who were prior owners
of the acquired companies. Amounts due under these leases are included in the
future minimum rental commitments under noncancelable operating leases
schedule in Note 10 above.
Stock subscriptions receivable of $1,000 and $102,000 as of December 31,
1996 and 1997, respectively, relate to notes due from officers of NES related
to purchases of Class B Common Stock and are secured by the purchased Class B
Common shares. Interest on the notes accrues at the federal funds rate and is
payable in full at maturity on June 4, 2006 or upon termination of employment.
Accrued interest on these notes was $0 and $8,000 for the period from
inception (June 4, 1996) through December 31, 1996 and the year ended December
31, 1997, respectively.
9. SUBSEQUENT EVENTS
Subsequent to year end, NES purchased the following rental equipment
companies:
<TABLE>
<CAPTION>
PURCHASE
ACQUISITION DATE COMPANY LOCATION PRICE
---------------- --------------------------- ---------------- -----------
<S> <C> <C> <C>
January 12, 1998 Genpower Pump and Deer Park, TX $ 8,000,000
Equipment Co.
January 16, 1998 Eagle Scaffolding and
Equipment Co. Las Vegas, NV $ 3,290,000
January 23, 1998 Grand Hi-Reach, Inc. Byron Center, MI $ 8,120,000
February 4, 1998 Work Safe Supply Company, Grandville, MI $ 7,845,000
Inc.
March 2, 1998 Dragon Rentals (division of Beaumont, TX $23,000,000
The Modern Group, Inc.)
March 4, 1998 Cormier Equipment Oakland, ME $27,500,000
Corporation
March 30, 1998 Albany Ladder Albany, NY $43,454,000
</TABLE>
S-9
<PAGE>
The purchase prices above are subject to a customary purchase price
adjustment mechanism and assumption of certain seller liabilities. These
acquisitions will be accounted for under the purchase method based on the
purchase prices. Under the purchase method of accounting NES will allocate the
costs of these acquisitions, as of the respective closing dates, to the assets
acquired and liabilities assumed based on their respective fair values.
The operating results of these acquisitions will be included in NES's
consolidated results of operations from the date of acquisition. The following
pro forma financial information represents the unaudited pro forma results of
operations as if the aforementioned acquisitions had been completed on January
1, 1996 and January 1, 1997, after giving effect to certain adjustments
including increased depreciation and amortization of property and equipment
and intangible assets and interest expense for acquisition debt. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which would have been
achieved had these acquisitions been completed as of these dates, nor are the
results indicative of NES's future results of operations.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
(UNAUDITED) (UNAUDITED)
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues........................................ $120,475 $146,000
Operating income................................ 19,234 26,821
Net income...................................... 751 5,439
</TABLE>
Additionally, subsequent to year end, NES entered into a definitive purchase
agreement to acquire Falconite, Inc., a rental equipment company with
operations in nine southern and mid-western states for $171.25 million and
$3.75 million of 8% convertible subordinated promissory notes. This pending
acquisition is planned to close in 1998 in connection with an initial public
offering of the Company's stock.
S-10
<PAGE>
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(AMOUNTS IN THOUSANDS OF DOLLARS)*
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
----------------------------------
(1) (2)
BALANCE AT CHARGED TO COST CHARGED TO OTHER WRITE- BALANCE AT
DESCRIPTION JANUARY 1, 1997 AND EXPENSES ACCOUNTS--DESCRIBE OFFS DECEMBER 31, 1997
- ------------------------ --------------- --------------- ------------------ -------- -----------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $ 0 $479 $ 0 $225 $254
Reserve for obsolete
inventory.............. $ 0 $732 $ 0 $242 $490
</TABLE>
- --------
* There were no valuation and qualifying accounts and reserves as of December
31, 1996 or during the period then ended.
S-11
<PAGE>
EXHIBIT 10.34
June 29, 1998
National Equipment Services, Inc.
1800 Sherman Avenue, Suite 100
Evanston, Illinois 60201
Attention: Mr. Paul Ingersoll
Vice President, Secretary
Re: Senior Bank Credit Facility
Dear Paul:
You have advised us that National Equipment Services, Inc. (the "Borrower")
seeks financing for the refinancing of its existing indebtedness, for capital
expenditures, for ongoing working capital requirements and for other general
corporate purposes, which will include the acquisition (the "Acquisition") of
Falconite, Inc. (the "Acquired Company") for a purchase price not in excess of
$185 million and other permitted acquisitions, together with the costs and
expenses related thereto.
You have further advised us that the Borrower proposes to enter into the
following financing arrangements in order to provide the foregoing financing,
including the Acquisition:
(i) the Borrower would enter into a Credit Agreement (the "Bank Credit
Facility") having substantially the terms set forth on the Summary of Terms and
Conditions attached hereto as Exhibit A (the "Term Sheet") with certain
financial institutions (collectively "the Lenders") for an aggregate of up to
$325 million, of which (a) $100 million is expected to be term loans (the "Term
Loans") and (b) $225 million is expected to be a revolving credit facility (the
"Revolving Credit Facility"); and
(ii) the Borrower proposes to issue on the Closing Date its common stock in
an initial public offering (the "Equity Financing"), aggregating at least $78
million.
The Acquisition and the transactions described in clauses (i) and (ii)
above are hereinafter referred to collectively as the "Transactions".
Based upon and subject to the foregoing and to the terms and conditions set
forth below and in the Term Sheet, First Union National Bank ("First Union") is
pleased to advise you of its commitment (the "Commitment") to provide the full
principal amount of the Bank Credit Facility. First Union Capital Markets, a
division of Wheat First Securities, Inc. ("FUCM" or the "Arranger"), is pleased
to advise you of its commitment, as arranger and syndication agent for the
<PAGE>
Bank Credit Facility, to form a syndicate of the Lenders, reasonably acceptable
to you, for the Bank Credit Facility. All capitalized terms used and not
otherwise defined herein shall have the meanings set forth in the Term Sheet.
The commitments of First Union and FUCM hereunder are subject to the
satisfaction of each of the following conditions precedent in a manner
acceptable to First Union and FUCM in their reasonable discretion:
(a) the negotiation, execution and delivery of definitive documentation
with respect to the Bank Credit Facility consistent with the Term Sheet and
otherwise satisfactory to First Union and FUCM;
(b) completion of all documentation relating to the Acquisition in form
and substance reasonably satisfactory to First Union;
(c) the purchase price for the Acquired Company not exceeding $185
million;
(d) compliance with all applicable laws and regulations (including
compliance of this Commitment and the transactions described herein with
all applicable federal banking laws, rules and regulations);
(e) execution of a fee letter among the Borrower, First Union and FUCM
prior to or concurrently with the acceptance by the Borrower of this letter
(the "Fee Letter");
(f) the satisfaction of all other conditions described herein, in the Term
Sheet and in such definitive credit documentation;
(g) there not having occurred and being continuing since December 31,
1997, in the opinion of First Union and FUCM, a material adverse change in
the business, assets, liabilities (actual or contingent), operations or
condition (financial or otherwise) of the Borrower, the Acquired Company or
their respective subsidiaries (taken as a whole); and
(h) there not having occurred and being continuing since the date hereof a
material disruption or other change in the financial, banking or capital
markets that has had or could have a material adverse effect on the
syndication of the Bank Credit Facility, as determined by First Union and
FUCM in their reasonable discretion. In the event of any such occurrence,
whether before or after the closing of the Bank Credit Facility, First
Union shall be entitled, after consultation with the Borrower, to change
the pricing, structure or terms of the Bank Credit Facility if First Union
determines that such changes are advisable in order to ensure a successful
syndication or an optimal credit structure of the Bank Credit Facility.
The commitments of First Union and FUCM hereunder are based upon the
financial and other information regarding the Borrower, its subsidiaries and the
Acquired Company previously
2
<PAGE>
provided to First Union and FUCM. If, however, the continuing review by First
Union and FUCM of the Borrower or the Acquired Company discloses information
relating to conditions or events not previously disclosed to First Union and
FUCM or relating to new information or additional developments concerning
conditions or events previously disclosed to First Union and FUCM which First
Union and FUCM in their reasonable discretion believe may have a material
adverse effect on the condition (financial or otherwise), assets, properties,
business or operations of the Borrower, the Acquired Company or their respective
subsidiaries (taken as a whole), First Union and FUCM may, in their reasonable
discretion, suggest alternative financing amounts or structures that ensure
adequate protection for the Lenders or decline to participate in the proposed
financing.
First Union will act as sole administrative agent for the Bank Credit
Facility (in such capacity, the "Agent") and FUCM, in its capacity as Arranger,
will act as sole manager, arranger and syndication agent for the Bank Credit
Facility. No additional agents will be appointed without the prior approval of
First Union and FUCM.
You acknowledge that it is the intent of First Union and FUCM to syndicate
the Bank Credit Facility. You agree to actively assist First Union and FUCM in
achieving a syndication of the Bank Credit Facility that is satisfactory to
First Union, FUCM and you. Syndication of the Bank Credit Facility will be
accomplished by a variety of means, including direct contact during the
syndication between senior management and advisors of the Borrower and the
proposed Lenders. To assist First Union and FUCM in the syndication efforts, you
hereby agree to (a) provide and cause your advisors to provide First Union and
FUCM and the other Lenders upon request with all information reasonably deemed
necessary by First Union and FUCM to complete syndication, including but not
limited to information and evaluations prepared by the Borrower and its
advisors, or on its behalf, relating to the Acquisition, (b) assist First Union
and FUCM upon their reasonable request in the preparation of an Information
Memorandum to be used in connection with the syndication of the Bank Credit
Facility and (c) otherwise assist First Union and FUCM in their syndication
efforts, including by making available officers and advisors of the Borrower and
its subsidiaries from time to time to attend and make presentations regarding
the business and prospects of the Borrower and its subsidiaries, as appropriate,
at a meeting or meetings of prospective Lenders. You further agree to refrain
from engaging in any additional financings for the Acquired Company during such
syndication process unless otherwise agreed to by First Union and FUCM.
It is understood and agreed that First Union and FUCM, after consultation
with you, will manage and control all aspects of the syndication, including
decisions as to the selection of proposed Lenders and any titles offered to
proposed Lenders, when commitments will be accepted and the final allocations of
the commitments among the Lenders. It is understood that no Lender participating
in the Bank Credit Facility will receive compensation from you outside the terms
contained herein and in the Term Sheet in order to obtain its commitment. It is
also understood and agreed that the amount and distribution of the fees among
the Lenders will be at
3
<PAGE>
the sole discretion of First Union and FUCM and that any syndication prior to
execution of definitive documentation will reduce the commitment of First Union.
The Borrower also agrees that First Union and its affiliates will be
afforded an opportunity to offer proposals to provide, arrange, underwrite or
administer (i) any interest rate caps, currency swaps and other hedging
transactions to be entered into by the Borrower or any subsidiary or affiliate
thereof, (ii) any cash management, funds transfer, trade, corporate trust and
securities services to be obtained by the Borrower or any subsidiary or
affiliate thereof and (iii) any public or private debt or equity instruments or
securities to be issued by the Borrower or any subsidiary thereof.
You hereby represent, warrant and covenant that (i) all information, other
than Projections (as defined below), which has been or is hereafter made
available to First Union and FUCM or the Lenders by you or any of your
representatives in connection with the transactions contemplated hereby
("Information") is and will be complete and correct in all material respects and
does not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained therein not
misleading and (ii) all financial projections concerning the Borrower and the
Acquired Company that have been or are hereafter made available to First Union
and FUCM or the Lenders by you or any of your representatives (the
"Projections") have been or will be prepared in good faith based upon reasonable
assumptions. You agree to furnish us with such Information and Projections as we
may reasonably request and to supplement the Information and the Projections
from time to time until the closing date for the Bank Credit Facility so that
the representation and warranty in the preceding sentence is correct on the such
date. In arranging and syndicating the Bank Credit Facility, First Union and
FUCM will be using and relying on the Information and the Projections without
independent verification thereof.
By executing this letter agreement, you agree to reimburse First Union and
FUCM from time to time on demand for all reasonable out-of-pocket fees and
expenses (including, but not limited to, all due diligence expenses, syndication
expenses and the reasonable fees, disbursements and other charges of Moore & Van
Allen, PLLC, as counsel to First Union and the other Lenders) incurred in
connection with the preparation, negotiation, execution and delivery of this
commitment and the preparation, negotiation, execution, delivery,
administration, syndication and enforcement of all documents executed in
connection with the Bank Credit Facility.
In the event that First Union or FUCM becomes involved in any capacity in
any action, proceeding or investigation in connection with any matter
contemplated by this letter, the Borrower will reimburse First Union and FUCM
for their legal and other expenses (including the cost of any investigation and
preparation) as they are incurred by First Union or FUCM. The Borrower also
agrees to indemnify and hold harmless First Union, FUCM and their affiliates and
their respective directors, officers, employees and agents (each an "Indemnified
Party") from and against any and all losses, claims, damages and liabilities,
joint or several, related to or arising
4
<PAGE>
out of any matters contemplated by this letter, unless and only to the extent
that it shall be finally judicially determined that such losses, claims, damages
or liabilities resulted primarily from the gross negligence or willful
misconduct of an Indemnified Party.
The provisions of the immediately preceding two paragraphs shall remain in
full force and effect regardless of whether definitive financing documentation
shall be executed and delivered and notwithstanding the termination of this
letter agreement or the commitment of First Union and FUCM hereunder, provided,
however, that the Borrower shall be deemed released of its obligations under the
immediately preceding two paragraphs upon the execution of definitive financing
documentation.
First Union reserves the right to allocate, in whole or in part, to FUCM
certain fees payable to First Union in such manner as First Union and FUCM agree
in their sole discretion. You acknowledge and agree that First Union may share
with any of its affiliates (including specifically FUCM) any information
relating to the Bank Credit Facility, the Borrower, its subsidiaries and
affiliates and the Acquired Company.
The Borrower is not authorized to show or circulate this Commitment or the
Term Sheet, or disclose the contents thereof, to any other person or entity
(other than to its directors, officers and legal and financial counsel;
provided, that (i) each of such persons shall also be bound by the
confidentiality provisions hereof and (ii) the Borrower shall be liable for any
breach of such limitations on disclosure by any such person), except as may be
required by law or applicable judicial process. If the Borrower does show or
circulate this Commitment, the Fee Letter or the Term Sheet, or disclose the
contents thereof, in breach of the foregoing sentence, then the Borrower shall
have been deemed to have accepted this Commitment and the Fee Letter. The
Borrower is also not authorized to disclose the contents of the Commitment in
any press release, judicial proceeding or securities filing without the approval
of First Union and FUCM.
This letter agreement may not be assigned by you without the prior written
consent of First Union and FUCM.
This Commitment shall terminate at 8:00 p.m., Charlotte time, on June 30,
1998, unless such Commitment is accepted by the Borrower in writing prior to
such time and, if accepted prior to such time, shall expire at the earlier of
(i) consummation of the Acquisition or another transaction or series of
transactions in which the Borrower or any of its affiliates acquires
substantially all of the capital stock or assets and liabilities of the Acquired
Company, (ii) termination of the definitive purchase agreement with regard to
the Acquisition, (iii) the occurrence of any event that First Union or FUCM
reasonably believes in good faith has, or could be expected to have, a material
adverse effect on the business, properties, operations or condition (financial
or otherwise) of the Borrower, the Acquired Company or any of their subsidiaries
or the feasibility of the Transactions, and (iv) 5:00 p.m. on August 15, 1998,
if the closing of the Acquisition and the Bank Credit Facility shall not have
occurred by such time.
5
<PAGE>
This letter may be executed in counterparts which, when taken together,
shall constitute an original. This letter, together with the Term Sheet and the
Fee Letter, embodies the entire agreement and understanding among First Union,
FUCM, the Borrower with respect to the specific matters set forth herein and
supersedes all prior agreements and understandings relating to the subject
matter hereof. No party has been authorized by First Union or FUCM to make any
oral or written statements inconsistent with this letter. THIS LETTER SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA, WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.
[The remainder of this page is intentionally left blank.]
6
<PAGE>
If the Borrower is in agreement with the foregoing, please execute and
return the enclosed copy of this letter agreement to First Union and FUCM,
together with an executed copy of the Fee Letter by no later than 8:00 p.m.,
Charlotte time, on June 30, 1998. This letter agreement will become effective
upon your delivery to us of executed counterparts of this letter agreement and
the Fee Letter and, without limiting the more specific terms hereof and of the
Term Sheet, you agree upon acceptance of this commitment to pay the fees set
forth in the Term Sheet and in the Fee Letter.
Very truly yours,
FIRST UNION NATIONAL BANK
By: /s/ John M. Burlingame
---------------------------
Name: John M. Burlingame
--------------------------
Title: Director
-------------------------
FIRST UNION CAPITAL MARKETS,
a division of Wheat First Securities, Inc.
By: /s/ John M. Burlingame
---------------------------
Name: John M. Burlingame
--------------------------
Title: Director
-------------------------
Agreed to and accepted this 30th
day of June, 1998.
NATIONAL EQUIPMENT SERVICES, INC.
By: /s/ Paul Ingersoll
----------------------------
Name: Paul Ingersoll
--------------------------
Title: Vice President
-------------------------
7
<PAGE>
EXHIBIT A
NATIONAL EQUIPMENT SERVICES, INC.
SUMMARY OF TERMS & CONDITIONS
SENIOR CREDIT FACILITY
================================================================================
- --------------------------------------------------------------------------------
BORROWER: National Equipment Services, Inc., a Delaware
corporation (the "Borrower").
GUARANTORS: All present and future, direct and indirect,
subsidiaries of the Borrower including hereafter
acquired subsidiaries including Falconite, Inc. (the
"Target" or "Falconite").
AGENT: First Union National Bank (the "Agent" or "First Union"
will act as sole and exclusive administrative agent. As
such, First Union will negotiate with the Borrower, act
as the primary contact for the Borrower and perform all
other duties associated with the role of exclusive
administrative agent. No other agents or co-agents may
be appointed without the prior written consent of First
Union and FUCM.
ARRANGER &
SYNDICATION AGENT: First Union Capital Markets, a division of Wheat First
Securities, Inc. ("FUCM").
LENDERS: A syndicate of financial institutions (including First
Union) arranged by FUCM, which institutions shall be
acceptable to the Borrower and the Agent (collectively,
the "Lenders").
CREDIT FACILITIES: Up to $325 million comprised of the following:
(i) $225 million Five-Year Revolving Credit Facility
(the "Revolver"), with a letter of credit
subfacility of $25 million (existing letters of
credit will
<PAGE>
be included in such subfacility on terms satisfactory
to the Agent); and
(ii) $100 million Five-Year Non-Amortizing Term Loan
Facility ("Term Loans").
FUCM may, at its discretion, increase or decrease the
individual amounts of the Term Loans and the Revolver
so long as the aggregate amount of the Term Loans and
the Revolver remains unchanged.
PURPOSE: The proceeds of the Credit Facilities, together with a
minimum of $78 million of proceeds from an initial
public offering of common stock of the Borrower
described in clause (iii) of the "Conditions Precedent
to Closing" contained herein, shall be used to
refinance existing indebtedness, to finance the
acquisition of the Target (the "Acquisition"), to
finance other permitted acquisitions, to provide
ongoing working capital for the Borrower and its
subsidiaries, to pay related fees and expenses, and for
general corporate purposes.
AVAILABILITY: Outstandings under the Revolver (including letters of
credit) will be limited to the lesser of (i) $225
million or (ii) the Borrowing Base (defined below) less
the outstanding amount of the Term Loans.
INTEREST RATES: The Credit Facilities shall bear interest as set forth
on Addendum I hereto.
MATURITY: The Credit Facilities shall terminate and all amounts
outstanding thereunder shall be due and payable in full
5 years from Closing.
SECURITY: The Agent (on behalf of the Lenders) shall receive a
first priority perfected security interest in all now
owed or hereafter acquired assets of the Borrower and
its subsidiaries, including without limitation,
<PAGE>
accounts receivable, inventory, fixed assets,
contracts, trademarks, copyrights, patents, license
agreements and general intangibles of the Borrower and
any operating companies and/or subsidiaries hereafter
acquired by the Borrower or any of its subsidiaries and
all proceeds of the foregoing.
The Agent (on behalf of the Lenders) shall also receive
a first priority pledge of all the capital stock of all
now owned or hereafter acquired direct and indirect
subsidiaries of the Borrower.
The foregoing security shall ratably secure the Credit
Facilities and any interest rate swap/foreign currency
swap or similar agreements with a Lender under the
Credit Facilities.
MANDATORY
PREPAYMENTS: The loans under the Credit Facilities will be prepaid
by an amount equal to: (i) 100% of the net cash
proceeds of all Asset Sales (defined below) by the
Borrower or any of its subsidiaries (including stock of
subsidiaries) and (ii) 100% of any casualty insurance
proceeds for major losses, subject, in each case, to de
minimus baskets and reinvestment provisions to be
agreed upon and net of selling expenses and taxes to
the extent such taxes are paid. Such proceeds shall be
applied pro rata among the Term Loans and the
outstandings under the Revolver, unless the Term Loan
Lenders shall decline receipt of such prepayment in
which case all such proceeds shall be applied to the
outstandings under the Revolver. The Borrower shall pay
all breakfunding costs in connection with mandatory
prepayments.
OPTIONAL PREPAYMENTS
AND COMMITMENT
<PAGE>
REDUCTIONS: The Borrower may voluntarily prepay the Term Loans in
minimum amounts of at least $5,000,000. The Borrower
may prepay the revolving loans under the Revolver and
may voluntarily reduce the Revolver commitment in
amounts of $5,000,000 at any time with prior notice and
without premium or penalty. Any such reductions shall
be permanent and shall be accompanied by any necessary
prepayment of the revolving loans outstanding. The
Borrower shall pay all breakfunding costs in connection
with voluntary prepayments.
CONDITIONS PRECEDENT
TO CLOSING: The initial funding of the Credit Facilities will be
subject to reasonable satisfaction of the conditions
precedent deemed appropriate by the Agent and the
Lenders for this type of financing generally and for
this transaction in particular, including but not
limited to the following:
(i) The negotiation, execution and delivery of
definitive documentation with respect to the
Credit Facilities reasonably satisfactory to the
Agent and the Lenders.
(ii) The Acquisition shall have been consummated in
accordance with the terms of the stock purchase
agreement providing for the purchase of the
Target's stock by the Borrower (the "Purchase
Agreement") and in compliance with applicable law
and regulatory approvals. The Purchase Agreement
shall not be altered, amended or otherwise changed
or supplemented or any condition therein waived,
without the prior written consent of the Agent.
The purchase price paid for Target shall not
exceed $185 million.
(iii) The corporate capital and ownership structure
(including articles of incorporation and by-laws),
<PAGE>
equityholder agreements and management of the
Borrower and its subsidiaries (after giving effect
to the Acquisition) shall be reasonably
satisfactory to the Agent. Without limiting the
generality of the above, the Agent shall be
satisfied that the Borrower shall have received
proceeds in a minimum amount of at least $78
million from the issuance of its common stock (the
"Common Stock") pursuant to an initial public
offering (the "IPO") under terms and conditions
acceptable to the Agent.
(iv) There shall not have occurred a material adverse
change since December 31, 1997 in the business,
assets, operations or condition (financial or
otherwise) of the Borrower, the Target or their
respective subsidiaries (taken as a whole) or in
the facts and information regarding such entities
or assets as represented to date.
(v) The Agent shall have received satisfactory
evidence as to the solvency of the Borrower and
its subsidiaries (including Target) (after giving
effect to the Acquisition and the incurrence of
indebtedness related thereto).
(vi) The Agent shall have received (A) satisfactory
opinions of counsel to the Borrower and its
subsidiaries (which shall cover, among other
things, authority, legality, validity, binding
effect and enforceability of the documents for the
Credit Facilities) and such resolutions,
certificates and other documents as the Agent
shall reasonably require and (B) satisfactory
evidence that the Agent (on behalf of the Lenders)
holds a perfected, first priority lien in all
<PAGE>
pledged collateral for the Credit Facilities,
subject to no other liens except for permitted
liens to be determined.
(vii) Receipt of all governmental, equityholder and third
party consents (including Hart-Scott Rodino
clearance) and approvals necessary or, in the
reasonable opinion of the Agent, desirable in
connection with the Acquisition and the related
financings and other transactions contemplated
hereby and expiration of all applicable waiting
periods without any action being taken by any
authority that could restrain, prevent or impose
any material adverse conditions on the consummation
of the Acquisition or such other transactions or
that could seek or threaten any of the foregoing,
and no law or regulation shall be applicable which
in the reasonable opinion of the Agent would have
such effect.
(viii) The absence of any action, suit, investigation or
proceeding pending or threatened in any court or
before any arbitrator or governmental authority
that could have a material adverse effect on any
transactions contemplated hereby or on the ability
of the Borrower and its subsidiaries to perform its
obligations under the documents to be executed in
connection with the Credit Facilities and the
Acquisition.
(ix) The Borrower and its subsidiaries shall be in
compliance with all existing financial obligations
(after giving effect to the Acquisition) under its
contracts relating to or evidencing indebtedness,
including, without limitation, under the existing
<PAGE>
indenture for the Borrower's 10% Senior
Subordinated Notes Due 2004.
(x) Total Funded Debt (defined below) of the Borrower
and its subsidiaries (including Target) at closing
shall not exceed $360 million, of which at least
$98.7 million shall be comprised of the Borrower's
10% Senior Subordinated Notes Due 2004.
(xi) Transaction fees and expenses of the Borrower and
its subsidiaries in respect of the issuance of the
Common Stock, the Acquisition and the Credit
Facilities shall not exceed $17 million.
(xii) The Agent shall have received a Phase I
environmental report on the Falconite facilities to
be acquired by the Borrower in form and substance
reasonably satisfactory to the Agent.
(xiii) The Agent shall have received the final Price
Waterhouse due diligence report on the Target in
form and substance reasonably satisfactory to the
Agent.
(xiv) The Agent shall have received the following
financial statements of the Borrower and the
Target: (a) the unaudited consolidated balance
sheet and statement of income and cash flow of the
Borrower and its subsidiaries for the five-month
period ended on May 31, 1998, (b) the unaudited
consolidated balance sheet and statement of income
and cash flow of the Target and its subsidiaries
for the five-month period ended on May 31, 1998,
(c) the unaudited pro forma consolidated and
consolidating balance sheets and statements of
income of the Borrower and the Target on a combined
basis for the
<PAGE>
five-month period ended on May 31, 1998, in each
case prepared in accordance with GAAP and in form
and substance satisfactory to the Agent and (d)
financial projections of the Borrower and its
subsidiaries (including the Target) for the five
year period following closing.
(xv) The pro forma combined EBITDA (defined below) of
the Borrower and its subsidiaries and the Target
and its subsidiaries for the twelve-month period
ended on May 31, 1998 shall not be less than $80
million.
(xvi) The Borrower shall have paid to the Lenders and the
Agent all fees and expenses due and payable at
Closing.
REPRESENTATIONS &
WARRANTIES: Usual and customary for transactions of this type, to
include without limitation: (i) corporate status; (ii)
corporate power and authority/enforceability; (iii) no
violation of law or contracts or organizational
documents; (iv) no material litigation; (v) correctness
of specified financial statements and no material
adverse change; (vi) no required governmental or third
party approvals; (vii) use of proceeds/compliance with
margin regulations; (viii) status under Investment
Company Act; (ix) ERISA; (x) environmental matters; (xi)
perfected liens and security interests; and (xii)
payment of taxes.
FINANCIAL REPORTING: The Borrower will provide the Agent with (i) audited
consolidated financial statements on an annual basis
prepared in accordance with GAAP; (ii) unaudited
consolidated and consolidating financial statements on a
monthly basis prepared in accordance with GAAP; (iii)
unaudited consolidated financial statements on a
quarterly basis prepared in accordance with GAAP; (iv)
quarterly financial covenant compliance certificates;
<PAGE>
(v) at each year end, a budget for the following year,
by month, with a level of detail acceptable to the
Agent; (vi) all public filings with the SEC and other
governmental agencies; (vii) a monthly Borrowing Base
calculation; and (viii) such other reports and
information as reasonably required by the Agent. The
Agent would reserve the right to inspect the books and
records of the Borrowers at any time and, from time to
time, in its sole discretion or at the direction of the
Required Lenders, to conduct periodic field exams and/or
appraisals of the rental fleet of the Borrower and its
subsidiaries.
AFFIRMATIVE
COVENANTS: Usual and customary for transactions of this type, to
include without limitation; (i) delivery of the
financial reports described above; (ii) notices of
default, material litigation and material governmental
and environmental proceedings; (iii) compliance with
laws; (iv) payment of taxes; and (v) maintenance of
insurance.
NEGATIVE COVENANTS: Usual and customary for transactions of this type, to
include without limitation:
1. Additional Indebtedness: The Borrower and its
subsidiaries will not create, assume, incur, guarantee
or in any manner become liable for any debt other than
the Credit Facilities, existing indebtedness and certain
other debt in amounts to be negotiated.
2. Acquisitions and Investments: Neither the Borrower
nor any of its subsidiaries may purchase or otherwise
acquire the assets of any business enterprise except for
Permitted Acquisitions described below (which will not
require any Lender consent), other acquisitions
permitted by the Required Lenders and/or investments to
be negotiated.
<PAGE>
3. Liens: The Borrower and its subsidiaries will not
create, incur, assume or suffer to exist any lien of any
nature except for: (i) carriers' warehousemen's and
mechanics' liens; (ii) liens arising under worker
compensation laws; (iii) existing liens approved by the
Agent; (iv) purchase money liens and liens securing
capital leases in an aggregate amount to be determined;
(v) liens for taxes; and (vi) baskets for other purposes
in amounts to be negotiated.
4. Restricted Payments: No restricted payments except
for permitted dividends and distributions in amounts and
nature to be negotiated.
5. Asset Sales: Sale of assets prohibited above a
threshold level to be negotiated.
6. Mergers or Consolidation: Neither the Borrower nor
any of its subsidiaries will merge into or consolidate
with any person other than mergers and consolidations of
any subsidiary of the Borrower with or into any other
subsidiary of the Borrower or mergers and consolidations
of any third party with or into any subsidiary of the
Borrower in connection with any Permitted Acquisition.
7. Transactions with Affiliates: Limited to arms-
length transactions other than with respect to certain
types of transactions with affiliates to be negotiated.
8. Line of Business: No material change in the
Borrower's or any subsidiary's line of business.
9. Accounting: No material change in the Borrower's
accounting methods, including, but not limited to,
depreciation methodology.
10. Other: Any other negative covenants reasonably
deemed appropriate by the
<PAGE>
Lenders in the context of the Credit Facilities.
FINANCIAL COVENANTS: Financial covenants to include (but not limited to) the
following (capitalized financial terms used herein are
defined in Addendum II hereto):
(i) Maintenance as of the last day of each fiscal quarter a
ratio of Total Funded Debt to EBITDA (computed for the
four fiscal quarterly periods then ending) which shall
not initially exceed 4.75 to 1.0 (with future step-downs
to be determined).
(a)
(ii) Maintenance as of the last day of each fiscal quarter a
ratio of Total Senior Funded Debt (defined below) to
EBITDA (computed for the four fiscal quarterly periods
then ending) which shall not initially exceed 3.25 to
1.0 (with future step-downs to be determined).
(a)
(iii) Maintenance as of the last day of each fiscal quarter an
Interest Coverage Ratio (defined below) (computed for
the four fiscal quarterly periods then ending) which
shall not initially be less than 2.25 to 1.0 (with
future step-ups to be determined).
(a)
(iv) Maintenance of book net worth of at least $100 million
plus 50% of cumulative net income of the Borrower and
its subsidiaries (including Target) since December 31,
1997 at all times.
(a)
(v) As of the last day of each fiscal month the sum of Total
Senior Funded Debt plus letter of credit obligations
shall not exceed the sum of (i) 85% of net accounts
receivable, (ii) 50% of net parts inventory, (iii) 100%
of the net book value of rental equipment and (iv) 80%
of the net book value of equipment held for resale, in
each case, as determined in accordance with GAAP
(collectively, items (i), (ii), (iii) and (iv), the
"Borrowing Base").
All financial covenants herein shall be calculated on a
pro forma basis to appropriately reflect acquisitions
made by the Borrower or any of its subsidiaries during
the relevant period of calculation thereof.
<PAGE>
PERMITTED
<PAGE>
ACQUISITIONS: The Borrower shall be permitted, without the approval of
the Required Lenders, to acquire companies (whether by
acquisition of stock or assets or by merger) so long as
the following conditions are satisfied to the
satisfaction of the Agent: (i) the acquired company is
an operating company that engages in a line of business
substantially similar to the line of business of the
Borrower, (ii) the total consideration paid for the
acquired company, when added to the aggregate total
consideration paid for all other acquisitions during the
prior 12-month period, shall not exceed $100 million,
(iii) the Borrower has completed its due diligence
process with respect to the acquisition in form and
substance reasonably satisfactory to the Agent, (iv) the
contemplated acquisition must not be hostile, (v) no
default or event of default shall exist with respect to
the Credit Facilities immediately prior to or after the
acquisition, (vi) execution by the acquired company (or
any subsidiary formed to consummate the acquisition) of
any and all loan documentation required by the Agent and
receipt of Phase I environmental reports for all real
property of the acquired company, (vii) the ratio of
Total Funded Debt to EBITDA after giving pro forma
effect to the proposed acquisition must be 0.25 less
than the maximum allowable ratio of Total Funded Debt to
EBITDA as of the fiscal quarter ending immediately
preceding the date of such proposed acquisition, (viii)
the Borrower shall be in pro forma compliance with all
financial covenants as of the fiscal quarter ending
immediately preceding the date of such proposed
acquisition, (ix) the Borrower shall demonstrate pro
forma compliance with all financial covenants for the
period commencing with the date of the proposed
acquisition through the last day covered by the
financial projections delivered at the closing of the
Credit Facilities, (x) the Agent
<PAGE>
shall have received: (A) the final due diligence report
on the acquired company prepared by Price Waterhouse (or
another nationally recognized accounting firm acceptable
to the Agent) in form and substance satisfactory to the
Agent, (B) the "Board Paper" for the acquired company
(i.e., a short memo prepared by the Borrower with
respect to the potentially acquired company), and (C) a
description of the proposed acquisition in reasonable
detail and the corresponding documentation and
historical financial information of the acquired company
and (xi) the aggregate consideration to be paid for any
acquisition shall not exceed $40 million. All
information, documents and financial data required in
connection with any Permitted Acquisition shall be
furnished to the Agent at least 15 business days prior
to the closing of the proposed acquisition.
Any proposed acquisition which fails to satisfy the
foregoing conditions shall be prohibited unless
otherwise approved by the Required Lenders.
EVENTS OF DEFAULT: Usual and customary in transactions of this nature, and
to include, without limitation, (i) nonpayment of
principal, interest, fees or other amounts with respect
to either of the Credit Facilities, (ii) violation of
covenants, (iii) material inaccuracy of representations
and warranties, (iv) cross-default to other material
agreements and indebtedness, (v) bankruptcy, (vi)
material judgments, (vii) ERISA, (viii) actual or
asserted invalidity of any loan documents or security
interests, and (ix) Change of Control (defined below).
REQUIRED LENDERS: 51%.
ASSIGNMENTS/
PARTICIPATIONS: Each Lender will be permitted to make minimum
assignments of $5 million to other financial
institutions approved by the Borrower and the Agent,
which approval
<PAGE>
shall not be unreasonably withheld. Lenders will be
permitted to sell participations with voting rights
limited to significant matters such as changes in
amount, rate, and maturity date.
WAIVERS &
AMENDMENTS: Amendments and waivers of the provisions of the loan
agreement and other definitive credit documentation will
require the approval of the Required Lenders, except
that the consent of all the Lenders affected thereby
shall be required with respect to (i) increases in
commitment amounts, (ii) reductions of principal,
interest, or fees, (iii) extensions of scheduled
maturities or scheduled amortization or times for
payment and (iv) releases of all or substantially all
collateral.
INDEMNIFICATION: The Borrower and the Guarantors shall indemnify the
Lenders from and against all losses, liabilities,
claims, damages or expenses (including but not limited
to reasonable attorneys' fees and settlement costs)
relating to the loans, the Borrower's use of loan
proceeds or the commitments except to the extent arising
from the gross negligence or willful misconduct of an
indemnified party. This indemnification shall survive
and continue for the benefit of the Lenders at all times
after the Borrower's acceptance of the Lenders'
commitment for the Credit Facilities, notwithstanding
any failure of the Credit Facilities to close.
GOVERNING LAW: New York.
FEES/EXPENSES: As outlined in ADDENDUM I.
OTHER: This term sheet is intended as an outline only and does
not purport to summarize all the conditions, covenants,
representations, warranties and other provisions which
would be contained in definitive legal documentation for
the Credit Facilities
<PAGE>
contemplated hereby. The Borrower and each of the
Guarantors shall waive their right to a trial by jury.
<PAGE>
ADDENDUM I
FEES AND INTEREST RATES
UNUSED FEE: The Applicable Unused Fee Percentage as set forth in
the Pricing Grid below (calculated on the basis of
actual number of days elapsed in a year of 360 days) on
the committed undrawn amount of the Revolver. The
Unused Fee shall be payable quarterly in arrears.
INTEREST RATES: At the Borrower's option:
(1) Base Rate + Applicable Base Rate Margin; or
(2) LIBOR Rate + Applicable LIBOR Rate Margin for 1,
2, 3 or 6 month interest periods.
No more than 8 LIBOR Rate loans shall be outstanding at
any time.
The Base Rate is defined as the higher of (i) the
applicable prime rate of First Union and (ii) the
federal funds rate + 1/2 of 1%.
LIBOR Rate is defined as the London Interbank Offered
Rate ("LIBOR") as shown on Telerate page 3750 for 1, 2,
3, or 6 months adjusted for reserves, if any.
The Applicable Base Rate Margin and the Applicable
LIBOR Rate Margin are equal to the respective
percentages set forth in the Pricing Grid below.
Interest in respect of Base Rate loans shall be payable
quarterly in arrears. Interest in respect of LIBOR Rate
loans shall be payable at the end of the applicable
Interest Period, but not less frequently than
quarterly. All interest and fees will be calculated on
the basis of the number of actual days elapsed in a 360
day year.
A penalty rate shall apply on all loans in the event of
default at a rate per annum of 2% above the applicable
interest rate.
<PAGE>
PRICING GRID: For the period commencing on the Closing Date through
the first calculation date occurring after the fiscal
quarter ended December 31, 1998, the Applicable LIBOR
Rate Margin, the Applicable Base Rate Margin and the
Applicable Unused Fee Percentage shall be based on the
Borrower's ratio of Total Funded Debt to EBITDA, as set
forth in the table below (calculated on a rolling four
quarter basis) as of the Closing Date, but shall not be
less than 2.00%, 0.75% and 0.50%, respectively, for
such period. Thereafter, the Applicable LIBOR Margin,
the Applicable Base Rate Margin and the Applicable
Unused Fee shall be calculated quarterly as set forth
below based upon the Borrower's ratio of Total Funded
Debt to EBITDA (calculated on a rolling four quarter
basis):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Applicable Applicable Applicable Applicable Applicable
LIBOR LIBOR Rate Base Rate Base Rate Unused
Total Rate Margin Margin For Margin For Margin For Fee
Funded Debt/EBITDA For Revolver Term Loans Revolver Term Loans Percentage
- -------------------------------------------------------------- ------------ ---------- ---------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 4.25 to 1.0 2.50% 2.50% 1.25% 1.25% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 3.75 to 1.0 but equal to or less than 4.25 to 1.0 2.25% 2.25% 1.00% 1.00% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 3.25 to 1.0 but equal to or less than 3.75 to 1.0 2.00% 2.00% 0.75% 0.75% 0.50%
- ---------------------------------------------------------------------------------------------------------------------------------
Greater than 2.75 to 1.0 but equal to or less than 3.25 to 1.0 1.75% 1.75% 0.50% 0.50% 0.3750%
- ---------------------------------------------------------------------------------------------------------------------------------
Equal to or less than 2.75 to 1.0 1.50% 1.75% 0.25% 0.50% 0.3125%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, at any time that the
ratio of Total Senior Funded Debt to EBITDA (calculated
on a rolling four quarter basis) shall be less than 2.5
to 1.0, the Applicable LIBOR Rate Margin for the
Revolver and the Applicable Base Rate Margin for the
Revolver may be reduced, at the election of the
Borrower, by 0.25%, provided that the Borrower shall
have demonstrated that the ratio of Total Senior Funded
Debt to EBITDA, on a pro forma basis, for the period
commencing with the date of such pricing reduction
through the last day covered by the financial
projections delivered at the closing of the Credit
Facilities, is 0.25 less than the maximum allowable
ratio of Total Senior Funded Debt to EBITDA required to
be complied with pursuant to the Credit Facility
<PAGE>
documentation. In addition, once a pricing reduction is
elected by the Borrower, the maximum allowable ratio of
Total Senior Funded Debt to EBITDA permitted under the
Credit Facility documentation shall be permanently
reduced by 0.25.
LETTER OF CREDIT FEES: The Borrower shall pay a per annum standby letter of
credit fee on the outstanding amount of all standby
letters of credit. The applicable standby letter of
credit fee shall be the percentage set forth for the
LIBOR Rate Margin for the Revolver in the Pricing Grid
above. The standby letter of credit fee shall be due
monthly in arrears and shared proportionately by the
Lenders.
In addition, the Borrower shall pay the Agent for its
own account a per annum facing fee of 0.25% on the
outstanding amount of all standby letters of credit.
The standby letter of credit facing fee shall be due
monthly in arrears.
<PAGE>
COSTS AND YIELD
PROTECTION: Usual for transactions and facilities of this type,
including, without limitation, in respect of
prepayments, changes in capital adequacy and capital
requirements or their interpretation, illegality,
unavailability, reserves without proration or offset.
<PAGE>
ADDENDUM II
DEFINED TERMS
- --------------------------------------------------------------------------------
"Asset Sales": The disposition (other than a sale or disposition of new or
used equipment held for resale made in the ordinary course of business) of any
or all of the assets (including without limitation the Capital Stock of a
Subsidiary) of the Borrower or any of its Subsidiaries whether by sale, lease,
transfer or otherwise. Asset Sales will also exclude (i) sales of rental
equipment so long as such equipment is replaced within 180 days, (ii) sales of
non-rental equipment so long as such equipment is replaced within 90 days and
(iii) sales of fixed assets not to exceed $5 million in the aggregate in any
fiscal year.
"Change of Control": Any of the following events: (1) any person or group
of persons (within the meaning of Section 13 or 14 of the Securities Exchange
Act of 1934, as amended), other than Golder, Thoma, Cressey, Rauner, Inc. (or
any of its affiliates), shall have acquired beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under said Act) of 20% or more in voting power of the outstanding capital stock
of the Borrower or (2) during any period of twelve consecutive months,
individuals who were directors of the Borrower on the first day of such period
shall cease to constitute a majority of the board of directors of the Borrower
other than because of the replacement as a result of death or disability of one
or more such directors.
"EBITDA": For any quarterly period of determination, net income of the
Borrower and its subsidiaries before deducting interest expense, taxes,
depreciation and amortization and without giving effect to nonrecurring charges
and extraordinary cash losses or gains.
"Interest Coverage Ratio": For any quarterly period of determination, the
ratio of (1) EBITDA to (2) all cash interest expense for such period.
"Total Funded Debt": All debt for borrowed money, notes, bonds or other
instruments, guarantees, letters of credit and bankers' acceptances, obligations
under conditional sales or other title retention agreements, and obligations
issued or assumed as the deferred purchase price of property or services of the
Borrower and its subsidiaries.
"Total Senior Funded Debt": All Total Funded Debt of the Borrower and its
subsidiaries excluding the 10% Senior Subordinated Notes Due 2004 of the
Borrower and any other subordinated debt of the Borrower and its subsidiaries
permitted under the Credit Agreement or approved by the Required Lenders.
<PAGE>
All financial calculations herein with respect to the financial terms
defined herein shall be made in accordance with GAAP and shall be reasonably
acceptable to the Agent.
<PAGE>
EXHIBIT 12.1
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands of dollars, except ratios)
<TABLE>
<CAPTION>
For the Period
From Inception Pro Forma
(June 4, 1996) For the Year For the Year
Through Ended Ended
December 31, 1996 December 31, 1997 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Pre-tax income (loss) $(332) $1,923 $11,870
Fixed charges:
Interest expense on all indebtedness 0 4,545 27,364
Rental expense representative of an interest factor 0 220 1,105
----- ------ -------
Total fixed charges 0 4,765 28,469
----- ------ -------
Earnings before income taxes and fixed charges $(332) $6,688 $40,339
===== ====== =======
Ratio of earnings to fixed charges (A) 1.40 1.42
===== ====== =======
<CAPTION>
For the Pro Forma
Three Months For the Three Months
Ended Ended
March 31, 1998 March 31, 1998
-------------- --------------------
<S> <C> <C>
Pre-tax income (loss) $ 290 $ 52
Fixed charges:
Interest expense on all indebtedness 3,300 6,841
Rental expense representative of an interest factor 116 185
------ ------
Total fixed charges 3,416 7,026
------ ------
Earnings before income taxes and fixed charges $3,706 $7,078
====== ======
Ratio of earnings to fixed charges 1.08 1.01
====== ======
</TABLE>
(A) The company's operations during the period from inception (June 4, 1996)
through December 31, 1996 were limited to organizational and start-up
activities while no revenues were generated; accordingly, presentation of
this rate is not considered meaningful.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports relating to the respective
financial statements which appear in such Prospectus.
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS DATE
-------------------- ----
<S> <C>
National Equipment Services, Inc. and Subsidiaries....... April 1, 1998
Aerial Platforms, Inc.................................... November 4, 1997
Lone Star Rentals, Inc................................... November 4, 1997
BAT Rentals, Inc......................................... November 4, 1997
Sprintank and Sprintank Mobile Storage
(divisions of Sprint Industrial Services, Inc.)......... November 4, 1997
MST Enterprises, Inc. d/b/a Equipco Rental and Sales..... November 4, 1997
Work Safe Supply Company, Inc. and Subsidiaries.......... March 4, 1998
Genpower Pump & Equipment, Inc........................... March 3, 1998
Albany Ladder Company, Inc. ............................. March 31, 1998
</TABLE>
We also consent to the application of the National Equipment Services, Inc.
and Subsidiaries report to the Financial Statement Schedules for the period
from inception (June 4, 1996) through December 31, 1996 and the year ended
December 31, 1997 listed under Item 16(b) of this Registration Statement when
such schedules are read in conjunction with the financial statements referred
to in our report. The audits referred to in such report also included these
schedules. We also consent to the reference to us under the heading "Experts."
/s/ Price Waterhouse LLP
Chicago, Illinois
June 30, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of National
Equipment Services, Inc. on Post-Effective Amendment No. 1 to Form S-1 of our
report dated February 3, 1998 except for Note 8, as to which the date is March
4, 1998, related to the financial statements of Cormier Equipment Corporation,
which appears in such Prospectus. We also consent to the references to us
under the heading "Experts" in such Prospectus.
/s/ Albin, Randall & Bennett, CPAs
Lewiston, Maine
June 30, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement of National
Equipment Services, Inc. on Post-Effective Amendment No. 1 to Form S-1 of our
report dated February 6, 1998 except for the information in Note 6 as to which
the date is March 23, 1998 and the information in Note 12 as to which the date
is April 1, 1998, on our audit of the financial statements of Falconite, Inc.
We also consent to the references to our firm under the captions "Experts."
/s/ Coopers & Lybrand L.L.P.
Louisville, Kentucky
June 30, 1998
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Falconite, Inc.
We consent to the inclusion of our report dated February 20, 1997 with
respect to the consolidated balance sheet of Falconite, Inc. and subsidiaries
as of December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended December 31, 1995 and
1996 included herein, and to the reference to our firm under the heading
"Experts" in the prospectus.
/s/ KPMG Peat Marwick L.L.P.
St. Louis, Missouri
June 30, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of National Equipment Services, Inc. of our
report dated March 3, 1998, relating to the financial statements of Dragon
Rentals (A Wholly Owned Division of The Modern Group, Inc.--A Texas
Corporation), which appears in such Prospectus. We also consent to the
references to us under the heading "Experts" in such Prospectus.
/s/ Lawrence, Blackburn, Meek, Maxey & Co. P.C.
Beaumont, Texas
June 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF NATIONAL EQUIPMENT SERVICES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS OTHER 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1997 JUN-04-1996 JAN-01-1998 JUN-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996 MAR-31-1998 MAR-31-1997
<CASH> 35,682 12 3,773 2,264
<SECURITIES> 0 0 0 0
<RECEIVABLES> 8,610 0 24,832 2,561
<ALLOWANCES> 254 0 737 35
<INVENTORY> 2,239 0 7,158 1,695
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 55,198 20 120,031 17,930
<DEPRECIATION> 5,385 3 8,126 350
<TOTAL-ASSETS> 131,137 216 242,303 29,416
<CURRENT-LIABILITIES> 0 0 0 0
<BONDS> 98,782 0 193,954 21,000
0 0 0 0
0 0 0 0
<COMMON> 2 1 2 2
<OTHER-SE> 26,471 105 26,858 6,428
<TOTAL-LIABILITY-AND-EQUITY> 131,137 216 242,303 29,416
<SALES> 14,890 0 6,336 1,043
<TOTAL-REVENUES> 41,288 0 22,151 2,319
<CGS> 7,807 0 3,224 381
<TOTAL-COSTS> 25,715 0 13,500 1,476
<OTHER-EXPENSES> 9,386 336 5,338 871
<LOSS-PROVISION> 479 0 483 35
<INTEREST-EXPENSE> 4,545 (4) 3,300 268
<INCOME-PRETAX> 1,923 (332) 290 (290)
<INCOME-TAX> 818 (137) 151 (135)
<INCOME-CONTINUING> 1,105 (195) 139 (155)
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 1,105 (195) 139 (155)
<EPS-PRIMARY> 0.09 (0.05) 0.01 (0.02)
<EPS-DILUTED> 0.08 (0.05) 0.01 (0.01)
</TABLE>
