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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 001-14299
NATIONSRENT, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 31-1570069
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification Number)
450 EAST LAS OLAS BOULEVARD, SUITE 1400
FORT LAUDERDALE, FLORIDA 33301
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (954) 760-6550
Securities Registered Pursuant To Section 12(b) of the Act:
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Title of Class Name of Each Exchange On Which Registered
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COMMON STOCK,
PAR VALUE $.01 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 28, 1999, the registrant had 55,759,497 shares of common
stock, $.01 par value per share, outstanding and, at such date, the aggregate
market value of the shares of common stock held by non-affiliates of the
registrant was approximately $184.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part III None.
Part IV Portions of previously filed reports and registration statements.
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INDEX
TO FORM 10-K
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PAGE
NUMBER
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6. Selected Financial Data..................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
Item 8. Financial Statements and Supplementary Data................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 39
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 50
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PART I
ITEM 1. BUSINESS
INTRODUCTION
NationsRent, Inc., a Delaware corporation, together with its subsidiaries
(the "Company," "NationsRent" or the "Registrant"), is one of the fastest
growing equipment rental companies in the United States. We have acquired a
platform of equipment rental businesses concentrated in selected markets and are
building a network of nationally branded locations. As of March 25, 1999, we
operate over 130 locations in 20 states across the United States. We have become
a leading provider of rental equipment as a result of our strategy to acquire
core businesses, open or acquire additional locations concentrated around those
businesses and expand our rental fleet. We believe that this "cluster" strategy
enables us to increase profitability in our acquired stores and achieve
profitability in our newly opened locations more quickly than our competitors.
By implementing the cluster strategy and expanding our fleet of rental
equipment, we are able to provide a full range of rental equipment to customers
with a wide variety of equipment rental needs.
We offer a comprehensive line of equipment for rental primarily to a broad
range of construction and industrial customers, including heavy highway
contractors, general contractors, subcontractors, manufacturing plants and
distribution centers. We also sell used and new equipment, spare parts and
supplies, and provide maintenance and repair services. Our locations offer a
full range of high quality, well-maintained rental equipment, including the
following:
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* backhoes * aerial lifts and work platforms * articulated trucks
* bulldozers * compressors and generators * excavators
* skid steer loaders * specialized hand tools * wheel loaders
</TABLE>
We serve over 140,000 active accounts primarily in the construction and
industrial segments of the equipment rental industry. Construction customers
include heavy highway contractors, general contractors, speciality contractors,
subcontractors, excavating contractors and trade contractors (such as
electricians and plumbers). Construction customers rent equipment for all manner
of construction activities, typically on a daily, weekly or monthly basis, with
relatively little lead time due to their need to react quickly to changes in
project scheduling. Industrial customers include operators of manufacturing
plants, petrochemical plants, distribution centers and transportation
facilities. Industrial customers typically rent equipment for
maintenance-oriented purposes on a weekly or monthly basis and are more likely
to place orders for rental equipment in advance of their regularly scheduled
maintenance requirements. In addition to construction and industrial customers,
we rent equipment to homeowners and other general rental customers.
INDUSTRY OVERVIEW
According to industry sources, the United States equipment rental industry
grew from an estimated $614.0 million in revenue in 1982 to an estimated $21.0
billion in 1998, which represents a compound annual growth rate of more than
24%. Construction and industrial companies primarily have driven this growth by
increasingly outsourcing their equipment needs to reduce investment in non-core
assets and convert costs from fixed to variable. According to industry sources,
the United States equipment rental industry is expected to grow to an estimated
range of $50.0 billion to $80.0 billion in annual revenue by the year 2008 due
to the overall growth in the economy and a continuing trend to rent rather than
buy equipment. In addition, the United States equipment rental industry is
highly fragmented, with more than 14,000 equipment rental locations. According
to industry sources, in 1997 the 100 largest equipment rental companies in the
United States had a combined market share of less than 20%, no single equipment
rental company in the United States had a market share greater than 3% and more
than 90% of the equipment rental companies had ten or fewer locations. We
believe that recent consolidation has increased the market share of the ten
largest equipment rental companies in the United States and that the largest
equipment rental company in the United States currently has a market share of
approximately 6%. We are taking advantage of the fragmentation in the equipment
rental industry and the absence of an equipment rental company with significant
market share by
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creating an integrated network of nationally branded locations offering broad
product selection and superior customer service.
BUSINESS STRATEGY
Our objectives are to increase revenue, profitability, market share and
cash flow by building a nationally branded network of locations that offer a
comprehensive selection of high quality rental equipment in convenient and
accessible locations to customers in the construction and industrial markets.
Key elements of our growth strategy are as follows:
Enhance Operations. We enhance the operations at our locations by:
* increasing the breadth and depth of rental inventory and sharing
rental equipment among locations;
* implementing the NationsRent customer service approach;
* linking locations to the NationsRent management information system;
* branding locations and rental inventory with the NationsRent logo,
colors and distinctive store appearance; and
* increasing awareness of our brand through targeted local and national
marketing.
Expand National Presence. We expect to continue to acquire leading
companies to implement our cluster strategy and position NationsRent to achieve
significant market share. We target businesses that have one or more of the
following characteristics:
* strong positions in their geographic market;
* experienced local management teams that will continue to work with us
following the acquisition;
* high quality inventory of equipment rental; and
* physical and operating characteristics that are suited to conversion
to the NationsRent format.
Once we have entered a particular market, we seek to acquire additional rental
businesses in that market or adjacent markets with locations and equipment
selection that complement our existing operations, thus enabling us to further
penetrate that market.
Open New Rental Locations. Once we have established a presence in a
particular market, we seek to open new locations in that geographic area or
adjacent areas to enable us to offer a greater selection and availability of
equipment, maximize our equipment inventory utilization rates and achieve
economies of scale. We believe that this strategy allows our new locations to
achieve profitability at a faster rate than our competitors because these
locations (1) generate revenue more quickly as a result of the pre-existing
market presence, name recognition and referrals from existing locations and (2)
have lower overhead costs due to the sharing of service, maintenance,
administrative functions and personnel with our already-established locations.
Since August 1997, we have opened six new locations.
Further Penetrate Industrial Rental Market. We believe that the equipment
needs of industrial customers are under served by the existing equipment rental
market in the United States and that there are significant opportunities to
further penetrate this market segment. We also believe that by offering a
comprehensive selection and available supply of rental equipment throughout an
integrated nationally branded network of locations, industrial customers will
become increasingly aware of the advantages of equipment rental relative to
ownership. Such advantages include reduced capital investment, reduced storage
and maintenance expense and greater access to the most modern equipment.
In furtherance of our growth strategy, as of March 25, 1999, we have
acquired 38 equipment rental businesses and currently operate over 130
locations. We believe that each of the equipment rental businesses which we have
acquired meets one or more of our acquisition criteria and promotes our cluster
strategy. Furthermore, each of these acquired businesses allows us to better
meet the needs of the broad range of
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construction and industrial customers to whom we primarily market our products
and services. To this end, many of the businesses we have acquired have been
doing business in their respective markets for more than 35 years.
RECENT DEVELOPMENTS
On January 20, 1999, we entered into a definitive merger agreement with
Rental Service Corporation ("RSC"), pursuant to which NationsRent will be merged
with and into RSC, with RSC continuing as the surviving corporation to be named
RSC NationsRent. RSC is a leading company in the rental equipment industry and
is headquartered in Scottsdale, Arizona. Each share of NationsRent common stock
outstanding immediately prior to the merger will be converted into 0.355 of a
share of RSC common stock upon consummation of the merger. The merger is
intended to qualify as a tax-free reorganization and will be accounted for using
the pooling of interests method of accounting. The merger is subject to certain
closing conditions, including stockholder approvals.
OPERATIONS
We are one of the fastest growing equipment rental companies in the United
States, operating over 130 locations as of March 25, 1999. Our operations
primarily consist of:
* renting a full range of equipment to construction and industrial
customers;
* selling our used equipment inventory;
* selling new equipment as a distributor or dealer on behalf of several
nationally known equipment manufacturers; and
* selling parts, supplies and merchandise and providing repair and
maintenance services to complement our equipment rentals and sales.
Equipment Rentals. We rent on a daily, weekly and monthly basis a broad
variety of light, medium and heavy equipment serving the long-term requirements
of contractors, the short and medium-term requirements of commercial customers,
and short through long-term requirements of industrial customers. Our rental
inventory includes such equipment as aerial lifts and work platforms, air
compressors, backhoes, boom lifts, bulldozers, ditching equipment, forklifts,
generators, articulated trucks, excavators, wheel loaders and skid loaders,
pumps and scissor lifts. The mix of equipment offered from each of our locations
varies based on the needs of the local market.
We make capital investments in new equipment, engage in periodic sales of
used equipment and conduct preventive maintenance. These practices are designed
to increase equipment utilization, enhance resale values and extend the useful
life of equipment.
We have developed operating initiatives that we are in the process of
introducing at all of our locations to offer our rental customers more
convenient access, faster check-in and check-out procedures, reduced equipment
downtime and shorter lead times for rentals than our competitors. For example,
all of our new locations are being designed with drive-through lanes to speed up
equipment loading and unloading. In addition, our rental equipment is being
outfitted with universal trailer hitches designed to accept a broad range of
towing mechanisms to ease customer transport of equipment. To reduce the
downtime associated with flat tires, we fill the tires of equipment used in
areas prone to flats with foam instead of air. Our rental locations also offer
equipment delivery and pick-up, on-site repair service within two hours of
customer request, 24-hour customer assistance, and written instructional
materials for equipment usage and safety.
Used Equipment Sales. We periodically sell used equipment to adjust the
size and composition of our rental equipment inventory in response to changing
market conditions and to maintain the quality and low average age of our rental
equipment. We attempt to balance the revenue obtainable from used equipment
sales with the revenue obtainable from continued equipment rentals. We are
generally able to achieve favorable resale prices for our used equipment due to
a preventive maintenance program and practice of selling used equipment before
it becomes obsolete or irreparable. We believe that the proactive management of
new
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equipment purchases and used equipment sales allows us to maximize utilization
rates and respond to changing economic conditions.
New Equipment Sales. We are a distributor of new equipment on behalf of
several nationally known equipment manufacturers. We have dealership
arrangements in certain geographic areas with various equipment manufacturers.
Typically, dealership agreements do not have a specific term and may be
terminated by either party upon specific events and/or written notice. In the
future we may continue, amend or terminate dealership arrangements, if any, of
businesses we acquire or we may enter into new dealership agreements or
arrangements, depending on market conditions in the area and other factors.
Parts, Supplies and Service. We sell a full complement of parts, supplies
and merchandise to our customers in conjunction with our equipment rental and
sales business. We provide repair service to rental customers and, as part of
our focus on customer service, we generally respond to rental equipment service
requests within two hours. We also offer maintenance service to customers who
own equipment and generate revenue from damage waiver charges and delivery
charges. We believe that revenue from parts and service is more stable than
equipment sales revenue because of the recurring nature of the parts and service
business. We also believe that during economic downturns the parts and service
business may increase as customers postpone new equipment purchases and instead
attempt to maintain their existing equipment.
CUSTOMERS
We serve over 140,000 active accounts primarily in the construction and
industrial segments of the equipment rental industry. No single customer
accounted for more than 10% of our 1998 revenue. Our customers vary in size from
large Fortune 500 companies to small construction contractors, subcontractors,
machine operators and homeowners.
We do not provide purchase financing to customers. We rent equipment, sell
parts and provide repair services on account to customers who are screened
through a credit application process. Customers can arrange financing of
purchases of large equipment through a variety of creditors including
manufacturers, banks, finance companies and other financial institutions. We
plan to enter into agreements with one or more financing sources to provide
financing to our customers for the purchase of new and used equipment.
SALES AND MARKETING
We maintain a strong marketing and sales orientation throughout our
organization in order to better understand and serve our customers and increase
our customer base. We undertake sales and marketing initiatives designed to
increase revenue and market share and build brand awareness. We prepare
marketing analyses which address key business issues such as market/industry
history, opportunities, company philosophy, sales trends, consumer behavior
trends, distribution channels, pricing issues, target markets, advertising and
media analysis, competitive situations and selling strategies. Based on the
results of our analyses, we develop marketing and sales strategies. To assist us
in implementing our marketing and sales strategies, we have retained a national
advertising agency.
Our regional managers are responsible for training, supervising and
directing the selling activities of the NationsRent sales force in their
markets. In addition, regional managers are also responsible for overseeing the
mix of equipment at their locations, keeping abreast of local construction and
industrial activity and monitoring competitors in their respective markets.
We employ over 250 equipment rental salespeople who utilize targeted local
marketing strategies to address specific customer needs and respond to
competitive pressures. To remain informed of local market activity, salespeople
track construction projects and new equipment sales in their area through
Equipment Data Reports, F.W. Dodge Reports and PEC Reports (Planning,
Engineering and Construction), follow up on referrals and visit construction
sites and potential equipment users who are new to the area.
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TRADEMARKS
We have applied to the United States Patent and Trademark Office to
register the service mark "NationsRent."
STORE LAYOUT AND DESIGN
Many of our locations are situated in high-visibility commercial areas and
are designed to offer easy and convenient access to customers. Our larger
locations are typically on a six to 12 acre site in a heavily-trafficked area
with a 20,000 to 40,000 square foot facility housing a repair and maintenance
center and a broad selection and extensive inventory of equipment and supplies.
Our smaller locations are typically on a two to six acre lot in a
high-visibility commercial area with a 7,500 to 11,000 square foot facility with
maintenance and delivery capabilities and inventory and supplies that are
targeted to the customer base in that area. Depending on the type of equipment
rented at a particular location and the needs of the local market, our locations
may include sales and administrative offices, a customer showroom displaying
equipment and parts, an equipment service area and outdoor and indoor equipment
storage facilities.
PURCHASING
We acquire equipment from vendors with reputations for product quality and
reliability. Our size and the quantity of equipment we acquire enable us to
purchase most equipment directly from manufacturers pursuant to national
purchasing agreements at lower prices and on more favorable terms than many
smaller competitors. We maintain close relationships with our vendors to ensure
the timely delivery of new equipment. We believe that we have sufficient
alternative sources of supply for the equipment we purchase in each of our
principal product categories. We acquire our rental equipment inventory through
a combination of purchase and lease arrangements.
We select the type and quantity of rental equipment to be purchased for
each of our locations based on the expected needs of the local market. We
determine rental rates for each type of equipment based on the cost and expected
utilization of the equipment, and adjust rental rates at each location for
demand, length of rental, volume of equipment rented and other competitive
considerations.
COMPETITION
The equipment rental industry is highly fragmented and competitive. We
compete with independent third parties in all of the markets in which we
operate. Most of our competitors in the rental business tend to operate in
specific, limited geographic areas, although some larger competitors compete on
a national basis. We also compete with equipment manufacturers which sell and
rent equipment directly to customers. Some of our competitors have greater
financial resources and name recognition than our company.
ENVIRONMENTAL AND SAFETY REGULATION
Our equipment, facilities and operations are subject to certain federal,
state and local laws and regulations relating to environmental protection and
occupational health and safety, including those governing wastewater discharges,
the use, treatment, storage and disposal of solid and hazardous wastes and
materials, air quality and the remediation of contamination associated with the
release of hazardous substances. For example, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, provides for,
among other things, the remediation of sites from which there is a release or
threatened release of a hazardous substance into the environment and may impose
liability for the costs of cleanup and for damages to natural resources upon
past and current owners and operators of such sites. In addition, the Federal
Water Pollution Control Act of 1972 regulates the discharge of pollutants into
streams, rivers and other waters and may require that we obtain discharge
permits. The Occupational Safety and Health Act of 1970 authorizes the
promulgation of occupational safety and health standards which apply to our
facilities and operations. In addition to federal environmental and safety
regulations, the states and certain localities in which we operate have their
own laws and regulations governing solid waste disposal, water pollution and, in
most cases, releases
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and cleanup of hazardous substances as well as liability for such matters, which
may be applicable to our facilities and operations.
Certain of our existing and former locations use and have used substances,
and currently generate or have generated or disposed of wastes, which are or may
be considered hazardous or otherwise are subject to applicable environmental
requirements. In particular, we store and dispense, or in the past we or the
prior owners or operators have stored or dispensed, petroleum products from
above-ground storage tanks and, in certain cases, underground storage tanks. We
also operate locations which in the past used hazardous materials, including
solvents, to clean and maintain equipment, and generate and dispose of solid and
hazardous wastes, including batteries, used motor oil, radiator fluid and
solvents. In connection with such activities, we have incurred certain capital
expenditures and other compliance costs which are expensed on a current basis
and which, to date, have not been material to our financial condition or results
of operations.
Additionally, in connection with acquisitions of equipment rental
businesses, we undertake environmental assessments of substantially all
locations that we will continue to operate following the acquisitions and expect
to continue to do so before acquiring any additional sites. We also undertake
environmental assessments at all facilities prior to leasing them for new
locations. We do not currently maintain comprehensive insurance covering
environmental liabilities at our sites. However, the sellers of each of the
equipment rental businesses which we have acquired and the landlords of
facilities we have leased have indemnified us with respect to environmental
liabilities associated with such businesses or facilities. Based on currently
available information, we believe that it is unlikely that we will have to incur
material capital expenditures or other material compliance or remediation costs
for environmental and safety matters in the foreseeable future. We cannot assure
you, however, that federal, state or local environmental and safety requirements
will not become more stringent or be interpreted and applied more stringently in
the future. We also cannot assure you that in connection with acquisitions or
leasing new facilities we will identify all existing adverse environmental
conditions or that indemnification from sellers or landlords will be enforceable
or sufficient to cover such conditions. Such future changes or interpretations,
or the identification of adverse environmental conditions following the time we
begin operating a site, could result in additional environmental compliance or
remediation costs which we do not currently anticipate, which could be material
to our financial condition or results of operations.
EMPLOYEES
As of March 1, 1999, we employed approximately 2,300 persons, approximately
50 of which are covered by a collective bargaining agreement. We believe our
relations with our employees are good.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Fort Lauderdale, Florida, in
leased premises. Certain of our property and equipment are subject to liens
securing payment of portions of our indebtedness. As of March 25, 1999, we
operated over 130 rental locations located in 20 states: Alabama, California,
Florida, Georgia, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan,
Nevada, New Hampshire, New York, Ohio, Pennsylvania, Rhode Island, Tennessee,
Texas, Vermont and West Virginia. We lease the real estate for all but two of
our locations and also lease certain of our equipment. We believe that all of
our facilities are sufficient for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are party to pending legal proceedings arising in the ordinary course of
business. While the results of such proceedings cannot be predicted with
certainty, we do not believe that any of these matters are material to our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock, $.01 par value per share, began trading on the New York
Stock Exchange on August 7, 1998 under the symbol "NRI." Prior to August 7,
1998, there was no established public trading market for the common stock. The
following table sets forth, for the periods indicated, the range of the high and
low sales prices per share for the common stock.
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PRICE RANGE OF
COMMON STOCK
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HIGH LOW
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FISCAL YEAR ENDED DECEMBER 31, 1998:
Third Quarter (from August 7, 1998)......................... $8.69 $6.06
Fourth Quarter.............................................. 7.19 4.39
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On March 24, 1999, the last reported sales price of the common stock on the
New York Stock Exchange was $5.63. As of the same date, there were approximately
129 holders of record of the common stock.
We have not paid any dividends in the past and presently anticipate that
earnings, if any, will be retained for the development of our business and that
we will not declare dividends on the common stock in the foreseeable future. In
addition, our ability to declare or pay dividends is restricted by the terms of
the our credit facilities as well as the terms of the indenture, governing our
10 3/8% senior subordinated notes due 2008. Any future dividends will be subject
to the discretion of our Board of Directors and will depend upon, among other
things, our future earnings, operating and financial condition, capital
requirements and general business conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with our Consolidated Financial Statements and notes thereto contained in Part
II, Item 8 of this Annual Report on Form 10-K. The following selected
consolidated financial information summarizes (1) the statement of operations
data and balance sheet data for Sam's Equipment Rental, Inc. and Gabriel Trailer
Manufacturing Company, Inc. (collectively, the "Predecessor") as of and for the
fiscal year ended March 31, 1995, and the selected balance sheet data as of
March 31, 1996, which have been derived from unaudited consolidated financial
statements not included herein, (2) the statement of operations data for the
Predecessor for the fiscal years ended March 31, 1996 and 1997 and the five
months ended August 31, 1997 and the selected balance sheet data as of March 31,
1997 and August 31, 1997, which have been derived from audited consolidated
financial statements not included herein, and (3) the statement of operations
data of NationsRent for the period from August 14, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998, and selected balance
sheet data as of December 31, 1997 and 1998, which have been derived from the
audited consolidated financial statements of NationsRent appearing elsewhere in
this Annual Report on Form 10-K. The other data has been derived from the
consolidated financial statements referred to above for the applicable periods.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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THE PREDECESSOR THE COMPANY(1)
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AUGUST 14, TWELVE
APRIL 1 (INCEPTION) MONTHS
THROUGH THROUGH ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1997 1998
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenue:
Equipment rentals............................... $7,237 $11,871 $15,328.. $8,515 $7,410 $150,668
Sales of equipment, merchandise, service, parts
and supplies.................................. 2,367 4,302 4,177 1,205 1,895 85,730
------ ------- ------- ------ ------ --------
Total revenue............................. 9,604 16,173 19,505 9,720 9,305 236,398
Cost of revenue:
Cost of equipment rentals, excluding
depreciation.................................. 3,442 4,380 6,029 2,193 2,196 56,084
Rental equipment depreciation(2)................ 1,842 2,053 3,465 1,848 1,526 24,463
Cost of sales of equipment, merchandise,
service, parts and supplies................... 1,156 4,491 2,791 984 1,691 61,455
------ ------- ------- ------ ------ --------
Total cost of revenue..................... 6,440 10,924 12,285 5,025 5,413 142,002
------ ------- ------- ------ ------ --------
Gross profit...................................... 3,164 5,249 7,220 4,695 3,892 94,396
Selling, general and administrative expenses...... 1,634 2,972 3,564 1,683 1,081 44,411
Non-rental equipment depreciation and
amortization(2)................................. 162 180 238 115 284 7,266
------ ------- ------- ------ ------ --------
Operating income.................................. 1,368 2,097 3,418 2,897 2,527 42,719
------ ------- ------- ------ ------ --------
Other (income)/expense:
Interest expense................................ 239 583 866 580 760 20,858
Other, net...................................... (353) (196) (203) 62 -- (401)
------ ------- ------- ------ ------ --------
(114) 387 663 642 760 20,457
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Income before provision for income taxes.......... 1,482 1,710 2,755 2,255 1,767 22,262
Provision for income taxes...................... 593 732 1,128 939 766 9,608
------ ------- ------- ------ ------ --------
Net income........................................ $ 889 $ 978 $ 1,627 $1,316 $1,001 $ 12,654
====== ======= ======= ====== ====== ========
Basic and diluted earnings per share(3)........... $ 0.04 $ 0.37
====== ========
OTHER DATA:
Gross margin.................................... 32.9% 32.5% 37.0% 48.3% 41.8% 39.9%
Operating margin................................ 14.2 13.0 17.5 29.8 27.2 18.1
Amortization of goodwill(2)..................... $ -- $ -- $ -- $ -- $ 170 $ 5,038
Depreciation and other amortization............. 2,004 2,233 3,703 1,963 1,640 26,691
</TABLE>
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY(1)
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AS OF AS OF AS OF
AUGUST 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1997 1998
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SELECTED BALANCE SHEET DATA:
Rental equipment, net.......................... $ 8,907 $14,722 $21,789 $21,886 $30,619 $ 382,573
Goodwill, net.................................. -- -- -- -- 36,686 523,785
Total assets................................... 10,948 17,423 27,614 29,088 79,157 1,075,812
Total debt..................................... 5,871 9,944 16,100 16,559 42,928 678,035
Stockholders' equity........................... 1,862 2,840 4,467 5,768 26,001 282,230
</TABLE>
- -------------------------
(1) Each of our acquisitions to date has been accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
statement of operations data and other data from the effective date of
acquisition.
(2) The amortization period for rental equipment depreciation ranges from three
to ten years. The amortization period for goodwill is 40 years.
(3) Earnings per share data is not included for the Predecessor as such
information would not be representative of the capital structure of the
Company.
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<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our consolidated results of
operations and financial condition should be read in conjunction with the
Consolidated Financial Statements and the related notes included elsewhere in
this Annual Report on Form 10-K. Unless otherwise indicated, all information
contained in this Item 7 is as of December 31, 1998.
GENERAL
NationsRent is one of the fastest growing equipment rental companies in the
United States. We have acquired a platform of equipment rental businesses
concentrated in selected markets and are building a network of nationally
branded locations. As of March 25, 1999, we operate over 130 equipment rental
locations in 20 states. We have become a leading provider of rental equipment as
a result of our strategy to acquire core businesses, open or acquire additional
locations concentrated around those businesses and expand our rental fleet. We
believe that this cluster strategy enables us to increase profitability in our
acquired stores and achieve profitability in our newly opened locations more
quickly than our competitors. By implementing the cluster strategy and expanding
our fleet of rental equipment, we are able to provide a full range of rental
equipment to customers with a wide variety of equipment rental needs.
NationsRent seeks to acquire businesses that have:
* strong positions in their geographic market;
* experienced local management teams that will continue to work with us
following the acquisition;
* high quality inventory of rental equipment; and
* physical and operating characteristics that are suited to conversion to
the NationsRent format.
During 1998, we acquired 32 equipment rental businesses. We paid an
aggregate of approximately $545.1 million for these 32 acquisitions which
consisted of approximately:
* $347.2 million in cash;
* $115.8 million of convertible subordinated debt;
* $29.6 million of subordinated debt;
* $4.2 million of future contractual cash payments;
* 5,542,812 shares of common stock;
* options to purchase 196,293 shares of common stock; and
* warrants to purchase 100,000 shares of common stock.
In addition, we have agreed to pay in the future up to an aggregate of $39.3
million in cash, subordinated notes and common stock to the former owners of the
businesses we acquired based on the achievement of certain future operating
results of the acquired companies or market performance of our common stock. We
funded the cash portion of the consideration paid with capital contributions by
our founding stockholders, proceeds from the issuance of equity, borrowings
under our senior credit facilities and proceeds from the issuance of senior
subordinated notes. The acquisitions have been accounted for using the purchase
method and, accordingly, the acquired assets and assumed liabilities have been
recorded at their estimated fair values as of the date of acquisition. Purchase
accounting values for certain acquisitions have been assigned on a preliminary
basis, and are subject to adjustment when additional information as to the fair
values of the net assets acquired is available. We are awaiting information form
third-party appraisers as to the fair value of certain rental equipment acquired
and the final determination of certain liabilities assumed. We do not believe
the final assignment of the fair value of the net assets acquired will have a
significant impact on future operating results.
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<PAGE> 12
After making an acquisition, we convert acquired locations to the
NationsRent format. Distinguishing characteristics of this format include
drive-through lanes, clearly marked equipment aisles, prominent use of the
NationsRent logo and colors, and attractive, well-organized and clean store
facilities. The cost of converting an acquired location to the NationsRent
format varies depending on the physical properties of the acquired location and
the condition, breadth and depth of rental equipment inventory at such location,
which are factors considered in the selection and pricing of acquisition
candidates. Once we have established a presence in a particular market, we may
open new locations in that geographic area or adjacent areas. Since August 1997,
we have opened six new locations. We plan to open 8 to 12 new locations in 1999
and continue to evaluate the need for new locations as we acquire equipment
rental companies in new markets. The cost of opening our six new locations has
varied depending on whether we leased or purchased the underlying real property,
the size of the location and the breadth and depth of inventory at each
location. See "-- Liquidity and Capital Resources." The average cost incurred
through December 31, 1998 to open new locations was approximately $2.6 million
per location. Our new locations have on average achieved profitability within
approximately five months of their opening.
We derive our revenue from equipment rental, sales of new and used
equipment, spare parts and supplies and maintenance and repair services. Rental
revenue 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. Revenue generated from the sale of used equipment is
affected by price, general economic conditions and the condition of the
equipment. Revenue from the sale of new equipment is affected by price and
general economic conditions. Revenue from the sale of spare parts and supplies,
maintenance and repair services is primarily affected by equipment rental and
sales volume.
The principal components of our cost of revenue include depreciation of
rental equipment, costs of new and used equipment sold, personnel costs,
occupancy costs, the cost of rental equipment under operating leases, repair and
maintenance costs and vehicle operations. Rental equipment depreciation is
calculated using the straight-line method over the estimated useful life of such
equipment. The range of useful lives estimated by management for rental
equipment is primarily three to ten years and is depreciated to a salvage value
ranging from zero to ten percent of original cost.
Selling, general and administrative expense includes management salaries,
advertising and marketing, travel, administrative and clerical salaries and data
processing.
Non-rental equipment depreciation and amortization includes the
depreciation of fixed assets that are not offered for rent, amortization of
leasehold improvements and amortization of intangible assets related to the
acquired businesses.
In January 1999, we entered into a merger agreement with RSC which provides
for NationsRent to merge into RSC, with RSC continuing as the surviving
corporation to be named RSC NationsRent. Upon consummation of the merger, each
outstanding share of NationsRent common stock will be converted into 0.355 of a
share of RSC common stock. The merger is expected to qualify as a tax-free
reorganization and to be accounted for as a pooling of interests. The merger is
subject to stockholder approvals of both companies and other closing conditions.
HISTORICAL RESULTS OF OPERATIONS
The acquisitions completed to date have significantly altered our cost
structure primarily due to changes to owners' compensation, depreciation
methodologies, interest expense and real estate costs. We believe that the
pre-acquisition historical results of the acquired businesses are not indicative
of future results. In addition, because we were only in operation for
approximately four months during 1997 and have acquired 32 businesses in 1998,
meaningful comparison to the prior year cannot be made. As such, the following
discussion of the historical and pro forma results of operations does not set
forth any prior year comparisons.
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<PAGE> 13
Year Ended December 31, 1998
Revenue. The following table sets forth our revenue by type for the year
ended December 31, 1998 (in thousands, except percentages):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C> <C>
Equipment rentals........................................... $150,668 63.7%
Sale of used equipment...................................... 36,602 15.5
Sale of new equipment....................................... 24,205 10.2
Sale of parts, supplies, maintenance and repair............. 24,923 10.6
-------- -----
$236,398 100.0%
======== =====
</TABLE>
Equipment rental revenue as a percentage of total revenue was 63.7% for the
year ended December 31, 1998 due primarily to the mix of revenue of companies
acquired during the year. We continue to expand our rental equipment inventory
at our current locations and continue to target equipment rental revenue as a
percentage of total revenue to be greater than 60%.
Gross Profit. Gross profit for the year ended December 31, 1998 was $94.4
million or 39.9% of revenue. Our rental equipment depreciation as a percent of
rental revenue was 16.2% for 1998. We financed approximately $115.1 million of
our rental fleet with operating leases during 1998 resulting in reported
depreciation expense below what it would have been had such fleet been
purchased.
Operating Expenses. Selling, general and administrative expenses for the
year ended December 31, 1998 were $44.4 million or 18.8% of revenue. Non-rental
equipment depreciation and amortization for the year ended December 31, 1998 was
$7.3 million or 3.1% of revenue.
Operating Income. Operating income for the year ended December 31, 1999
was $42.7 million or 18.1% of total revenue.
Other Income and Expense. Interest expense for the year ended December 31,
1998 was $20.9 million or 8.8% of revenue. Interest expense is primarily
attributable to borrowings under our senior credit facilities for acquisitions
and capital expenditures, the issuance of notes to finance the purchase of
equipment, the issuance of subordinated notes to sellers in acquisitions and the
issuance of senior subordinated notes.
Income Taxes. Our effective income tax rate for the year ended December
31, 1998 was 43.2%. The amount above statutory income tax rates is attributable
primarily to non-deductible goodwill amortization for federal income tax
purposes.
HISTORICAL RESULTS OF OPERATIONS -- PREDECESSOR COMPANY
Fiscal Year Ended March 31, 1997 ("Fiscal 1997") as Compared to Fiscal Year
Ended March 31, 1996 ("Fiscal 1996")
Revenue. Total revenue for Fiscal 1997 increased 20.6% to $19.5 million
from $16.2 million in Fiscal 1996. This increase was primarily attributable to a
29.1% increase in equipment rental revenue. Equipment rental revenue increased
as a result of the increased selection and availability of rental equipment and
from the opening of two new locations during Fiscal 1997.
Gross Profit. Gross profit for Fiscal 1997 increased 37.6% to $7.2 million
from $5.2 million in Fiscal 1996. Gross margin increased from 32.5% in Fiscal
1996 to 37.0% in Fiscal 1997. This improvement primarily resulted from increased
margins on the sale of used equipment.
Operating Expenses. Selling, general and administrative expenses for
Fiscal 1997 increased 20.6% to $3.8 million from $3.2 million in Fiscal 1996. As
a percentage of total revenue, these costs were 19.5% in Fiscal 1996 compared
with 19.5% in Fiscal 1997. The increase in selling, general and administrative
expenses was primarily attributable to additional administrative staff hired and
growth in business volume during Fiscal
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<PAGE> 14
1997. In addition, we incurred additional non-rental depreciation expense
attributable to an increase in property, plant and equipment as a result of the
two locations opened during Fiscal 1997.
Operating Income. As a result of the foregoing, operating income increased
63.0% from $2.1 million for Fiscal 1996 to $3.4 million in Fiscal 1997.
Operating income margin increased from 13.0% in Fiscal 1996 to 17.5% in Fiscal
1997.
Other Expense. Other expense for Fiscal 1997 increased to $0.7 million
from $0.4 million in Fiscal 1996. This increase was primarily attributable to an
increase in debt and related interest expense which resulted from our increased
financing of rental equipment asset purchases.
Income Tax Expense. Income tax expense was $1.1 million for Fiscal 1997,
compared to $0.7 million in Fiscal 1996. Our effective tax rate was 40.9% for
Fiscal 1997, compared to 42.8% for the same period in Fiscal 1996.
Net Income. Net income for Fiscal 1997 increased 66.4% to $1.6 million
from $1.0 million for Fiscal 1996 for the aforementioned reasons. Net income as
a percentage of revenue was 8.3% for Fiscal 1997 compared with 6.1% for Fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of cash have been the funding of acquisitions and capital
expenditures. To date, we have funded our cash requirements primarily with
borrowings under our senior credit facilities, proceeds from the issuance of
debt and equity securities, equity contributions from our founding stockholders
and cash provided by operations.
Our net cash provided by operations was $60.5 million for the year ended
December 31, 1998. Net cash used in investing activities was $443.3 million for
the year ended December 31, 1998. Cash used in investing activities in 1998 was
primarily a result of cash consideration of $345.8 million for the acquisition
of businesses, net of cash acquired and $118.8 million for purchases of rental
equipment. Cash provided by financing activities was $392.0 million for the year
ended December 31, 1998, net of the repayment of debt assumed in connection with
acquired businesses, and was primarily a result of:
* $168.8 million of net proceeds from the issuance of 10 3/8% senior
subordinated notes due 2008;
* $94.4 million of net proceeds from our initial public offering of our
common stock;
* $23.4 million of additional equity contributions from our founders;
* $27.6 million of proceeds from a private placement of common stock; and
* $325.9 million of net borrowings under our senior credit facilities.
In February 1999, we increased our senior credit facilities to $500.0
million consisting of a $180.0 million term loan due September 2004 and a $320.0
million revolving line of credit due June 2001. The credit facilities can be
used to complete permitted acquisitions, make capital expenditures, enter into
standby letters of credit, or for working capital and other general corporate
purposes. Borrowings under the revolving line of credit bear interest at either
the BankBoston, N.A. base rate plus a percentage ranging from 0.00% to 0.50% or,
at our option, the Eurodollar market rate plus a percentage ranging from 2.00%
to 2.75%. The term loan bears interest ranging from 3.00% to 3.25% over the
Eurodollar market rate. The percentage over the BankBoston, N.A. base rate or
the Eurodollar market rate is based on our financial performance as measured by
the total funded debt ratio. The credit facilities are secured by a security
interest in substantially all of our assets. The credit facilities also impose,
among other covenants, a tangible assets to senior debt covenant, a restriction
on all of our retained earnings including cash dividends, consent requirements
on certain acquisitions and a restriction on the ratio of total funded debt to
earnings before interest, income taxes, depreciation and amortization. On
December 31, 1998, $174.9 million and $151.0 million of cash borrowings were
outstanding under the revolving line of credit and term loan, respectively.
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<PAGE> 15
In December 1998, we offered and sold at par, $175.0 million aggregate
principal amount of 10 3/8% senior subordinated notes due 2008. Net proceeds
from the offering of the notes were approximately $168.8 million and were used
to repay certain subordinated acquisition debt and certain outstanding
indebtedness under our senior credit facilities. The senior subordinated notes
call for semi-annual interest payments on June 15 and December 15 of each year
beginning in June 1999 and mature December 15, 2008. The senior subordinated
notes are guaranteed by substantially all of our current and future domestic
subsidiaries. The indenture governing the notes contains covenants restricting
additional indebtedness, certain payments, asset sales, liens, mergers and
consolidations and transactions with affiliates. The merger with RSC will
constitute a change of control under the terms of the indenture governing the
senior subordinated notes. Upon a change of control, we must offer to repurchase
the notes at a purchase price of 101% of the principal amount. NationsRent and
RSC have entered into a commitment letter from a group of financial institutions
which have agreed to collectively underwrite a new $1.5 billion senior credit
facility conditioned upon a number of requirements including the closing of the
merger. The repurchase of any of the senior subordinated notes would be made
with proceeds from the new senior credit facility.
During 1998, we added $233.9 million of new equipment to our rental
equipment fleet $115.1 million of which was added using operating leases. These
operating leases have terms expiring over the next seven years.
Our short-term cash requirements for our existing operations consist
primarily of:
* capital expenditures to maintain, modernize and expand our rental
equipment inventory;
* working capital requirements; and
* repair and maintenance of rental equipment, purchase of merchandise
inventory and other operating activities.
We estimate that equipment expenditures over the next 12 months for our
existing locations and for new store openings will be in the range of $175.0
million to $225.0 million, net of proceeds from used equipment sales.
Approximately one-third of the estimated net capital expenditures is to replace
existing rental equipment. We believe that we will be able to finance our
short-term cash needs through borrowings under the senior credit facilities, the
use of equipment leases and cash generated from operations. We estimate that
such sources will be sufficient to fund the cash required for our existing
operations for at least 12 months.
During the year ended December 31, 1998, we opened six new locations within
identified clusters. We estimate that the aggregate capital costs associated
with each such new location was in the range of $2.0 million to $4.5 million. We
expect to open 8 to 12 new locations in 1999. We believe that cash generated
from operations and borrowings under our senior credit facilities will be
sufficient to fund these costs without the issuance of additional debt or equity
securities.
We are developing a management information system that became operational
at certain locations in the fourth quarter of 1998. We estimate the total cost
to complete development and installation of the system at our existing locations
will range from $5.0 million to $7.0 million over the next several years and we
believe cash generated from operations and borrowings under our senior credit
facilities will be sufficient to fund these costs.
We plan to continue our acquisition strategy and believe that in connection
with new acquisitions we will be required to make additional expenditures to
expand and modernize rental equipment of acquired companies. We expect to
finance future acquisitions and related rental equipment expenditures using
cash, capital stock, notes and/or assumption of indebtedness. To fully implement
our growth strategy and meet the resulting capital requirements, we will be
required to increase amounts available under our senior credit facilities or
raise additional capital through issuance of additional debt or equity
securities. There can be no assurance that additional capital, if and when
required, will be available on terms satisfactory to us, or at all.
There may be liabilities that we fail or are unable to discover in the
course of performing due diligence investigations on each company or business we
have acquired or seek to acquire in the future. Such liabilities could include
those arising from employee benefits contribution obligations of a prior owner
or non-
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<PAGE> 16
compliance with applicable federal, state or local environmental requirements by
prior owners for which we, as a successor owner, may be responsible. We try to
minimize these risks by conducting such due diligence, including employee
benefit and environmental reviews, as we deem appropriate under the
circumstances. However, we cannot assure that we have identified, or in the case
of future acquisitions, will identify, all existing or potential risks. We also
generally require each seller of acquired businesses or properties to indemnify
us against undisclosed liabilities. In some cases this indemnification
obligation may be supported by deferring payment of a portion of the purchase
price or other appropriate security. However, we cannot assure that the
indemnification, even if obtained, will be enforceable, collectible or
sufficient in amount, scope or duration to fully offset the possible liabilities
associated with the business or property acquired. Any such liabilities,
individually or in the aggregate, could have a material adverse effect on our
business, financial condition or results of operations.
SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS
Our revenue and income are dependent upon activity in the construction
industry in the markets we serve. Construction activity is dependent upon
weather and other seasonal factors affecting construction in the geographic
areas where we have operations. Because of this variability in demand, our
quarterly revenue may fluctuate, and revenue for the first quarter of each year
can be expected to be lower than the remaining quarters. Although we believe
that the historical trend in quarterly revenue for the second, third and fourth
quarters of each year is generally higher than the first quarter, there can be
no assurance that this will occur in future periods. Accordingly, quarterly or
other interim results should not be considered indicative of results to be
expected for any other quarter or for a full year.
Operating results may fluctuate due to other factors including, but not
limited to:
* changes in general economic conditions including changes in national,
regional or local construction or industrial activities;
* the timing of acquisitions and opening of new locations;
* the timing of expenditures for new rental equipment and the disposition
of used equipment;
* competitive pricing pressures; and
* changes in interest rates.
We will incur significant expenses in opening new locations, such as
employee training, marketing and facility set-up costs. Initially, new locations
may generate lower operating margins than established locations and may operate
at a loss for a period of time. Our new locations have on average achieved
profitability within approximately five months of their opening. In addition,
when we purchase new rental equipment, the depreciation related to such
equipment may contribute to near-term margin decline, because such equipment may
not initially generate revenue at a rate that is sufficient to match such
increased depreciation expense. As such, the opening of new rental locations and
the purchase of new equipment to expand our current rental equipment inventory
may reduce our operating margins during a start-up period.
INFLATION
We do not believe that inflation has been a significant factor to the cost
of our operations or the operations of the Predecessor.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." We adopted SFAS No. 130 during the quarter ended June 30,
1998. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS No. 130 is to report a measure (comprehensive income) of
all changes in equity of an enterprise that result from transactions and other
economic events in a period other than transactions with owners. The adoption of
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<PAGE> 17
SFAS No. 130 did not impact our consolidated financial statements, as
comprehensive income was equal to net income for all periods presented.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." We adopted SFAS No. 131 during the quarter
ended December 31, 1998. SFAS No. 131 superseded SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes a new
method by which companies will report operating segment information. This method
is based on the manner in which management organizes the segments within a
company for making operating decisions and assessing performance. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS No. 131 did not
affect our consolidated financial position, results of operations or financial
statement disclosures, as we operate only one business segment.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria
for determining which costs of developing or obtaining internal-use computer
software should be charged to expense and which should be capitalized. SOP 98-1
is effective for all transactions entered into in fiscal years beginning after
December 15, 1998. We do not believe that the adoption of SOP 98-1 will have a
material effect on our financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that all non-governmental entities expense costs of start-up
activities, including pre-operating, pre-opening and organization activities, as
those costs are incurred. We do not believe that the adoption of this Statement
will not have a material effect on our financial position or results of
operations.
YEAR 2000
Since many computer systems and other equipment with embedded chips or
microprocessors use only two digits to represent the year, these systems may be
unable to process accurately certain data before, during or after the year 2000.
As a result, business and governmental entities are at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the "Year 2000" issue. We may be affected
by Year 2000 issues in our own information technology ("IT") systems or non-IT
systems, as well as by Year 2000 issues related to IT and non-IT systems
operated by third parties.
State of Readiness
Our plan to address the Year 2000 issue is structured in five phases:
inventory, assessment, correction, testing and implementation. The inventory
phase is an investigation of all our operations to identify the software and
hardware of all of our systems. The assessment phase is an analysis of each
component of each system to determine date sensitivity to the year 2000. The
correction phase is the effort to correct, replace, upgrade or eliminate
non-compliant hardware and software. The testing phase involves verifying that
corrections to our systems are Year 2000 compliant. Finally, the implementation
phase is the effort to deploy the corrected and verified systems throughout our
current operations.
IT SYSTEMS. Our current state of progress with our IT systems is as
follows:
* Inventory and Assessment. Since our inception, we have acquired 38
equipment rental companies, each with its own information system for
rental counter operations, inventory control and financial reporting. In
assessing the systems of the companies that we acquired, we determined
that there was no one system that could manage our projected growth and
that was Year 2000 compliant. We determined, therefore, that we needed to
develop our own Year 2000 compliant management information system. We
believe the inventory and assessment phases of our IT systems is
complete.
* Correction and Testing. During the second quarter of 1998, we began
developing our own management information system that included software
modules for rental counter operations, inventory control, database and
financial reporting to replace the information systems of businesses we
have
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<PAGE> 18
acquired. During the development of our systems, we tested and validated
them for Year 2000 compliance and selected our third party vendors for
the software modules and hardware components of our new system based on
their certification of Year 2000 compliance. To date, we have handled our
Year 2000 plan with our own internal personnel and have not engaged any
third-party consultants. The system is functional and we believe we are
95% complete with testing of all of the components. We are not currently
aware of any Year 2000 problems relating to our new IT system or the
systems and hardware supplied by third parties which would have a
material effect on our business, results of operations or financial
condition.
* Implementation. For us, the implementation phase consists of the
conversion and replacement of the non-Year 2000 compliant systems of our
acquired businesses with our new management information system. During
October 1998, we began converting our operations to our new management
information system. As of March 25, 1999, we operate over 130 locations.
We have completely converted ten of these locations to our new system and
have converted 19 additional locations to the financial reporting
component of our system. We expect to have all of our current operations
fully converted to our new system by the end of the third quarter of
1999.
NON-IT SYSTEMS. We are at the initial inventory phase for our non-IT
systems such as chips and microprocessors that may be embedded in our facilities
and equipment. We believe there is a minimal amount of dependence of our
critical operations on non-IT systems. However, since we have not completed our
inventory and assessment, we cannot currently determine if there are any
potential Year 2000 problems that would cause a material adverse effect on our
business, results of operations or financial condition. We expect to complete
all five phases of our Year 2000 plan for our non-IT systems by the end of the
third quarter of 1999.
THIRD-PARTY SYSTEMS. We rely on third-party suppliers for operating
supplies, merchandise for resale, utilities, transportation, equipment for rent
and retail sales and other key services. Interruption of any such third-party's
operations due to Year 2000 issues could have a material adverse effect on our
business, results of operations or financial condition. We have begun efforts to
evaluate the progress of our critical third-party suppliers relative to their
Year 2000 issues. Letters and questionnaires are being sent to all essential
third parties with which we do business to assess their Year 2000 readiness. To
the extent necessary, we will seek alternative third-party relationships if
circumstances warrant. We have begun efforts to evaluate the progress of our
critical customers' relative to their Year 2000 issues. We expect to complete
all five phases of our Year 2000 plan for our third-party systems by the end of
the third quarter of 1999.
Costs
The majority of our costs to address the Year 2000 issue are related to the
development of our new management information system. Such costs principally
consist of licensing and developing software and purchasing hardware. To date we
have spent a total of approximately $5.4 million for the new system, of which
approximately $4.1 million was related to software development and approximately
$1.3 million was related to purchases of hardware. Such costs have been
capitalized in accordance with generally accepted accounting principals. We
expect to incur in the range of approximately $1.5 million to $2.0 million in
additional software and hardware costs installing the new IT system at the rest
of our current locations in 1999. The aggregate cost of conversion and training
employees to the new IT system, which will be charged to expense in the period
incurred, is expected to range from $0.7 million to $1.0 million. Although we do
not expect to incur significant expenses to address the Year 2000 issue beyond
our capital investment in the new IT system software and hardware, Year 2000
problems may require us to incur unanticipated expenses which could have a
material adverse effect on our business, financial condition or results of
operations. These costs account for approximately 90% of our information
technology budget for 1999. To date, the development of our management
information system has run concurrent with and been a part of our Year 2000
compliance efforts. No other major projects have been deferred as a result of
the system development effort. The source of the funds for our Year 2000
compliance efforts has been cash generated from operations and borrowings under
our senior credit facilities.
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Risks Relating to the Company's Failure to Become Year 2000 Compliant
Our worst case scenarios resulting from the Year 2000 issue include:
* Interruptions in our customers' operations which could prevent them from
renting our equipment, using our services or paying for equipment rented
or services rendered.
* Disruptions to our utilities and other service providers which could
prevent our locations from operating in the normal course of business.
* Failure of our suppliers' operations which could result in our inability
to obtain rental equipment and other supplies to meet the demands of our
customers.
* Failure to convert all of our locations to our new management information
system before December 31, 1999 which could prevent such locations from
processing invoices from our counter systems and tracking accounts
receivable, equipment utilization and other critical financial data. This
could also prevent our locations from sharing equipment and data to
service our customers in a timely manner.
* Failure to convert all of the systems of the businesses we acquire during
1999 to our system prior to the year 2000 which could prevent these
locations from being integrated into the rest of our operations.
Such failures could materially and adversely affect our business, results
of operations and financial condition. Due to the general uncertainty inherent
in the Year 2000 problem, resulting in part from the uncertainty of the Year
2000 readiness of third-party suppliers and customers, we are unable to
determine at this time what our most reasonably likely worst case scenario would
be or whether the consequences of Year 2000 failures will have a material
adverse impact on our results of operations, liquidity or financial condition.
As we complete all of the phases of our Year 2000 compliance plan, we expect to
have a better understanding of our most reasonably likely worst case scenarios
and will tailor our contingency plans accordingly.
Contingency Plans
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. Contingency plans for Year 2000-related interruptions are
being developed and will include emergency backup and recovery procedures for
lost data, manual invoicing, billing and collection procedures, identification
of alternate suppliers, acceleration of conversion times to our management
information system and increasing inventory levels of critical supplies and
rental equipment. All plans are expected to be completed by the end of the third
quarter of 1999. These activities are intended to provide a means of managing
risk, but cannot eliminate the potential for disruption due to third-party
failure.
We are currently considering what our final contingency plans will be in
the event that we are not able to bring all of our existing and acquired systems
into Year 2000 compliance by the end of 1999. We currently plan to complete such
contingency plans by the end of the third quarter of 1999.
FORWARD LOOKING STATEMENTS
Certain statements and information in this Annual Report on Form 10-K may
include "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, including in particular the statements about our plans,
strategies and prospects under the headings "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we cannot assure
you that such plans, intentions or expectations will be achieved. Important
factors that could cause actual results to differ materially from our
forward-looking statements are set forth below and elsewhere in this Annual
Report on Form 10-K. Such factors include, among others: the ability to develop
and implement operational and financial systems to manage rapidly growing
operations; competition in our principal businesses; the ability to integrate
and successfully operate acquired businesses and the risks associated with
17
<PAGE> 20
such businesses; the ability to obtain financing on terms acceptable to us to
finance our growth strategy and for us to operate within the limitations imposed
by financing arrangements; dependence on key personnel; and the ability to
properly assess and capitalize on future business opportunities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited primarily to the fluctuating
interest rates associated with our variable rate indebtedness. Our variable
interest rates are subject to interest rate changes in the United States and the
Eurodollar market. We do not currently use, nor have we historically used,
derivative financial instruments to manage or reduce market risk. At December
31, 1998, we had $358.1 million of variable rate indebtedness, representing
approximately 53% of our total debt outstanding, at an average interest rate of
8.2%.
18
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... 20
Consolidated Balance Sheets at December 31, 1998 and 1997... 21
Consolidated Statements of Income for the year ended
December 31, 1998 and the period from August 14, 1997
(inception) to December 31, 1997.......................... 22
Consolidated Statement of Stockholders' Equity.............. 23
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and the period from August 14, 1997
(inception) to December 31, 1997.......................... 24
Notes to Consolidated Financial Statements.................. 25
</TABLE>
19
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To NationsRent, Inc.:
We have audited the accompanying consolidated balance sheets of
NationsRent, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income, stockholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from August 14, 1997 (inception) to December 31, 1997. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of NationsRent,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998 and for the
period from August 14, 1997 (inception) to December 31, 1997 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
February 19, 1999.
20
<PAGE> 23
NATIONSRENT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
---------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 10,597 $ 1,493
Accounts receivable, net of allowance for doubtful accounts
of $4,732 and $587 at December 31, 1998 and 1997,
respectively.............................................. 72,951 5,008
Inventories................................................. 23,147 1,840
Prepaid expenses and other assets........................... 24,451 755
Rental equipment, net....................................... 382,573 30,619
Property and equipment, net................................. 37,839 2,334
Intangible assets related to acquired businesses, net....... 524,254 37,108
---------- -------
Total Assets........................................... $1,075,812 $79,157
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 68,177 $ 3,253
Accrued compensation and related taxes.................... 4,901 328
Accrued expenses and other liabilities.................... 32,970 2,579
Debt...................................................... 678,035 42,928
Income taxes payable...................................... 3,115 1,523
Deferred income taxes..................................... 6,384 2,545
---------- -------
Total liabilities...................................... 793,582 53,156
---------- -------
Commitments and Contingencies (Note 11)
Stockholders' Equity:
Preferred stock -- $0.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding........... -- --
Common stock -- $0.01 par value, 250,000,000 shares
authorized, 55,618,023 and 25,000,000 shares issued and
outstanding at December 31, 1998 and 1997,
respectively........................................... 556 250
Additional paid-in capital................................ 268,019 24,750
Retained earnings......................................... 13,655 1,001
---------- -------
Total stockholders' equity............................. 282,230 26,001
---------- -------
Total Liabilities and Stockholders' Equity............. $1,075,812 $79,157
========== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
21
<PAGE> 24
NATIONSRENT, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION)
DECEMBER 31, THROUGH
1998 DECEMBER 31, 1997
------------ -----------------
<S> <C> <C>
Revenue:
Equipment rentals......................................... $150,668 $ 7,410
Sales of equipment, merchandise, service, parts and
supplies............................................... 85,730 1,895
-------- --------
Total revenue..................................... 236,398 9,305
-------- --------
Cost of revenue:
Cost of equipment rentals, excluding depreciation......... 56,084 2,196
Rental equipment depreciation............................. 24,463 1,526
Cost of sales of equipment, merchandise, service, parts
and supplies........................................... 61,455 1,691
-------- --------
Total cost of revenue............................. 142,002 5,413
-------- --------
Gross profit................................................ 94,396 3,892
Operating expenses:
Selling, general and administrative expenses.............. 44,411 1,081
Non-rental equipment depreciation and amortization........ 7,266 284
-------- --------
Operating income............................................ 42,719 2,527
-------- --------
Other (income)/expense:
Interest expense.......................................... 21,063 760
Interest income........................................... (205) (29)
Other, net................................................ (401) 29
-------- --------
20,457 760
-------- --------
Income before provision for income taxes.................... 22,262 1,767
Provision for income taxes................................ 9,608 766
-------- --------
Net income.................................................. $ 12,654 $ 1,001
======== ========
Net income per share -- basic and diluted................... $ 0.37 $ 0.04
======== ========
Weighted average common shares outstanding:
Basic..................................................... 33,999 25,000
======== ========
Diluted................................................... 38,545 25,007
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
22
<PAGE> 25
NATIONSRENT, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
---------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, August 14, 1997 (Inception)......... -- $ -- $ -- $ --
Issuance of common stock (after giving
effect to the stock split discussed in
Note 1)................................. 25,000,000 250 24,750 -- 25,000
Net income................................. -- -- -- 1,001 1,001
---------- ---- --------- ------- --------
Balance, December 31, 1997................... 25,000,000 250 24,750 1,001 26,001
Additional capital contributions of the
Company's founders...................... -- -- 23,400 -- 23,400
Proceeds from sale of common stock in a
private placement....................... 5,118,694 51 27,549 -- 27,600
Proceeds from sale of common stock, less
issuance cost of $9,605................. 13,000,000 130 94,265 -- 94,395
Issuance of common stock, options and
warrants in connection with
acquisitions............................ 5,542,812 55 48,125 -- 48,180
Conversion of unsecured subordinated
convertible promissory notes............ 6,956,517 70 49,930 -- 50,000
Net income................................. -- -- -- 12,654 12,654
---------- ---- --------- ------- --------
Balance, December 31, 1998................... 55,618,023 $556 $ 268,019 $13,655 $282,230
========== ==== ========= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this statement.
23
<PAGE> 26
NATIONSRENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION)
DECEMBER 31, THROUGH
1998 DECEMBER 31, 1997
------------ -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 12,654 $ 1,001
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 32,180 1,810
Gain on sale of rental equipment.......................... (9,530) (59)
Deferred income tax provision............................. 6,709 357
Changes in operating assets and liabilities:
Accounts receivable..................................... (17,485) 334
Inventories............................................. (342) 83
Prepaid expenses and other assets....................... (8,312) (296)
Accounts payable........................................ 43,412 776
Accrued expenses and other liabilities.................. 719 (428)
Income taxes payable.................................... 453 117
--------- --------
Net cash provided by operating activities............... 60,458 3,695
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES, NET OF ACQUISITIONS:
Acquisitions of businesses, net of cash acquired.......... (345,845) (34,137)
Purchases of rental equipment............................. (118,798) (2,461)
Purchases of property and equipment....................... (15,305) (963)
Proceeds from sale of rental equipment.................... 36,602 1,159
Decrease in notes receivable from affiliates.............. -- 1,358
--------- --------
Net cash used in investing activities................... (443,346) (35,044)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 121,995 25,000
Capital contributions..................................... 23,400 --
Proceeds from debt........................................ 909,952 21,917
Payment of debt issuance costs............................ (9,172) --
Repayments of debt........................................ (654,183) (14,075)
--------- --------
Net cash provided by financing activities............... 391,992 32,842
--------- --------
Net increase in cash and cash equivalents................... 9,104 1,493
Cash and cash equivalents, beginning of period.............. 1,493 --
--------- --------
Cash and cash equivalents, end of period.................... $ 10,597 $ 1,493
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 13,737 $ 621
========= ========
Cash paid for income taxes................................ $ 3,033 $ 390
========= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
The Company acquired the net assets and assumed certain
liabilities of certain businesses as follows:
Fair value of assets acquired, net of cash acquired... $ 875,711 $ 78,629
Total liabilities assumed............................. (331,996) (27,311)
Amounts paid through the issuance of debt and future
cash commitments...................................... (149,690) (17,181)
Amounts paid through the issuance of stock, options and
warrants.............................................. (48,180) --
--------- --------
Net cash paid........................................... $ 345,845 $ 34,137
========= ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
24
<PAGE> 27
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ACCOUNTING POLICIES
Basis of Presentation
NationsRent, Inc. (the "Company") was incorporated in the state of Delaware
on August 14, 1997 for the purpose of creating a nationally branded network of
equipment rental locations offering a broad selection of equipment primarily to
the construction and industrial segments of the equipment rental industry in the
United States. The Company also sells used and new equipment, spare parts,
merchandise and supplies, and provides maintenance and repair services.
The nature of the Company's business is such that short-term obligations
are typically met by cash flow generated from long-term assets. Consequently,
consistent with industry practice, the accompanying consolidated balance sheets
are presented on an unclassified basis.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. The Company had no
cash equivalents at December 31, 1998 and 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventories
Inventories, which consist of equipment, tools, parts and related
merchandise supply items, are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Provision is made to
reduce excess or obsolete inventories to their estimated net realizable value.
Rental Equipment
Rental equipment purchased by the Company is recorded at cost and
depreciated over the estimated useful life of the equipment using the
straight-line method. The range of useful lives estimated by management for
rental equipment is three to ten years. Rental equipment is depreciated to a
salvage value ranging from zero to ten percent of cost. Rental equipment having
a cost of $500 or less generally has a useful life of less than one year and
therefore is charged to expense at the time of purchase. Accumulated
depreciation on rental equipment was $22,785,000 and $1,526,000 at December 31,
1998 and 1997, respectively. Ordinary maintenance and repair costs are charged
to operations as incurred. Expenditures that extend the useful life or increase
the capacity, efficiency or safety of rental equipment are capitalized.
25
<PAGE> 28
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment purchased new by the Company is recorded at cost.
Property and equipment obtained through the acquisition of a business is
recorded at the estimated fair market value at the time of acquisition.
Depreciation and amortization are recorded on a straight-line basis over the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements 10-39 years, not to exceed lease term
Furniture, fixtures and office equipment 3-7 years
Vehicles, delivery and shop equipment 5-10 years
</TABLE>
Ordinary maintenance and repair costs are charged to expense as incurred.
Capitalized Interest
Interest cost incurred on capital expenditures for assets constructed by
the Company is capitalized and included in the cost of such assets. Total
interest cost incurred by the Company was $21,146,000 and $760,000 for the year
ended December 31, 1998 and the period from August 14, 1997 (inception) to
December 31, 1997, respectively. Total interest capitalized was $83,000 for the
year ended December 31, 1998. There was no interest capitalized in the period
from August 14, 1997 (inception) to December 31, 1997.
Intangible Assets Related to Acquired Businesses
Intangible assets are recorded at cost and are amortized using the
straight-line method over their estimated useful lives of five years for
covenants not to compete and 40 years for goodwill. The accumulated amortization
of intangible assets was approximately $5,337,000 and $180,000 at December 31,
1998 and 1997, respectively. Amortization expense of intangible assets was
$5,157,000 and $180,000 for the year ended December 31, 1998 and the period from
August 14, 1997 (inception) to December 31, 1997, respectively.
Long-Lived Assets
The carrying value of long-lived assets, including goodwill, is reviewed if
the facts and circumstances suggest that it may be impaired. If this review
indicates that long-lived assets will not be recoverable, as determined based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the long-lived assets will
be reduced by the amount by which carrying value exceeds fair value.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying consolidated balance
sheets for cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses and other liabilities approximate fair value due to the
short-term nature of these accounts. The fair value of long-term debt is
determined using current applicable interest rates as of the balance sheet date
and approximates the carrying value of such debt because the underlying
instruments are at variable rates that are repriced frequently. The fair value
of the Senior Subordinated Notes approximates carrying value based on the
Company's estimate of the current market for similar debt.
Revenue Recognition
Rental revenue is recognized on a straight-line basis as earned during the
rental contract period. Equipment rentals in the consolidated statements of
income includes revenue earned on equipment rentals, rental equipment delivery
and pick-up fees and fuel sales. Revenue from the sale of used equipment, parts
and
26
<PAGE> 29
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
supplies and retail merchandise is recognized at the time of delivery to, or
pick-up by, the customer. When rental equipment is sold, the related cost and
accumulated depreciation are removed from the respective accounts. Proceeds from
the sale and the related book value of the equipment sold are reported as
revenue from sales of equipment, merchandise, service, parts and supplies and
cost of sales of equipment, merchandise, service, parts and supplies,
respectively, in the statements of income.
Advertising
Advertising costs are charged to expense as incurred. The Company incurred
advertising costs of $2,339,000 and $171,000 for the year ended December 31,
1998 and the period from August 14, 1997 (inception) to December 31, 1997,
respectively.
Income Taxes
The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Under the liability method, deferred tax assets and liabilities
are determined based on differences between the financial reporting and tax
bases of assets and liabilities using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. Recognition of
deferred tax assets is limited to amounts considered by management to be more
likely than not of realization in future periods. The Company and its
wholly-owned subsidiaries file a consolidated federal income tax return.
Computation of Earnings Per Share
Earnings per share is calculated in accordance with the requirements of
SFAS No. 128, "Earnings Per Share," as well as Staff Accounting Bulletin No. 98
(issued by the Securities and Exchange Commission in February 1998), which
amends the determination of and accounting for "cheap stock" in periods prior to
an initial public offering. The effect of dilutive securities is computed using
the treasury stock method.
Stock Split
In June 1998, the Company effected a 2,500-for-one split of its common
stock. The accompanying consolidated financial statements reflect the stock
split on a retroactive basis from the beginning of the periods presented.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company maintains cash and cash equivalents with high
quality financial institutions. Concentrations of credit risk with respect to
accounts receivable are limited because a large number of diverse customers make
up the Company's customer base. No single customer represents greater than 10%
of total accounts receivable. The Company controls credit risk through credit
approvals, credit limits, and monitoring procedures.
Stock Based Compensation
The Company accounts for stock compensation arrangements in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25")
and accordingly, recognizes no compensation expense for the stock compensation
arrangements since the stock options are granted at exercise prices at or
greater than the fair value of the shares at the date of grant.
27
<PAGE> 30
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Seasonality
The Company's revenue and income are dependent upon the activity in the
construction industry in the markets served by the Company. Construction
activity is dependent upon weather and the traditional seasons for construction
work. Because of this variability in demand, the Company's quarterly revenue may
fluctuate, and revenue for the first quarter of each year can be expected to be
lower than the remaining quarters. Although the Company believes that the
historical trend in quarterly revenue for the second, third and fourth quarters
of each year is generally higher than the first quarter, there can be no
assurance that this will occur in future periods. Accordingly, quarterly or
other interim results should not be considered indicative of results to be
expected for any quarter or for the full year.
Reclassification
Certain amounts presented for the period from August 14, 1997 (inception)
to December 31, 1997 have been reclassified to conform to the 1998 presentation.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." The Company adopted SFAS No. 130
during the quarter ended June 30, 1998. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of financial statements. The objective of SFAS No. 130 is to report a
measure (comprehensive income) of all changes in equity of an enterprise that
result from transactions and other economic events in a period other than
transactions with owners. The adoption of SFAS No. 130 did not impact the
Company's consolidated financial statements, as comprehensive income was equal
to net income for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company adopted SFAS No. 131 during
the quarter ended December 31, 1998. SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes a new method by which companies will report operating segment
information. This method is based on the manner in which management organizes
the segments within a company for making operating decisions and assessing
performance. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. The adoption
of SFAS No. 131 did not affect the Company's consolidated financial position,
results of operations or financial statement disclosures, as the Company
operates only one business segment.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 establishes criteria
for determining which costs of developing or obtaining internal-use computer
software should be charged to expense and which should be capitalized. SOP 98-1
is effective for all transactions entered into in fiscal years beginning after
December 15, 1998. The Company will adopt SOP 98-1 prospectively effective
January 1, 1999. The Company does not believe that the adoption of SOP 98-1 will
have a material effect on the Company's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires that all non-governmental entities expense costs of start-up
activities, including pre-operating, pre-opening and organization activities, as
those costs are incurred. The Company will adopt SOP 98-5 effective January 1,
1999. The Company does not believe that the adoption of SOP 98-5 will have a
material effect on the Company's financial position or results of operations.
28
<PAGE> 31
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS
The Company is building a nationally branded network of equipment rental
locations. Pursuant to this strategy, the Company made 32 acquisitions of
equipment rental businesses during 1998. The aggregate consideration for these
acquisitions was $545,087,000 and consisted of (i) $347,217,000 of cash, (ii)
$115,821,000 of subordinated convertible debt, (iii) $29,634,000 of subordinated
debt, (iv) $4,235,000 of future contractual cash payments, (v) 5,542,812 shares
of the Company's common stock, $0.01 par value per share ("Common Stock"), (vi)
options to purchase 196,293 shares of Common Stock, and (vii) warrants to
purchase 100,000 shares of Common Stock. The cash portion of the consideration
was funded through borrowings under the Company's credit facility, capital
contributions by the founders of the Company, the proceeds of a private
placement of Common Stock and the proceeds from the issuance of senior
subordinated notes. The Company repaid or assumed outstanding indebtedness of
the acquired companies in the aggregate amount of $282,318,000. In addition, in
connection with nine of the acquisitions, the Company has agreed to make future
payments up to an aggregate of $39,331,000 in cash, subordinated notes,
subordinated convertible notes and Common Stock to the former owners based on
the achievement of certain future operating results of the acquired companies or
market performance of the Common Stock. Such payments may be made at various
times through December 2001. The acquisitions have been accounted for using the
purchase method and, accordingly, the acquired assets and assumed liabilities
have been recorded at their estimated fair values as of the date of acquisition.
Purchase accounting values for certain acquisitions have been assigned on a
preliminary basis, and are subject to adjustment when additional information as
to the fair values of the net assets acquired is available. The Company is
awaiting information from third-party appraisers as to the fair value of certain
rental equipment acquired and the final determination of certain liabilities
assumed. The Company does not believe the final assignment of the fair value of
the net assets acquired will have a significant impact on future operating
results. The operations of the acquired businesses have been included in the
Company's consolidated statements of income since the effective date of each
respective acquisition.
The Company made five acquisitions of equipment rental businesses during
1997. The aggregate consideration for these acquisitions was $51,802,000 and
consisted of (i) $34,621,000 of cash, (ii) $11,090,000 of subordinated
convertible debt and (iii) $6,091,000 of subordinated debt. In addition, the
Company repaid or assumed outstanding indebtedness of the acquired companies in
the aggregate amount of $17,905,000.
The following table sets forth the estimated fair value of the assets
acquired and liabilities assumed for the aforementioned acquisitions:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Assets, including cash...................................... $390,874 $41,193
Goodwill.................................................... 491,067 37,925
Other intangibles........................................... -- 599
Liabilities................................................. 336,854 27,915
</TABLE>
29
<PAGE> 32
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the unaudited pro forma consolidated results
of operations for the years ended December 31, 1998 and 1997 giving effect to
the aforementioned acquisitions completed during 1998 and 1997 as if such
acquisitions had occurred on January 1, 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue..................................................... $477,064 $406,493
Net income.................................................. 19,915 11,354
Basic earnings per share.................................... 0.36 0.20
Diluted earnings per share.................................. 0.35 0.20
</TABLE>
The above unaudited pro forma consolidated results of operations are based
upon certain assumptions and estimates which the Company believes are
reasonable. The unaudited pro forma consolidated results of operations may not
be indicative of the operating results that actually would have been reported
had the acquisitions been consummated on January 1, 1997, nor are they
necessarily indicative of results which will be reported in the future.
3. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Buildings and improvements.................................. $10,530 $ 96
Furniture, fixtures and office equipment.................... 10,691 514
Vehicles, delivery and shop equipment....................... 17,819 906
Construction in progress.................................... 971 923
------- ------
40,011 2,439
Less -- accumulated depreciation and amortization........... (2,172) (105)
------- ------
Property and equipment, net............................... $37,839 $2,334
======= ======
</TABLE>
30
<PAGE> 33
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Notes payable to financial institutions:
Term loan................................................. $151,000 $18,500
Revolving credit facility................................. 174,900 1,958
10.375% Senior Subordinated Notes due December 15, 2008 with
interest due semi-annually each June 15 and December 15,
beginning June 15, 1999................................... 175,000 --
Subordinated promissory notes, bearing interest at 6.0% to
8.5%, interest payable quarterly and maturities through
November 2002............................................. 2,923 6,091
Subordinated convertible promissory notes, bearing interest
at 6.0% to 8.5%, interest payable quarterly and maturities
through October 2004...................................... 76,511 11,090
Rental equipment financing obligations, secured by
equipment, payable in monthly installments, through April
2002, capitalized by the Company.......................... 26,038 --
Note payable, with interest at the commercial paper rate
plus 2.05% to 2.25%, payable in monthly installments
through September 2004, secured by equipment.............. 14,375 --
Note payable, with interest at the London Interbank Offered
Rate plus 2.75%, payable in monthly installments through
March 1999, secured by equipment.......................... 32,155 --
Note payable, with interest at 6.63%, payable in quarterly
installments through July 2001............................ 1,566 --
Equipment notes, bearing interest at 6.2% to 9.25%, payable
in various monthly installments through April 2003,
secured by equipment...................................... 23,240 5,144
Other....................................................... 327 145
-------- -------
Total debt........................................ $678,035 $42,928
======== =======
</TABLE>
Notes payable to financial institutions at December 31, 1998 consist of
amounts due under the Company's credit facility (the "Credit Facility") with a
syndicate of lenders to provide for cash borrowings and letters of credit. The
Credit Facility can be used to complete permitted acquisitions, make capital
expenditures, enter into standby letters of credit, or for working capital and
other general corporate purposes. As of December 31, 1998, the Credit Facility
included a term loan of $151,000,000 (the "Term Loan") and a revolving credit
facility with an aggregate commitment of up to $284,000,000 (the "Revolver").
The Revolver has a three-year term scheduled to expire in June 2001 and the Term
Loan has a six-year term scheduled to expire in September 2004. Borrowings under
the Revolver bear interest at either the BankBoston base rate plus a percentage
ranging from 0.00% to 0.50% or, at the Company's option, the Eurodollar market
rate plus a percentage ranging from 2.00% to 2.75%. The Term Loan bears interest
ranging from 3.00% to 3.25% over the Eurodollar market rate. The percentage over
the BankBoston base rate or the Eurodollar market rate is based on the Company's
financial performance as measured by the total funded debt ratio. The interest
rate for the Revolver and the Term Loan was 7.9% and 8.5%, respectively, at
December 31, 1998. The Credit Facility is secured by a security interest in
substantially all of the assets of the Company. The Credit Facility also
imposes, among other covenants, a tangible assets to senior debt covenant, a
restriction on all of the Company's retained earnings including the declaration
and payment of cash dividends, consent requirements on certain acquisitions and
a restriction on the ratio of total funded debt to earnings before interest,
income taxes, depreciation and amortization. The Company had no letters of
credit outstanding under the Credit Facility at December 31, 1998.
Notes payable to financial institutions at December 31, 1997 consist of
amounts due under (i) a $12,500,000 interest bearing term loan, with interest
equal to the prime rate less 0.25%, payable in equal
31
<PAGE> 34
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
monthly installments of $20,833 and a final payment of $12,000,000 on September
22, 1999, (ii) a $6,000,000 interest bearing term loan, with interest equal to
the prime rate less 0.25%, payable in equal monthly installments of $83,333 and
a final payment of $5,500,000 on June 18, 1998, and (iii) a $2,000,000 revolving
credit agreement, bearing interest equal to the prime rate less 0.25%, with the
principal due on September 22, 1999. Each of the above notes were repaid during
1998 with proceeds from the Credit Facility.
On December 8, 1998, the Company issued $175,000,000 aggregate principal
amount of 10.375% Senior Subordinated Notes due 2008 (the "Notes") in a private
placement transaction. At any time on or after December 15, 2003, the Notes are
redeemable at the option of the Company at redemption prices ranging from
105.188% of par to 100.000% of par. At any time on or prior to December 15,
2001, at the option of the Company, up to 35% of the Notes are redeemable from
the proceeds of certain equity offerings at a redemption price of 110.375% of
par. The indenture governing the Notes contains covenants restricting additional
indebtedness, certain payments, asset sales, liens, mergers and consolidations
and transactions with affiliates. The Notes are guaranteed, on a senior
subordinated basis, by substantially all of the Company's existing subsidiaries
(the "Subsidiary Guarantors"). Each subsidiary that will be organized in the
future by the Company, unless such subsidiary is designated as an unrestricted
subsidiary, will guarantee the Notes on a senior subordinated basis. The
subsidiary guarantees are joint and several, full and unconditional and general
unsecured obligations of the Subsidiary Guarantors. At present, the Subsidiary
Guarantors comprise all of the direct and indirect wholly-owned subsidiaries of
the Company. The subsidiary guarantees are subordinated in right of payment to
all existing and future senior debt of the Subsidiary Guarantors, including the
Credit Facility, and are also effectively subordinated to all secured
obligations of the Subsidiary Guarantors to the extent of the assets securing
such obligations, including the Credit Facility. Furthermore, the indenture
governing the Notes permits Subsidiary Guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. The Company
has not presented separate financial statements and other disclosures concerning
each of the Subsidiary Guarantors because management has determined that such
information is not material to investors.
The subordinated promissory notes and the subordinated convertible
promissory notes were issued in connection with the acquisition of certain
businesses. The convertible notes have features that allow the holder to convert
the principal of the note, or portion thereof, into Common Stock with various
exercise prices between $7.76 and $12.50 per share.
Rental equipment financing obligations consist of leases which meet the
criteria for treatment as capital leases under generally accepted accounting
principles. The total amount of assets recorded under these leases is
$23,149,000 and the accumulated depreciation related to these assets is
$1,468,000 at December 31, 1998. There were no assets recorded under capital
leases at December 31, 1997. Future minimum lease payments under capital leases
at December 31, 1998 total $8,309,000, $9,496,000, $7,466,000 and $3,047,000 for
the years ending December 31, 1999, 2000, 2001 and 2002, respectively. There are
no payments under capital leases subsequent to the year ending December 31,
2002. The amount representing interest relating to these lease payments is
$2,280,000. Amortization relating to these assets is included in rental
equipment depreciation.
The aggregate maturities of debt, including the principal portion of rental
equipment financing obligations, is $55,482,000, $27,842,000, $188,829,000,
$20,596,000 and $53,335,000 for the five years ending December 31, 1999, 2000,
2001, 2002 and 2003, respectively, and $331,951,000 for 2004 and thereafter. The
amortization of deferred financing and debt issuance costs were $451,000 and
$3,000 for the year ended December 31, 1998 and the period from August 14, 1997
(inception) to December 31, 1997, respectively.
32
<PAGE> 35
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY
Preferred Stock
The Company has authorized 5,000,000 shares of $0.01 par value preferred
stock. No shares of preferred stock have been issued at December 31, 1998. The
rights and preferences of the preferred stock will be fixed by the Board of
Directors at the time such shares are issued. The preferred stock, when issued,
could have dividend and liquidation preferences over those of the common
stockholders.
Common Stock
During 1998, the founding stockholders of the Company made additional
capital contributions in the aggregate amount of $23,400,000. In June 1998, the
Company sold an aggregate of 5,118,694 shares of Common Stock in a private
placement for aggregate proceeds of approximately $27,600,000. Investors in the
private placement included Company employees and associates of the founding
stockholders of the Company.
In August 1998, the Company consummated its initial public offering of
13,000,000 shares of Common Stock at $8.00 per share. The Company received net
proceeds of approximately $94,395,000 after deducting underwriting discounts and
commissions and offering expenses. The Company used all of the net proceeds to
repay a portion of the outstanding borrowings of the Company under its Credit
Facility.
In December 1998, the Company converted $50,000,000 of unsecured
subordinated convertible promissory notes issued in connection with the
acquisition of Ray L. O'Neal, Inc. and Arenco, L.L.C. (collectively "A-1
Rentals") into 6,956,517 shares of Common Stock at a price of $7.1875 per share.
6. INCOME TAXES
The components of the provision for federal and state income taxes are
summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
(IN THOUSANDS)
<S> <C> <C>
Current................................................... $2,899 $409
Deferred.................................................. 6,709 357
------ ----
$9,608 $766
====== ====
Federal................................................... $8,087 $602
State..................................................... 1,521 164
------ ----
$9,608 $766
====== ====
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
<S> <C> <C>
Federal statutory income tax rate......................... 35.0% 34.0%
Add:
Non-deductible goodwill amortization.................... 3.0 3.0
State income taxes, net of federal tax benefit.......... 4.4 6.1
Other, net.............................................. 0.8 0.3
---- -----
43.2% 43.4%
==== =====
</TABLE>
33
<PAGE> 36
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the tax effects of temporary differences
between the carrying value of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities and other reserves.................... $ 3,292 $ 761
Bad debt provision not currently deductible............... 1,300 233
Net operating loss carryforwards.......................... 9,071 --
Alternative minimum tax and other credits................. 3,578 --
Valuation allowance....................................... (4,689) --
-------- -------
12,552 994
-------- -------
Deferred tax liabilities:
Depreciation and amortization............................. (18,492) (2,766)
Other..................................................... (444) (773)
-------- -------
(18,936) (3,539)
-------- -------
Net deferred income tax liabilities....................... $ (6,384) $(2,545)
======== =======
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of $23,259,000, of which $9,424,000 relate
to certain of the Company's acquisitions, that expire in the years 2006 through
2018. The acquired separate company net operating loss carryforwards are subject
to restrictions in accordance with Internal Revenue Code Section 382, and the
ultimate utilization of the net operating loss carryforwards is further limited
based upon the future profitability of the acquired entities. For financial
reporting purposes, a valuation allowance of $3,675,000 has been recognized to
offset the deferred tax asset related to the net operating loss carryforwards
obtained in connection with these acquisitions.
At December 31, 1998, the Company had alternative minimum tax credit and
general business credit carryforwards of $3,578,000, of which $1,014,000 relate
to certain of the Company's acquisitions, for federal income tax purposes that
are available to offset future regular income tax that is in excess of the
alternative minimum tax in such year. Limitations similar to those restricting
the use of acquired company net operating loss carryforwards also restrict the
use of acquired company tax credit carryforwards. For financial reporting
purposes, a valuation allowance of $1,014,000 has been recognized to offset the
deferred tax asset related to the tax credit carryforwards obtained in
connection with these acquisitions.
In connection with certain acquisitions, $796,000 of net deferred tax
liabilities that were assumed by the Company in the year ended December 31, 1998
and the period from August 14, 1997 (inception) to December 31, 1997 still exist
at December 31, 1998.
The valuation allowance for deferred tax assets is $4,689,000 at December
31, 1998. There was no valuation allowance recorded at December 31, 1997. The
valuation allowance for the current year is due to purchase accounting
adjustments for certain acquisitions recorded in 1998. The increase in the
valuation allowance reduced the net deferred tax assets recorded from these
acquisitions. In the event the valuation allowance is not required, a reduction
to goodwill will occur in accordance with SFAS No. 109.
34
<PAGE> 37
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
<S> <C> <C>
Numerator:
Net income.............................................. $12,654 $ 1,001
Interest expense on convertible subordinated debt, net
of income taxes...................................... 1,416 --
------------ -------
Numerator -- diluted earnings per share................. $14,070 $ 1,001
============ =======
Denominator:
Denominator for basic earnings per
share -- weighted-average shares..................... 33,999 25,000
Effect of dilutive securities:
Convertible subordinated debt........................ 4,381 --
Employee stock options............................... 165 7
------------ -------
Denominator for diluted earnings per share -- adjusted
weighted-average shares.............................. 38,545 25,007
============ =======
Basic and diluted earnings per share...................... $0.37 $ 0.04
============ =======
</TABLE>
Options and warrants to purchase 1,898,440 and 113,752 shares of Common
Stock were outstanding at December 31, 1998 and December 31, 1997, respectively,
but were not included in the computation of diluted earnings per share because
the options' exercise price was greater than the average fair value of the
common shares and, therefore, the effect would be antidilutive.
8. STOCK OPTIONS
In August, 1998, the Board of Directors and stockholders of the Company
approved the NationsRent 1998 Stock Option Plan (the "1998 Plan"), which
authorized the grant of options to directors (employee and non-employee) and
employees of the Company for up to 5,000,000 shares of Common Stock. In
addition, the Company has granted to certain employees 1,087,571 of options to
purchase shares of Common Stock prior to the adoption of the 1998 Plan (the
"Pre-Plan Options"). The exercise price per share for all options granted was
based on the estimated fair value of the Company's common stock at the time of
the grant. As such, no compensation cost has been recognized for these stock
options. During 1998, a total of 3,496,671 stock options were granted with
exercise prices ranging from $4.40 to $8.00 per share.
In connection with the acquisition of Logan Equipment Corporation
("Logan"), the Company assumed outstanding options to purchase shares of stock
in Logan, which were granted under the Logan 1998 Stock Option Plan, and
converted them into options to purchase 196,293 shares of Common Stock with
exercise prices of $0.86 per share. See Note 2.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock Based Compensation", as if the
Company had accounted for its granted employee stock options under the fair
value method of that Statement. The Company's pro forma net income, pro forma
earnings per share and pro forma weighted average fair value of options granted
(with related assumptions) would have been as follows:
35
<PAGE> 38
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 14, 1997
YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ---------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Pro forma net income.................................... $9,562 $ 978
Pro forma net income per share, basic and diluted....... $0.28 $ 0.04
Pro forma weighted average fair value of
options granted....................................... $5.03 $ 2.86
Expected life (years)................................... 6 7
Risk-free interest rate................................. 5.47% 6.00%
Expected volatility..................................... 78.15% 75.00%
Dividend yield.......................................... 0.00% 0.00%
</TABLE>
As of December 31, 1998, a total of 6,188,862 shares of Common Stock have
been reserved for issuance of options to purchase shares of Common Stock with
2,320,873 remaining available for grant. A summary of the Company's outstanding
stock option activity, and related information, for the year ended December 31,
1998 and the period from August 14, 1997 (inception) to December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Balance at August 14, 1997.................................. -- $ --
Granted................................................... 282,527 3.54
Canceled.................................................. -- --
Exercised................................................. -- --
--------- -----
Balance at December 31, 1997................................ 282,527 3.54
Granted................................................... 3,692,964 6.77
Canceled.................................................. (107,502) 6.11
Exercised................................................. -- --
--------- -----
Balance at December 31, 1998................................ 3,867,989 $6.55
========= =====
</TABLE>
The weighted-average fair market value of options whose exercise price
equals and exceeds the market price of the stock on the grant date is $5.10 and
$0.68 for the period ended December 31, 1998.
Generally, options granted have ten year terms and vest in equal increments
over a three or four year period commencing on the first anniversary of date of
the grant, except for options granted to non-employee directors of the Company
which are fully exercisable at the time of grant. At December 31, 1998, 200,000
options had been granted to non-employee directors of the Company. Options
granted under the 1998 Plan and Pre-Plan Options expire upon termination of
employment or service on the board. The following table summarizes information
concerning outstanding and exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.86 - 5.75 791,977 9.31 $3.60 70,632 $3.54
5.77 - 7.00 1,277,572 9.46 6.34 -- --
8.00 - 8.00 1,798,440 9.59 8.00 200,000 8.00
--------- -------
3,867,989 9.49 6.55 270,632 6.84
========= =======
</TABLE>
36
<PAGE> 39
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company leases certain properties from TTG Properties, a general
partnership controlled by one of the directors of the Company. Rental expense
for such properties totaled $511,000 and $160,000 for the year ended December
31, 1998 and the period from August 14, 1997 (inception) to December 31, 1997,
respectively.
The Company leases certain office space from Florida Panthers Holdings,
Inc. ("Panthers Holdings"). Lease payments for such space totaled $313,000 for
the year ended December 31, 1998. In addition, the Company leases certain other
facilities and related services from the Arena Operating Company, which is
controlled by Panthers Holdings, with lease payments totaling $125,000 for the
year ended December 31, 1998. There were no lease payments made to Panthers
Holdings or the Arena Operating Company in the period from August 14, 1997
(inception) to December 31, 1997. Two of the Company's directors serve as
directors of Panthers Holdings, one of which controls a majority of the voting
interests of Panthers Holdings.
The Company has purchased certain building construction services from
Alvada Construction, Inc ("Alvada"), which totaled $1,162,000 for the year ended
December 31, 1998. There were no payments made to Alvada in the period from
August 14, 1997 (inception) to December 31, 1997. The principal shareholder of
Alvada is directly related to a certain officer and director of the Company.
The Company leases certain facilities and related services from South
Florida Stadium Corporation at Pro Player Stadium which is owned by one of the
Company's directors. Lease payments for such facilities totaled $212,000 for the
year ended December 31, 1998. There were no lease payments made to South Florida
Stadium Corporation in the period from August 14, 1997 (inception) to December
31, 1997.
In connection with the acquisition of A-1 Rentals, the Company issued
subordinated debt to and leases certain facilities from a previous owner who
became an officer of the Company. Interest payments on such subordinated debt
totaled $157,000 and lease payments for such facilities totaled $325,000 for the
year ended December 31, 1998.
In connection with the acquisition of Sam's Equipment Rental, Inc. and
Gabriel Trailer Manufacturing Company, Inc., the Company issued subordinated
debt to a previous owner who became a director of the Company. Interest payments
related to this debt totaled $336,000 and $115,000 for the year ended December
31, 1998 and the period from August 14, 1997 (inception) to December 31, 1997,
respectively.
In May 1998, the Company received an unsecured subordinated loan in the
amount of $17,400,000 from Huizenga Investments Limited Partnership, an entity
controlled by a director of the Company. This loan represented bridge financing
to complete certain acquisitions until the Company's founders could fund the
final portion of their original capital commitments. The principal amount of the
loan was repaid in June 1998 from an additional equity contribution from the
Company's founders. Interest expense related to this loan was $124,000 for the
year ended December 31, 1998.
10. RETIREMENT PLAN
In November 1998, the Company adopted the NationsRent 401(k) Retirement
Plan (the "Plan") which allows its eligible employees to make contributions, up
to a certain limit, to the Plan on a tax-deferred basis under Section 401(k) of
the Internal Revenue Code of 1986, as amended. Eligible employees are those who
are expected to complete 1,000 hours of service in each calendar year, are over
twenty-one years of age and have 60 days of service with the Company. The
Company may, at its discretion, make matching contributions to the Plan out of
its profits for the plan year. The Company made matching contributions of
$33,000 to the Plan for the year ended December 31, 1998.
37
<PAGE> 40
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases rental equipment, real estate and certain office
equipment under operating leases. Certain real estate leases require the Company
to pay maintenance, insurance, taxes and certain other expenses in addition to
the stated rentals. Future minimum lease payments under noncancelable operating
leases at December 31, 1998 total $35,664,000, $35,596,000, $34,876,000,
$35,554,000 and $16,926,000 for the years ending December 31, 1999, 2000, 2001,
2002 and 2003, respectively and $20,874,000 thereafter. Rent expense under
noncancelable operating leases was $5,681,000 and $410,000 for the year ended
December 31, 1998 and the period from August 14, 1997 (inception) to December
31, 1997.
Legal Matters
The Company is subject to claims and lawsuits in the ordinary course of its
business. In the opinion of management, the Company has adequate legal defenses
and/or adequate indemnification or insurance coverage for such matters. If not
insured, management believes that such matters will not, in the aggregate, have
a material adverse impact upon the Company's consolidated financial position,
results of future operations or cash flows.
Environmental Matters
The Company and its operations are subject to various laws and related
regulations governing environmental matters. Under such laws, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances located on or in, or emanating from, such
property, as well as investigation of property damage. As part of the Company's
acquisition due diligence and prior to leasing any new facilities, the Company
performs extensive environmental analysis on the sites to be operated by the
Company. Any required remediation has typically been the responsibility of the
prior owner or landlord. The Company does not believe there are currently any
environmental liabilities which should be recorded or disclosed in its financial
statements. The Company believes the possibility is remote that its compliance
with various laws and regulations relating to the protection of the environment
will have a material effect on its capital expenditures, future earnings or
financial position.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth the Company's condensed consolidated
statements of income by quarter for the year ended December 31, 1998 and the
period from August 14, 1997 (inception) to December 31, 1997.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998
Revenue........................................... $9,039 $35,359 $68,330 $123,670
Gross profit...................................... 3,049 12,268 30,571 48,508
Operating income.................................. 845 4,554 15,271 22,049
Net income........................................ $ 93 $ 1,200 $ 5,561 $ 5,800
====== ======= ======= ========
Basic net income per share........................ $ 0.00 $ 0.04 $ 0.15 $ 0.13
====== ======= ======= ========
Diluted net income per share...................... $ 0.00 $ 0.04 $ 0.14 $ 0.12
====== ======= ======= ========
</TABLE>
38
<PAGE> 41
NATIONSRENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FROM
AUGUST 14, 1997
(INCEPTION)
THROUGH FOURTH
SEPTEMBER 30, 1997 QUARTER
------------------ -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
1997
Revenue..................................................... $2,841 $6,464
Gross profit................................................ 1,860 2,032
Operating income............................................ 1,510 1,017
Net income.................................................. $ 806 $ 195
====== ======
Basic and diluted net income per share...................... $ 0.03 $ 0.01
====== ======
</TABLE>
13. SUBSEQUENT EVENTS
On January 20, 1999, the Company entered into an Agreement and Plan of
Merger with Rental Service Corporation ("RSC"), a Delaware corporation. The
merger agreement provides, subject to the terms and conditions set forth
therein, for the Company to be merged with and into RSC with RSC continuing as
the surviving corporation to be named RSC NationsRent. Following the merger, the
Company's subsidiaries will become wholly owned subsidiaries of RSC. At the
effective time of the merger (i) each outstanding share of the Company's common
stock will be converted into 0.355 of a share of RSC's common stock (the
"Exchange Ratio") and (ii) all outstanding options to purchase shares of the
Company's common stock will be assumed by RSC and converted into options to
purchase RSC common stock subject to adjustment for the Exchange Ratio. The
merger is expected to be qualified as a tax free reorganization and to be
accounted for as a pooling of interests. The merger is subject to stockholder
approvals and other closing conditions. The merger with RSC will constitute a
change of control under the terms of the indenture governing the Notes. Upon a
change of control, the Company must offer to repurchase the Notes at a purchase
price of 101% of the principal amount. The Company and RSC have entered into a
commitment letter with a group of financial institutions which have agreed to
collectively underwrite a new $1.5 billion senior credit facility conditioned
upon a number of requirements including the closing of the merger of the Company
into RSC. The repurchase of any of the Notes would be made with proceeds from
the new senior credit facility.
In February 1999, the Company amended its Credit Facility to increase the
total aggregate commitment to $500,000,000. At that time the Term Loan was
increased to $180,000,000 and the aggregate commitment under the Revolver was
increased to $320,000,000.
In February 1999, the Company completed an exchange offer to replace its
privately issued Notes with publicly registered notes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names and ages of our executive officers and
directors as well as the positions and offices held by such persons.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James L. Kirk........................ 49 Chairman of the Board and Chief Executive
Officer
Don R. O'Neal........................ 51 President and Chief Operating Officer
Gene J. Ostrow....................... 44 Executive Vice President and Chief Financial
Officer
Philip V. Petrocelli................. 40 Executive Vice President
Kris E. Hansel....................... 41 Vice President and Controller
Pamela K.M. Beall.................... 42 Vice President, Treasurer and Assistant
Secretary
Joseph H. Izhakoff................... 33 Vice President, General Counsel and Secretary
H. Wayne Huizenga.................... 61 Director
Harris W. Hudson..................... 56 Director
Gary L. Gabriel...................... 56 Director
Thomas H. Bruinooge.................. 55 Director
</TABLE>
JAMES L. KIRK is a co-founder of the Company, together with H. Family
Investments, Inc. and Mr. Ostrow, and has served as the Chairman of the Board of
the Company since August 1997 and as Chief Executive Officer of the Company
since April 1998. Mr. Kirk also served as President of the Company from April
1998 until October 1998. From 1985 to February 1998, Mr. Kirk was Chairman of
the Board, President and Chief Executive Officer of OHM Corporation ("OHM"), a
leading environmental construction company.
DON R. O'NEAL joined the Company as President and Chief Operating Officer
in October 1998. From 1985 to October 1998, Mr. O'Neal served as President of
Ray L. O'Neal, Inc., a Texas corporation and Arenco, L.L.C., a Texas limited
liability company (collectively operating as "A-1 Rentals"), which was acquired
by the Company in October 1998. Mr. O'Neal has served on the Board of Directors
of the American Rental Association and has served as President of the Texas
Rental Association. Mr. O'Neal has been in the equipment rental business for
over 30 years.
GENE J. OSTROW is a co-founder of the Company, together with H. Family
Investments, Inc. and Mr. Kirk, and has served as its Executive Vice President
and Chief Financial Officer since August 1997. From August 1997 to April 1998,
Mr. Ostrow served as Secretary and Treasurer of the Company. From March 1997 to
October 1997, Mr. Ostrow was Vice President of Corporate Development of OHM.
From November 1994 to March 1997, Mr. Ostrow was a Senior Vice President,
Corporate Finance with Raymond James and Associates and from July 1996 to March
1997, Mr. Ostrow was co-head of that firm's mergers and acquisitions practice.
From October 1993 to November 1994, Mr. Ostrow was Vice President and Chief
Financial Officer of Ecoscience Corporation. Mr. Ostrow was employed by OHM and
its affiliates from February 1986 to October 1993 in various positions,
including Vice President and Chief Financial Officer of OHM from February 1986
through September 1991, and as Executive Vice President and Chief Financial
Officer of NSC Corporation (an affiliate of OHM) from July 1988 through October
1993. Mr. Ostrow is also a Certified Public Accountant.
PHILIP V. PETROCELLI joined the Company as Executive Vice President in
February 1998. From August 1993 to February 1998, Mr. Petrocelli was Vice
President -- Western Region of OHM. Before joining OHM, Mr. Petrocelli was a
Regional Director and acting Vice President-Analytical Labs with IT Corporation,
a provider of engineering services, since September 1988.
KRIS E. HANSEL joined the Company as Vice President and Controller in March
1998. Prior to joining the Company, Mr. Hansel served in various positions of
increasing responsibility at OHM since 1988, most recently as Vice President and
Controller. Prior to joining OHM, Mr. Hansel was General Accounting Manager of
WearEver-Proctor Silex, Inc.
40
<PAGE> 43
PAMELA K.M. BEALL joined the Company as Vice President and Treasurer in
April 1998. Ms. Beall also served as Secretary from April to October 1998 and
currently serves as Assistant Secretary. From June 1985 to April 1998, Ms. Beall
served as Treasurer of OHM and in various positions of increasing responsibility
at OHM, most recently as Vice President and Assistant Secretary. Before joining
OHM, Ms. Beall was General Manager, Treasury Services for USX Corporation, and
previous to that she was with Marathon Oil Company. From November 1996 to
February 1998, Ms. Beall served as a director of NSC Corporation, an affiliate
of OHM. Since May 1996, Ms. Beall has served as a director of System One
Services, Inc.
JOSEPH H. IZHAKOFF joined the Company as Vice President and General Counsel
in September 1998. Commencing October 1998, Mr. Izhakoff also began serving as
Secretary. Prior to joining the Company, Mr. Izhakoff was an attorney at
Akerman, Senterfitt & Eidson, P.A., in Miami, Florida, since August 1995, most
recently as a shareholder, where his practice focused on corporate and
securities matters and mergers and acquisitions. From September 1990 to July
1993, Mr. Izhakoff was an attorney at Paul, Weiss, Rifkind, Wharton & Garrison
and from September 1993 to July 1995, Mr. Izhakoff was an attorney at Thomson
Muraro Razook & Hart, P.A.
H. WAYNE HUIZENGA joined the Company as a director in June 1998. Since July
1998, Mr. Huizenga has served as a director of theglobe.com, an on-line
interactive communication business. Since May 1998, Mr. Huizenga has served as
Chairman of the Board of Republic Services, Inc. ("Republic Services"), a
leading provider of non-hazardous solid waste collection and disposal services.
From May 1998 to December 1998, Mr. Huizenga served as the Chief Executive
Officer of Republic Services. Since August 1995, Mr. Huizenga has served as
Chairman of the Board of Republic Industries, Inc. ("Republic Industries"),
which owns the nation's largest chain of franchised automotive dealerships, is
building a chain of used vehicle megastores and owns National Car Rental and
Alamo Rent-A-Car. Since October 1996, Mr. Huizenga has served as Co-Chief
Executive Officer of Republic Industries and from August 1995 until October
1996, Mr. Huizenga served as Chief Executive Officer of Republic Industries.
Since September 1996, Mr. Huizenga has served as the Chairman of the Board of
Florida Panthers Holdings, Inc. ("Panthers Holdings"), a leisure, recreation and
entertainment company which owns and operates certain luxury resort hotels and
the Florida Panthers professional sports franchise. Since January 1995, Mr.
Huizenga also has served as the Chairman of the Board of Extended Stay America,
Inc., an operator of extended stay lodging facilities. From September 1994 until
October 1995, Mr. Huizenga served as the Vice Chairman of Viacom Inc.
("Viacom"), a diversified entertainment and communications company. During the
same period, Mr. Huizenga also served as the Chairman of the Board of
Blockbuster Entertainment Group, a division of Viacom. From April 1987 through
September 1994, Mr. Huizenga served as the Chairman of the Board and Chief
Executive Officer of Blockbuster Entertainment Corporation ("Blockbuster"),
during which time he helped build Blockbuster from a 19-store chain into the
world's largest video rental company. In September 1994, Blockbuster merged into
Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc. ("Waste
Management"), which he helped build into the world's largest integrated solid
waste services company, and he served in various capacities, including
President, Chief Operating Officer and a director from its inception until 1984.
Mr. Huizenga also owns the Miami Dolphins professional sports franchise, as well
as Pro Player Stadium in South Florida. Mr. Huizenga is the brother-in-law of
Mr. Hudson.
HARRIS W. HUDSON joined the Company as a director in June 1998. Since May
1998, Mr. Hudson has served as Vice Chairman and a director of Republic
Services. Mr. Hudson has served as a director of Republic Industries since
August 1995 and as Vice Chairman of Republic Industries since October 1996. Mr.
Hudson served as Chairman of Republic Industries' Solid Waste Group from October
1996 until July 1998. From August 1995 until October 1996, Mr. Hudson served as
President of Republic Industries. From May 1995 until August 1995, Mr. Hudson
served as a consultant to Republic Industries. From 1983 until August 1995, Mr.
Hudson founded and served as Chairman of the Board, Chief Executive Officer and
President of Hudson Management Corporation, a solid waste collection company,
which was acquired by Republic Industries in August 1995. From 1964 to 1982, Mr.
Hudson served as Vice President of Waste Management of Florida, Inc., a
subsidiary of Waste Management and its predecessor. Mr. Hudson also serves as a
director of Panthers Holdings. Mr. Hudson is the brother-in-law of Mr. Huizenga.
41
<PAGE> 44
GARY L. GABRIEL joined the Company as a director in June 1998. Since
September 1997, Mr. Gabriel has provided consulting services to the Company on
operational and business development matters. From January 1978 to September
1997, Mr. Gabriel served as President of Sam's Equipment Rental, Inc. and
Gabriel Trailer Manufacturing Company, Inc. ("Sam's") which was acquired by the
Company in September 1997. In 1961, Mr. Gabriel co-founded a predecessor company
of Sam's.
THOMAS H. BRUINOOGE joined the Company as a director in June 1998. Mr.
Bruinooge is an attorney who has been in private practice since 1968 and has
practiced with the firm of Bruinooge & Associates since 1987.
Our executive officers are selected by and serve at the discretion of the
Board of Directors. Our directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
COMMITTEES OF THE BOARD OF DIRECTORS
We have established an Executive Committee which has the same powers and
authority as our Board of Directors (the "Board"), subject to the limitations of
the Delaware General Corporation Law (the "DGCL") and our Certificate of
Incorporation, as amended (the "Certificate"), and Bylaws, as amended (the
"Bylaws"). Messrs. Kirk and Huizenga are the members of the Executive Committee.
We have established an Audit Committee and a Compensation Committee, each
composed of two independent directors. The Audit Committee, comprised of Gary L.
Gabriel and Thomas H. Bruinooge, was formed to recommend the annual appointment
of our auditors and to review the scope of audit and non-audit assignments and
related fees, accounting principles used by us in financial reporting, internal
auditing procedures and the adequacy of our internal control procedures. The
Compensation Committee, comprised of Harris W. Hudson and Thomas H. Bruinooge,
administers the 1998 Stock Option Plan and makes recommendations to the Board
regarding compensation for our executive officers.
COMPENSATION OF DIRECTORS
The 1998 Stock Option Plan provides for an automatic grant of options to
purchase 50,000 shares of common stock to each member of the Board who joins the
Board as a non-employee director. In addition, the 1998 Stock Option Plan
provides for an additional automatic grant of options to purchase 10,000 shares
of common stock at the beginning of each fiscal year to each non-employee
director continuing to serve on the Board at such time. The 1998 Stock Option
Plan also provided for the automatic grant of options to purchase 50,000 shares
of common stock to each member of the Board who was a non-employee director at
the time of our initial public offering. All options granted automatically to a
non-employee director will be fully vested and immediately exercisable. In
addition, each automatic grant of options to a non-employee director will remain
exercisable for a term of ten years from the date of grant so long as such
person remains a member of the Board. Each automatic grant of options to a
non-employee director serving on the Board at the time of our initial public
offering has an exercise price per share equal to $8.00, and each automatic
grant thereafter is exercisable at a price per share equal to the closing price
of a share of common stock on the New York Stock Exchange, on the date
immediately prior to the automatic grant date. In addition to such automatic
option grant, we expect to reimburse directors for their reasonable expenses
incurred in connection with their attendance at Board and Committee meetings.
In September 1997, in connection with the acquisition of Sam's, we entered
into an agreement with Gary L. Gabriel pursuant to which Mr. Gabriel provides
certain consulting services to our company. See "Item 13 -- Certain
Relationships and Related Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We established a Compensation Committee consisting of non-employee
directors during the fiscal year ended December 31, 1998. See "-- Committees of
the Board of Directors." There were no Compensation Committee interlocks during
such fiscal year.
42
<PAGE> 45
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than ten percent of a
registered class of our equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC").
Officers, directors and greater than ten-percent stockholders are required by
the SEC regulations to furnish us with copies of all Section 16(a) reports they
file.
Based solely upon review of the copies of such reports furnished to us and
written representations from certain of our executive officers and directors
that no other such reports were required, we believe that during 1998 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
We were formed in August 1997 and did not pay any compensation to our Chief
Executive Officer and did not pay salary and bonus in excess of $100,000 to any
of our executive officers for the period from August 14, 1997 (inception) to
December 31, 1997. The following table sets forth the annual base salaries and
other compensation that we paid for the year ending December 31, 1998 to the
named executive officers below (the "Named Officers") and certain options to
purchase common stock which we have granted to the Named Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------- UNDERLYING OPTIONS
FISCAL OTHER ANNUAL TO PURCHASE SHARES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OF COMMON STOCK
--------------------------- ------ -------- ----- ------------ ------------------
<S> <C> <C> <C> <C> <C>
James L. Kirk(1)................. 1998 $109,616 -- $188,510(2) 250,000(3)
Chairman of the Board and Chief
Executive Officer
Gene J. Ostrow................... 1998 196,154 -- -- 100,000(3)
Executive Vice President and
Chief Financial Officer
Philip V. Petrocelli(5).......... 1998 166,923 -- 62,199(2) 346,472(4)
Executive Vice President
Kris E. Hansel(5)................ 1998 101,923 -- -- 112,569(6)
Vice President and Controller
</TABLE>
- -------------------------
(1) We began paying compensation to Mr. Kirk in August 1998.
(2) Consists solely of relocation expenses we paid in connection with the Named
Officers' initial employment with our company.
(3) These options have an exercise price of $8.00 per share and vest over a
four-year period at the rate of 25% per year commencing August 6, 1999.
These options become immediately exercisable upon a change of control of our
company (as defined in the 1998 Stock Option Plan).
(4) These options have an exercise price of $5.77 per share and vest over a
four-year period at the rate of 25% per year commencing on February 24,
1999. These options become immediately exercisable upon a change of control
of our company (as defined in the option agreement related to such options).
(5) Mr. Petrocelli joined our company in February 1998 and Mr Hansel joined our
company in March 1998.
(6) These options have an exercise price of $6.66 per share and vest over a
four-year period at the rate of 25% per year commencing on March 9, 1999.
These options become immediately exercisable upon a change of control of our
company (as defined in the option agreement related to such options).
43
<PAGE> 46
OPTION GRANT TABLE
The following table sets forth certain information concerning grants of
stock options made during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James L. Kirk....................... 250,000 6.9% $8.00 08/06/08 $1,257,789 $3,187,484
Chairman of the Board and shares
Chief Executive Officer
Gene J. Ostrow...................... 100,000 2.8% $8.00 08/06/08 $ 503,115 $1,274,993
Executive Vice President shares
and Chief Financial Officer
Philip V. Petrocelli................ 346,472 9.6% $5.77 02/24/08 $1,257,790 $3,187,489
Executive Vice President shares
Kris E. Hansel...................... 112,569 3.1% $6.66 03/09/08 $ 471,672 $1,195,310
Vice President and shares
Controller
</TABLE>
Certain of our executive officers and other employees have been granted
stock options to purchase shares of our common stock prior to the adoption of
the 1998 Stock Option Plan. As of December 31, 1998, there were outstanding
options, granted prior to the adoption of the plan, to purchase 992,569 shares
at exercise prices ranging from $2.96 per share to $6.67 per share of which
70,632 were immediately exercisable at that time. These options vest over a
four-year period at the rate of 25% per year commencing on the first anniversary
of the date of grant. Also, these options become immediately exercisable upon a
"change in control" of our company. A "change in control" of our company is
deemed to occur when any person becomes the beneficial owner of or acquires
voting control with respect to more than 50% of the common stock or any person
has the ability to elect or to cause the election of directors consisting at the
time of such election of a majority of the Board.
Our executive officers receive health benefits which do not exceed 10% of
their respective salaries. These benefits are also provided to other employees
of our company. See "-- Stock Option Plan." In October 1998, in connection with
our acquisition of A-1 Rentals, Don R. O'Neal entered into an employment
agreement to serve as our President and Chief Operating Officer. See "Item
13 -- Certain Relationships and Related Transactions."
STOCK OPTION PLAN
Our Board of Directors and stockholders adopted the 1998 Stock Option Plan
(the "Plan"), effective August 6, 1998. Pursuant to the Plan, options to acquire
a maximum of 5,000,000 shares of common stock may be granted to employees,
directors (including employee and non-employee directors) and certain
independent contractors and consultants of the Company or any Subsidiary (as
defined in the Plan). As of December 31, 1998, there were outstanding options to
purchase 2,679,127 shares at exercise prices ranging from $5.50 per share to
$8.00 per share granted under the Plan, 200,000 of which were immediately
exercisable at that time.
The Compensation Committee administers the Plan. The Compensation Committee
determines which persons will receive options and the number of options to be
granted to such persons. The Plan also provides for annual mandatory grants of
options to non-employee directors. See "Item 10 -- Directors and Executive
Officers of the Registrant -- Compensation of Directors." The Board of Directors
or the Compensation Committee, as the case may be, will make all determinations
that it may deem necessary or advisable for the administration of the Plan.
44
<PAGE> 47
Pursuant to the Plan, we may grant Incentive Stock Options ("ISOs") as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and Non-Qualified Stock Options ("NQSOs"), not intended to qualify
under Section 422 of the Code. The price at which our common stock may be
purchased upon the exercise of options granted under the Plan will be required
to be not less than the per share fair market value of the common stock on the
date the particular options are granted. Options granted under the Plan may have
maximum terms of not more than ten years and are not transferable, except by
will or the laws of descent and distribution. None of the ISOs under the Plan
may be granted to an individual owning more than 10% of the total combined
voting power of all classes of stock we issued unless the purchase price of the
common stock under such option is at least 110% of the fair market value of the
shares issuable on exercise of the option determined as of the date the option
is granted, and such option is not exercisable more than five years after the
grant date.
Generally, options granted under the Plan terminate upon the date the
person to whom such options were granted is no longer employed or retained by
our company or serving on our Board of Directors other than by reason of
permanent and total disability as that term is defined in the Plan.
Pursuant to the Plan, unless otherwise determined by the Board of
Directors, options vest over a four-year period at the rate of 25% per year
commencing on the first anniversary of the date of grant. Options granted under
the Plan shall become immediately exercisable upon a "change in control" of our
company. A "change in control" of our company is deemed to occur when any person
becomes the beneficial owner of or acquires more than 50% of the total combined
voting power with respect to the election of directors of our issued and
outstanding capital stock.
The Plan also provides that, upon the death or permanent and total
disability of an optionee, the optionee's estate or the optionee has three
years, from the date of such death or disability and prior to the termination of
the option period, to exercise the number of vested options held by the optionee
on the date of death or disability.
ISOs granted under the Plan are subject to the restriction that the
aggregate fair market value (determined as of the date of grant) of options
which first become exercisable in any calendar year cannot exceed $100,000.
The Plan provides for appropriate adjustments in the number and type of
shares covered by the Plan and options granted thereunder in the event of any
reorganization, dissolution, liquidation, recapitalization or certain other
transactions involving us.
401(k) PLAN
We have adopted a 401(k) Retirement Savings Plan (the "401(k) Plan") to
provide retirement and other benefits to our employees and to permit employees a
means to save for their retirement. The 401(k) Plan is intended to be a
tax-qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as
amended.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The DGCL authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of the directors' fiduciary duty of care. The Certificate
limits the liability of our directors or our stockholders to the fullest extent
permitted by Delaware law. Specifically, our directors will not be personally
liable for monetary damages for breach of a director's fiduciary duty as a
director, except for liability (1) for any breach of the director's duty of
loyalty to us or our stockholders, (2) for acts or omissions not in good faith
or which involve intentional misconduct or knowing violations of law, (3) under
Section 174 of the DGCL or (4) for any transaction from which the director
derived an improper personal benefit. The inclusion of this provision in the
Certificate may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
us and our stockholders. This provision has no effect on
45
<PAGE> 48
any non-monetary remedies that may be available to us or our stockholders, nor
does it relieve us or our directors from compliance with federal or state
securities laws.
The Bylaws provide that we shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit (each, a "Proceeding") by reason of the fact that he is or was
our director or officer, or is or was serving at our request as a director,
officer, employee or agent of another entity, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with such Proceeding. In addition, we have obtained director and officer
liability insurance that insures our directors and officers against certain
liabilities.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1999, information with
respect to the beneficial ownership of the common stock by (1) each person or
entity known to us to beneficially own more than 5% of the outstanding shares of
common stock, (2) each of our directors and each Named Officer, and (3) all of
our directors and executive officers as a group. Unless otherwise indicated,
each such stockholder has sole voting and investment power with respect to the
shares beneficially owned by such stockholder. Percentages of shares
beneficially owned are based upon 55,759,497 shares of common stock outstanding
as of the date first set forth above in this paragraph, plus for each person
named below any shares of common stock that may be acquired by such person
within 60 days of such date upon exercise of outstanding options or other
rights.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES COMMON
NAME BENEFICIALLY OWNED STOCK
- ---- ------------------ ------------
<S> <C> <C>
H. Family Investments, Inc.(1)............................. 12,000,000(2) 21.5%
450 East Las Olas Blvd.
Ft. Lauderdale, Florida 33301
James L. Kirk.............................................. 12,000,100(2)(3) 21.5
Don R. O'Neal.............................................. 4,024,302(4) 7.2
Gene J. Ostrow............................................. 1,000,000 1.8
Philip V. Petrocelli....................................... 210,394(5) *
Kris Hansel................................................ 65,234(6) *
H. Wayne Huizenga.......................................... 1,692,047(2)(7)(8) 3.0
Harris W. Hudson........................................... 1,023,650(8)(9) 1.8
Gary L. Gabriel............................................ 471,250(8)(10) *
Thomas H. Bruinooge........................................ 97,092(8) *
All executive officers and directors as a
group (11 persons)....................................... 20,706,175(10)(11) 36.9
</TABLE>
- -------------------------
* Less than 1%
(1) H. Family Investments, Inc. is a Florida corporation controlled by H. Wayne
Huizenga, Jr., the son of Mr. Huizenga ("HFI").
(2) In January 1999, HFI, Kirk Holdings Limited Partnership, a Nevada limited
partnership controlled by Mr. Kirk ("KHLP"), and Huizenga Investments
Limited Partnership, a Nevada limited partnership controlled by Mr.
Huizenga ("HILP"), entered into a voting agreement with RSC in which they
agreed to vote all of their shares of common stock in favor of the merger.
As a result, they each may be deemed to beneficially own all the shares of
common stock beneficially owned by the others which collectively represents
approximately 46.1% of the outstanding shares of common stock. Each of HFI,
KHLP and HILP disclaims beneficial ownership of those shares of common
stock attributed to each of them pursuant to the voting agreement.
(3) 12,000,000 of these shares are held by KHLP.
(4) Includes 621,392 shares of common stock owned by Don R. O'Neal's spouse, as
to which Mr. O'Neal disclaims beneficial ownership. Also includes 1,966,000
shares of common stock in the name of the 1997
46
<PAGE> 49
Ray L. O'Neal and Ellen M. O'Neal irrevocable trust for Don R. O'Neal of
which Don R. O'Neal is a trustee.
(5) Includes 86,618 shares of common stock issuable upon exercise of options,
which are immediately exercisable.
(6) Includes 28,142 shares of common stock issuable upon exercise of options,
which are immediately exercisable.
(7) 1,632,047 of these shares are held by HILP. The number of shares of common
stock beneficially owned by Mr. Huizenga does not include the 12,000,000
shares of common stock held by H. Family Investments, Inc. because Mr.
Huizenga does not share voting or dispositive control of such shares and
disclaims beneficial ownership of such shares.
(8) Includes 60,000 shares of common stock issuable upon exercise of options,
which are immediately exercisable.
(9) Includes 250,000 shares of common stock owned by Mr. Hudson's spouse, as to
which Mr. Hudson disclaims beneficial ownership.
(10) Includes 411,250 shares of common stock issuable upon conversion of
convertible promissory notes in an aggregate principal amount of $3.29
million, which are convertible at a price of $8.00 per share of common
stock.
(11) Includes an aggregate of 384,136 shares of common stock issuable upon
exercise of options held by certain executive officers and directors, which
are immediately exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1997, we were founded by H. Family Investments, Inc. and Messrs.
Kirk and Ostrow. These founding stockholders committed an aggregate of $48.4
million in equity capital to us which was funded at various times from September
1997 through June 2, 1998 as required to complete acquisitions. The founding
stockholders entered into lock-up agreements with the underwriters of our
initial public offering (the "Founders' Lock-up Agreements") pursuant to which
they have agreed not to offer, sell or otherwise dispose of any shares of common
stock or any security, convertible into, exercisable for or exchangeable for
shares of common stock until February 1999. In August 1998, we registered with
the SEC for resale, subject to the Founders' Lock-up Agreements, under the
Securities Act and applicable state securities laws the shares of common stock
held by the founding stockholders. We paid registration expenses incidental to
such registration, excluding underwriters' commissions and deductions.
In September 1997, we acquired Sam's for $23.4 million from Gary L.
Gabriel, Troy L. Gabriel and certain trusts controlled by them. We paid a
portion of the purchase price to Gary L. Gabriel and certain trusts controlled
by him in the form of (1) unsecured promissory notes in the aggregate original
principal amount of approximately $2.6 million which bear interest at the rate
of 8.5% per annum, (2) an unsecured convertible promissory note, as amended, in
the original principal amount of approximately $0.7 million which bears interest
at the rate of 8.0% per annum, and (3) unsecured contingent convertible
promissory notes, as amended, in the aggregate original principal amount of $3.0
million which bear interest at the rate of 8.0% per annum. As of December 31,
1998, the aggregate principal amount remaining outstanding under such notes was
$3.3 million. As part of the Sam's acquisition, we entered into certain leases,
as amended, on four properties used in its operations from TTG Properties, an
Ohio general partnership ("TTG"), of which Gary L. Gabriel and Troy L. Gabriel
are general partners. Each of the four leases to which the Company and TTG are a
party commenced on October 1, 1997, provides for an initial term of 10 years,
with three automatic five-year extensions. Under the leases, we have the option
to purchase the leased premises at any time within the last five years of the
initial lease term at a fixed price. The aggregate monthly rental payment to TTG
under the leases on the four properties is $57,000. In addition, we have entered
into leases for two facilities in Ohio, from TTG, each with a ten-year term and
two automatic five-year extensions. The aggregate monthly rental payment to TTG
under these leases is $23,190. Also, in connection with the Sam's acquisition,
Sam's entered into an agreement with Gary L. Gabriel pursuant to which Mr.
Gabriel provides certain consulting services to the Company. This agreement has
a three year term which automatically renews for an additional one year term.
This agreement provides for annual compensation of $100,000, and use of a leased
vehicle and up to
47
<PAGE> 50
$30,000 of rental equipment per year. The agreement provides that if Mr.
Gabriel's services are terminated at any time without cause, he will be entitled
to receive one year's annual compensation as severance.
In May 1998, we received an unsecured subordinated loan in the amount of
$17.4 million from HILP. This loan represented bridge financing to complete
certain acquisitions until the Founders could fund the final portion of their
original capital commitments. The principal amount of the loan was repaid on
June 3, 1998 from an additional equity contribution of $17.4 million from our
founding stockholders. Interest in the amount of approximately $124,000 accrued
on this loan and was paid by us on June 3, 1998.
On June 2, 1998, we sold an aggregate of 5,118,694 shares of common stock
in a private placement for aggregate proceeds of $27.6 million which represented
approximately 17.0% of our common stock outstanding following the transaction.
The table below sets forth our officers and directors who participated in such
private placement and the number of shares of common stock acquired in such
transaction:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME COMMON STOCK
- ---- ------------
<S> <C>
H. Wayne Huizenga........................................... 1,632,047(1)
Harris W. Hudson............................................ 463,650
Philip V. Petrocelli........................................ 111,276
Pamela K.M. Beall........................................... 92,730
Kris E. Hansel.............................................. 37,092
Thomas H. Bruinooge......................................... 37,092
</TABLE>
- -------------------------
(1) These shares are held by HILP.
The holders of the shares of common stock issued in the June 1998 private
placement entered into lock-up agreements, which expired in February 1998, with
the underwriters of our initial public offering similar to our Founders' Lock-up
Agreements described above. We registered with the SEC for resale, subject to
the lock-up agreements, under the Securities Act and applicable state securities
laws the shares of common stock issued in the June 1998 private placement. We
paid the registration expenses incidental to such registration, excluding
underwriters' commissions and discounts.
In October 1998, we acquired substantially all of the assets of A-1 Rentals
for approximately $178.8 million, $100.7 million of which was paid in cash and
$78.1 million which was paid in the form of unsecured subordinated convertible
and non-convertible promissory notes. In December 1998, we converted the entire
$50.0 million of the unsecured subordinated convertible promissory notes held by
Mr. O'Neal, members of Mr. O'Neal's family and certain trusts controlled by them
into an aggregate of 6,956,517 shares of common stock, at a price of $7 3/16 per
share. Each of these convertible promissory notes had a six-year term and bore
interest at 6.00% per year. Approximately $28.1 million of the proceeds of the
offering of our 103/8% senior subordinated notes due 2008 was used to repay the
entire outstanding principal amount of the non-convertible promissory notes.
Each of the non-convertible promissory notes had a four-year term and bore
interest at 8.00% per year. Upon the satisfaction of certain earnings targets,
we may pay to A-1 Rentals additional consideration of $10.0 million in cash and
$10.0 million in shares of common stock.
In connection with the acquisition of A-1 Rentals, Mr. O'Neal entered into
a two-year employment agreement to serve as our President and Chief Operating
Officer for a minimum annual salary of approximately $250,000. Also, in
connection with the acquisition of A-1 Rentals, we entered into leases with
entities affiliated with Mr. O'Neal for 15 properties used in connection with
the business of A-1 Rentals. The lease agreements, which have initial terms
ranging from one to five years, require aggregate monthly rental payments of
approximately $120,000.
We have entered into certain contracts for building construction with
Alvada Construction, Inc., an entity controlled by Mr. Kirk's brother. As of
December 31, 1998, the aggregate amount paid under these contracts was
approximately $1.2 million.
48
<PAGE> 51
We lease the office space and parking for our corporate headquarters from
Panthers Holdings. The monthly lease amount payable by us is approximately
$44,000, which amount includes a share of the operating expenses for this
location based upon estimated usage. In addition, we license from Panthers
Holdings the use of an executive suite at the Broward County Arena, which is
operated by Panthers Holdings, for a fee of $95,000 per annum for a term of
seven years. We may also enter into a sponsorship agreement with Panthers
Holdings for certain sponsorship, marketing and advertising services. Mr.
Huizenga is Chairman of the Board of Panthers Holdings and controls a majority
of the voting interests of Panthers Holdings. Mr. Hudson is also a director of
Panthers Holdings.
In addition, we have entered into a license agreement with South Florida
Stadium Corporation at Pro Player Stadium, a professional sports stadium in
South Florida which is owned by Mr. Huizenga, for the use of an executive suite
at Pro Player Stadium for a fee of approximately $166,000 per year for a term of
seven years.
Pursuant to the merger agreement between NationsRent and RSC, upon the
completion of the merger, the surviving corporation, RSC NationsRent, will enter
into a registration rights agreement with persons who may be deemed to be
affiliates of RSC NationsRent. Under the registration rights agreement, RSC
NationsRent will be required to register the shares of RSC NationsRent common
stock that will be issued to such persons in the merger and certain shares
issuable to them under options outstanding on the date of the merger agreement.
In January 1999, in connection with our merger agreement with RSC, HFI,
KHLP and HILP entered into a voting agreement with RSC. Under the voting
agreement, the parties agreed to vote all of their shares of common stock in
favor of the proposed merger, the adoption of the merger agreement and each of
the other transactions contemplated by the merger agreement, provided our Board
has not withdrawn its recommendation to vote in favor of the merger.
With respect to transactions discussed in this section, no independent
determination has been made as to the fairness or reasonableness of the terms
thereof. We believe, however, based on its prior experience, that the terms of
each transaction were as favorable to us as we could have obtained from an
unaffiliated party.
49
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
(1)Financial Statements of the Company are set forth in Part II, Item 8.
(2) Schedule II -- Valuation and Qualifying Accounts.
Other schedules are omitted because they are not applicable, are not
present in amounts sufficient to require submission of the schedules
or the required information is presented in the Consolidated
Financial Statements or related notes.
(3) Exhibits -- (See Index to Exhibits included elsewhere herein.)
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K on November 9, 1998 relating to the
acquisition of Ray L. O'Neal, Inc. and Arenco, L.L.C.
50
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
March 26, 1999 NATIONSRENT, INC.
</TABLE>
By: /s/ JAMES L. KIRK
------------------------------------
James L. Kirk, Chairman of the Board
and Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board and March 26, 1999
/s/ James L. Kirk Chief Executive Officer
- ----------------------------------------------------- (Principal Executive
James L. Kirk Officer)
Executive Vice President March 26, 1999
/s/ Gene J. Ostrow and Chief Financial Officer
- ----------------------------------------------------- (Principal Financial
Gene J. Ostrow Officer)
/s/ Kris E. Hansel Vice President and March 26, 1999
- ----------------------------------------------------- Controller (Principal
Kris E. Hansel Accounting Officer)
/s/ H. Wayne Huizenga
- -----------------------------------------------------
H. Wayne Huizenga Director March 26, 1999
/s/ Harris W. Hudson
- -----------------------------------------------------
Harris W. Hudson Director March 26, 1999
/s/ Gary L. Gabriel
- -----------------------------------------------------
Gary L. Gabriel Director March 26, 1999
/s/ Thomas H. Bruinooge
- -----------------------------------------------------
Thomas H. Bruinooge Director March 26, 1999
</TABLE>
51
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 -- Amended and Restated Certificate of Incorporation of the
Company.(2)
3.2 -- Amended and Restated By-Laws of the Company.(1)
4.1 -- Unregistered 10 3/8% Global Senior Subordinated Note due
2008.(6)
4.2 -- Registered 10 3/8% Senior Subordinated Notes.(3)
4.3 -- Senior Subordinated Guarantee dated December 11, 1998 of the
Guarantors.(6)
4.4 -- Indenture dated December 11, 1998, by and among Company, the
Guarantors and The Bank of New York, including table of
contents and cross-reference table.(6)
4.5 -- Registration Rights Agreement dated December 11, 1998, by
and among the Company, the Guarantors and the Initial
Purchasers.(6)
4.6 -- Second Amended and Restated Revolving Credit Agreement, ated
as of September 24, 1998, by and among the Company,
BankBoston, N.A., LaSalle National Bank, Fleet Bank, N.A.,
NationsBank, N.A., BancBoston Securities, Inc. and other
lending institutions named therein.(4)
4.7 -- Amendment No. 1 and Consent to Second Amendment and Restated
Revolving Credit and Term Loan Agreement, dated as of
October 9, 1998, by and among the Company, its named
subsidiaries therein and BankBoston, N.A., LaSalle National
Bank and other lending institutions and parties Named
therein.(6)
4.8 -- Second Amendment to the Second Amended and Restated
Revolving Credit Agreement, dated as of November 2, 1998, by
and among the Company, its named subsidiaries therein and
Citicorp Del-Lease, Erste Bank Der Oesterreichischen
Sparkassen AG and other lending institutions and parties
named therein.(6)
4.9 -- Amendment No. 3 to the Second Amended and Restated Revolving
Credt and Term Loan Agreement, dated as of November 4, 1998,
by and among the Company, its Subsidiaries named therein and
BankBoston, N.A. and lending institutions and other partes
named therein.(6)
4.10 -- Security Agreement, dated as of March 18, 1998, between the
Company and BankBoston, N.A.(1)
4.11 -- Omnibus Amendment to Security Documents, dated as of June
29, 1998, among the Company, its subsidiaries and
BankBoston, N.A.(1)
4.12 -- Omnibus Amendment No. 2 to Security Documents, dated as of
September 24, 1998, among the Company, its subsidiaries and
BankBoston, N.A.(4)
10.1 -- Stock Purchase Agreement, dated August 15, 1997, by and
among the Company, Sam's and the shareholders of Sam's,
together with Amendment Nos. 1-6.(1)
10.2 -- Form of Unsecured Subordinated Promissory Notes -- Sam's.(1)
10.3 -- Form of Unsecured Convertible Promissory Notes -- Sam's.(1)
10.4 -- Form of Unsecured Contingent Convertible Subordinated
Promissory Notes -- Sam's.(1)
10.5 -- Agreement, dated September 22, 1997, between the Company and
Gary L. Gabriel.(1)
10.6 -- Asset Purchase Agreement, dated December 8, 1997, by and
among NationsRent of Ohio, Inc., R&R Rental, Inc. ("R&R")
and the sole shareholder of R&R, together with an Amendment
dated December 10, 1997.(1)
10.7 -- Form of Unsecured Subordinated Promissory Note -- R&R.(1)
10.8 -- Asset Purchase Agreement, dated December 8, 1997, as
amended, among NationsRent of Indiana, Inc. and C&E Rental
and Service, Inc. ("C&E"), together with an Amendment dated
December 23, 1997.(1)
10.9 -- Form of Unsecured Convertible Subordinated Promissory
Note -- C&E.(1)
10.10 -- Stock Purchase Agreement, dated December 20, 1997, as
amended, among NationsRent of West Virginia, Inc., Titan
Rentals, Inc. ("Titan") and the shareholder of Titan,
together with an Amendment dated December 31, 1997.(1)
10.11 -- Form of Unsecured Convertible Subordinated Promissory
Note -- Titan.(1)
10.12 -- Stock Purchase Agreement, dated March 24, 1998, among the
Company, Bode-Finn Limited Partnership ("Bode-Finn") and the
shareholders of Bode-Finn, together with Amendment No. 1,
dated April 6, 1998, and Amendment No. 2, dated April 17,
1998.(1)
10.13 -- Form of Unsecured Convertible Subordinated Promissory
Notes -- Bode-Finn.(1)
</TABLE>
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.14 -- Form of Warrant -- Bode-Finn.(1)
10.15 -- Registration Rights Agreement, dated May 5, 1998, among the
Company, Bode-Finn, and Raymond E. Mason Foundation.(1)
10.16 -- Asset Purchase Agreement, dated March 25, 1998, among
NationsRent of Indiana, Inc., RFL, Enterprises, Inc. and the
sole shareholder of RFL Enterprises, Inc. ("RFL").(1)
10.17 -- Asset Purchase Agreement, dated April 21, 1998, among
NationsRent of Florida, Inc. and Naples Rent-All and Sales
Company, Inc. ("Naples").(1)
10.18 -- Form of Unsecured Convertible Subordinated Promissory
Note -- Naples.(1)
10.19 -- Stock Purchase Agreement, dated May 7, 1998, among the
Company, Raymond Equipment Co. ("Raymond Equipment") and the
shareholders of Raymond Equipment.(1)
10.20 -- Form of Unsecured Subordinated Promissory Notes -- Raymond
Equipment.(1)
10.21 -- Form of Unsecured Convertible Subordinated Promissory
Notes -- Raymond Equipment.(1)
10.22 -- Asset Purchase Agreement, dated May 14, 1998, among the
Company and General Rental, Inc.(1)
10.23 -- Stock Purchase Agreement, dated May 30, 1998, among the
Company, J. Kelly Co., Inc. ("J. Kelly") and the
shareholders of J. Kelly.(1)
10.24 -- Form of Unsecured Convertible Subordinated Promissory
Note -- J. Kelly.(1)
10.25 -- Form of Registration Rights Agreement among the Company and
the shareholders of J. Kelly.(1)
10.26 -- Asset Purchase Agreement, dated June 7, 1998, among the
Company, Associated Rental Equipment Management Company,
Inc. ("Associated") and the sole shareholder of
Associated.(1)
10.27 -- Form of Unsecured Convertible Subordinated Promissory
Note -- Associated.(1)
10.28 -- Form of Registration Rights Agreement -- Associated.(1)
10.29 -- Form of Subscription Agreement, dated May 1998, between the
Company and certain subscribers.(1)
10.30 -- NationsRent 1998 Stock Option Plan.(2)
10.31 -- Form of Stock Option Agreement.(1)
10.32 -- Amended and Restated Purchase Agreement, dated as of
September 9, 1998, by and among NationsRent, Inc., Ray L.
O'Neal, Inc., Arenco, L.L.C., Don R. O'Neal, Elizabeth M.
O'Neal and the O'Neal Revocable Trust dated December 29,
1987.(5)
10.33 -- Unsecured Convertible Subordinated Promissory Note, dated as
of October 23, 1998, from NationsRent, Inc. to Ray L.
O'Neal, Inc.(5)
21.1 -- Subsidiaries of the Company.(6)
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- 1998 Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, Commission File No. 333-56233.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998.
(3) Included in Exhibit 4.3 hereto as Exhibit A.2.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended September 30, 1998.
(5) Incorporated by reference to the Company's Current Report on Form 8-K filed
on November 9, 1998.
(6) Incorporated by reference to the Company's Registration Statement on Form
S-4, Commission File No. 333-69691.
<PAGE> 56
NATIONSRENT, INC.
VALUATION AND QUALIFYING ACCOUNT AND RESERVES
SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO ACCOUNTS BALANCE AT
BEGINNING COSTS AND WRITTEN END
DESCRIPTIONS OF PERIOD EXPENSES OFF OTHER(b) OF YEAR
- ------------ ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Period ended December 31, 1998
Allowance for Doubtful Accounts............. $587 $1,436 $(1,784) $4,493 $4,732
Period ended December 31, 1997
Allowance for Doubtful Accounts............. --(a) -- (40) 627 587
</TABLE>
- -------------------------
(a) August 14, 1997 (Inception)
(b) Represents allowance for doubtful accounts of acquired companies.
S-1
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Form S-8 Registration Statement (File No. 33-70647).
ARTHUR ANDERSEN LLP
Fort Lauderdale, Florida,
March 26, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,597
<SECURITIES> 0
<RECEIVABLES> 77,683
<ALLOWANCES> 4,732
<INVENTORY> 23,147
<CURRENT-ASSETS> 0
<PP&E> 445,369
<DEPRECIATION> 24,957
<TOTAL-ASSETS> 1,075,812
<CURRENT-LIABILITIES> 0
<BONDS> 678,035
0
0
<COMMON> 556
<OTHER-SE> 281,674
<TOTAL-LIABILITY-AND-EQUITY> 1,075,812
<SALES> 85,730
<TOTAL-REVENUES> 236,398
<CGS> 61,455
<TOTAL-COSTS> 142,002
<OTHER-EXPENSES> 44,411
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,063
<INCOME-PRETAX> 22,262
<INCOME-TAX> 9,608
<INCOME-CONTINUING> 12,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,654
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
