-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SfpXFOWKGolYgmEa0zS/nyJRwrghr6PXCQMli/klysZDS6KP0pAFLtW5Yb5Kc1LK hvUSdpqS2Gil2kWx/h10Pw== 0000950130-98-006051.txt : 19981228 0000950130-98-006051.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950130-98-006051 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981223 ITEM INFORMATION: FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED RENTALS INC /DE CENTRAL INDEX KEY: 0001067701 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 061522496 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-14387 FILM NUMBER: 98775234 BUSINESS ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036223131 MAIL ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED RENTALS NORTH AMERICA INC CENTRAL INDEX KEY: 0001047166 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 061493538 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13663 FILM NUMBER: 98775235 BUSINESS ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2036223131 MAIL ADDRESS: STREET 1: FOUR GREENWICH OFFICE PARK CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: UNITED RENTALS INC DATE OF NAME CHANGE: 19971020 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): December 23, 1998 ------------------ UNITED RENTALS, INC. UNITED RENTALS (NORTH AMERICA), INC. (EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR CHARTERS) ------------------------- Delaware 1-14387 06-1522496 Delaware 1-13663 06-1493538 - -------------------------------------------------------------------------------- (State or Other Jurisdiction (Commission File Numbers) (IRS Employer of Incorporation) Identification Nos.) Four Greenwich Office Park, Greenwich, Connecticut 06830 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrants' telephone number, including area code (203) 622-3131 -------------- ================================================================================ Item 5. Other The registrant has completed certain acquisitions that were accounted for as purchases for financial accounting purposes. Financial statements for certain of these acquired companies are filed as an Exhibit hereto. Exhibit 99.1 Index to Financial Statements 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on this 23rd day of December, 1998. UNITED RENTALS, INC. By: Michael J. Nolan ------------------------------ Name: Michael J. Nolan Title: Chief Financial Officer 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on this 23rd day of December, 1998. UNITED RENTALS (NORTH AMERICA), INC. By: Michael J. Nolan ------------------------------ Name: Michael J. Nolan Title: Chief Financial Officer 4 EX-99.1 2 FINANCIAL STATEMENTS EXHIBIT 99.1 INDEX TO FINANCIAL STATEMENTS
PAGE ---- I. Combined Financial Statements of Equipment Supply Co., Inc. and Affiliates Report of Independent Certified Public Accountants.. F-5 Combined Balance Sheets--December 31, 1997 and 1996 and June 30, 1998 (unaudited)............................................... F-6 Combined Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 and for the Six Months Ended June 30, 1998 and 1997 (unaudited)........................................... F-7 Combined Statements of Stockholders' Equity for the Years Ended December 31, 1995, 1996 and 1997 and for the Six Months Ended June 30, 1998 (unaudited)...................................... F-8 Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 and for the Six Months Ended June 30, 1998 and 1997 (unaudited)...................................... F-9 Notes to Combined Financial Statements.......................... F-10 II. Financial Statements of Power Rental Co., Inc. Report of Independent Auditors.................................. F-22 Balance Sheets--July 31, 1997 and May 31, 1998 (unaudited)...... F-23 Statements of Operations for the Year Ended July 31, 1997 and for the Ten Months Ended May 31, 1997 and 1998 (unaudited)..... F-24 Statements of Stockholders' Equity for the Year Ended July 31, 1997 and for the Ten Months Ended May 31, 1998 (unaudited)..... F-25 Statements of Cash Flows for the Year Ended July 31, 1997 and for the Ten Months Ended May 31, 1997 and 1998 (unaudited)..... F-26 Notes to Financial Statements................................... F-27 III. Combined Financial Statements of Adco Equipment, Inc. Report of Independent Auditors.................................. F-33 Combined Balance Sheets--December 31, 1997 and June 30, 1998 (unaudited).................................................... F-34 Combined Statements of Operations For the Year Ended December 31, 1997 and For the Six Months Ended June 30, 1997 and 1998 (unaudited).................................................... F-35 Combined Statements of Stockholders' Equity For the Year Ended December 31, 1997 and For the Six Months Ended June 30, 1998 (unaudited).................................................... F-36 Combined Statements of Cash Flows For the Year Ended December 31, 1997 and For the Six Months Ended June 30, 1997 and 1998 (unaudited).................................................... F-37 Notes to Combined Financial Statements.......................... F-38 IV. Consolidated Financial Statements of McClinch Inc. and Subsidi- aries Reports of Independent Accountants.............................. F-42 Consolidated Balance Sheets--January 31, 1998 and August 31, 1998........................................................... F-44 Consolidated Statements of Income and Retained Earnings for the Year Ended January 31, 1998 and For the Seven Months Ended August 31, 1998 and 1997 (unaudited)........................... F-45 Consolidated Statements of Cash Flows For the Year Ended January 31, 1998 and For the Seven Months Ended August 31, 1998 and 1997 (unaudited)............................................... F-46 Notes to Consolidated Financial Statements...................... F-47 V. Financial Statements of Industrial Lift, Inc. Report of Independent Auditors.................................. F-54 Balance Sheets--December 31, 1996 and 1997 and as of May 12, 1998 (unaudited)............................................... F-55 Statements of Income and Retained Earnings for the Years Ended December 31, 1996 and 1997 and for the Period Ended May 12, 1997 and 1998 (unaudited)...................................... F-56 Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 and for the Period Ended May 12, 1997 and 1998 (unaudited).................................................... F-57 Notes to Financial Statements................................... F-58
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PAGE ----- VI. Combined Financial Statements of Able Equipment Rental, Inc. Report of Independent Auditors.................................. F-63 Combined Balance Sheets--December 31, 1997 and February 28, 1998 (unaudited).................................................... F-64 Combined Statements of Income for the Year Ended December 31, 1997 and for the Two Months Ended February 28, 1997 and 1998 (unaudited).................................................... F-65 Combined Statements of Stockholders' Equity and Partners' Capital for the Year Ended December 31, 1997 and for the Two Months Ended February 28, 1998 (unaudited)..................... F-66 Combined Statements of Cash Flows for the Year Ended December 31, 1997 and for the Two Months Ended February 28, 1997 and 1998 (unaudited)............................................... F-67 Notes to Combined Financial Statements.......................... F-68 VII. Combined Financial Statements of Grand Valley Equipment Co., Inc. and Kubota of Grand Rapids, Inc. Independent Auditors' Report on Combined Financial Statements .. F-73 Combined Balance Sheets--December 31, 1997 and May 31, 1998 (unaudited).................................................... F-74 Combined Statements of Income and Retained Earnings for the year ended December 31, 1997 and for the five months ended May 31, 1997 and 1998 (unaudited)...................................... F-75 Combined Statements of Cash Flows for the year ended December 31, 1997 and for the five months ended May 31, 1997 and 1998 (unaudited).................................................... F-76 Notes to Financial Statements................................... F-77 VIII. Financial Statements of McClinch Equipment Services, Inc. Reports of Independent Accountants.............................. F-81 Balance Sheets--December 31, 1997 and August 31, 1998........... F-83 Statements of Income and Retained Earnings for the year ended December 31, 1997 and for the eight months ended August 31, 1998 and 1997 (unaudited)...................................... F-84 Statements of Cash Flows for the year ended December 31, 1997 and for the eight months ended August 31, 1998 and 1997 (unaudited).................................................... F-85 Notes to Financial Statements................................... F-86 IX. Combined Financial Statements of Valley Rentals, Inc. Report of Independent Auditors.................................. F-91 Combined Balance Sheets--December 31, 1997 and March 31, 1998 (unaudited).................................................... F-92 Combined Statements of Income for the Year Ended December 31, 1997 and for the Three Months Ended March 31, 1997 and 1998 (unaudited).................................................... F-93 Combined Statements of Stockholders' Equity and Partners' Capital for the Year Ended December 31, 1997 and for the Three Months Ended March 31, 1998 (unaudited)........................ F-94 Combined Statements of Cash Flows for the Year Ended December 31, 1997 and for the Three Months Ended March 31, 1997 and 1998 (unaudited).................................................... F-95 Notes to Combined Financial Statements.......................... F-96 X. Financial Statements of Lift Systems, Inc. Independent Accountants' Report................................. F-100 Balance Sheets--December 31, 1997 and July 28, 1998 (unaudited).................................................... F-101 Statement of Income for the year ended December 31, 1997 and for the 209 day periods ended July 28, 1998 and 1997 (unaudited).................................................... F-102 Statement of Changes in Stockholder's Equity for the year ended December 31, 1997 and for the 209 day period ended July 28, 1998 (unaudited)............................................... F-103 Statement of Cash Flows for the year ended December 31, 1997 and for the 209 day periods ended July 28, 1998 and 1997 (unaudited).................................................... F-104 Notes to Financial Statements................................... F-106
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PAGE ----- XI. Consolidated Financial Statements of Perco Group Ltd. Report of Independent Auditors................................. F-111 Consolidated Balance Sheet--December 31, 1997 and May 19, 1998 (unaudited)................................................... F-112 Consolidated Statement of Earnings for the year ended December 31, 1997 and for the 139 days ended May 19, 1997 and 1998 (unaudited)................................................... F-113 Consolidated Statement of Retained Earnings for the year ended December 31, 1997 and for the 139 days ended May 19, 1998 (unaudited)................................................... F-114 Consolidated Statement of Changes in Financial Position for the year ended December 31, 1997 and for the 139 days ended May 19, 1997 and 1998 (unaudited)................................. F-115 Notes to Consolidated Financial Statements..................... F-116 XII. Financial Statements of Reitzel Rentals Ltd. Auditors' Report............................................... F-124 Balance Sheets--February 28, 1998 and May 31, 1998 (unaudited)................................................... F-125 Statements of Operations for the year ended February 28, 1998 and for the three months ended May 31, 1997 and 1998 (unaudited)................................................... F-126 Statements of Shareholders' Equity for the year ended February 28, 1998 and for the three months ended May 31, 1998 (unaudited)................................................... F-127 Statements of Cash Flows for the year ended February 28, 1998 and for the three months ended May 31, 1997 and 1998 (unaudited)................................................... F-128 Notes to Financial Statements.................................. F-129 XIII. Combined Financial Statements of Channel Equipment Holding, Inc. Report of Independent Auditors................................. F-135 Combined Balance Sheet--December 31, 1997...................... F-136 Combined Statement of Operations for the Year Ended December 31, 1997...................................................... F-137 Combined Statement of Stockholders' Equity (Deficit) for the Year Ended December 31, 1997.................................. F-138 Combined Statements of Cash Flows for the Year Ended December 31, 1997...................................................... F-139 Notes to Combined Financial Statements......................... F-140 XIV. Financial Statements of Paul E. Carlson, Inc. dba Carlson Equipment Company Independent Auditor's Report................................... F-144 Balance Sheets--February 28, 1998 and June 30, 1998 (unaudited)................................................... F-145 Statements of Operations for the year ended February 28, 1998 and for the four months ended June 30, 1997 and 1998 (unaudited)................................................... F-147 Statements of Stockholders' Equity for the year ended February 28, 1998 and for the four months ended June 30, 1998 (unaudited)................................................... F-148 Statements of Cash Flows for the year ended February 28, 1998 and for the four months ended June 30, 1997 and 1998 (unaudited)................................................... F-149 Notes to Financial Statements.................................. F-150 XV. Financial Statements of West Main Rentals and Sales, Incorporated Independent Auditor's Report................................... F-158 Balance Sheet--December 31, 1997 and March 31, 1998 (unaudited)................................................... F-159 Statement of Income for the Year Ended December 31, 1997 and for the Three Months Ended March 31, 1998 and 1997 (unaudited)................................................... F-160 Statement of Stockholders' Equity for the Year Ended December 31, 1996, 1997 and for the Three Months Ended March 31, 1998 (unaudited).................................................... F-161 Statement of Cash Flows for the Year Ended December 31, 1997 and for the Three Months Ended March 31, 1998 and 1997 (unaudited).................................................... F-162 Notes to Financial Statements................................... F-163 XVI. Financial Statements of Pro Rentals, Inc. Report of Independent Auditors.................................. F-169 Balance Sheet--December 31, 1997................................ F-170 Statement of Income for the Year Ended December 31, 1997........ F-171 Statement of Stockholders' Equity for the Year Ended December 31, 1997....................................................... F-172 Statement of Cash Flows for the Year Ended December 31, 1997.... F-173 Notes to Financial Statements................................... F-174
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PAGE ----- XVII. Financial Statements of ASC Equipment Company Report of Independent Auditors.................................. F-177 Balance Sheet--December 31, 1997................................ F-178 Statement of Income for the Year Ended December 31, 1997........ F-179 Statement of Stockholders' Equity for the Year Ended December 31, 1997....................................................... F-180 Statement of Cash Flows for the Year Ended December 31, 1997.... F-181 Notes to Financial Statements................................... F-182 XVIII. Financial Statements of MERCER Equipment Company Independent Auditor's Report.................................... F-185 Balance Sheets--December 31, 1996 and October 24, 1997.......... F-186 Statements of Income and Retained Earnings for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997....................................... F-187 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997........................................................... F-188 Notes to Financial Statements................................... F-189 XIX. Consolidated Financial Statements of A&A Tool Rentals & Sales, Inc. and subsidiary Report of Independent Auditors.................................. F-194 Consolidated Balance Sheets--October 31, 1996 and October 19, 1997 and July 31, 1997 (unaudited)............................. F-195 Consolidated Statements of Operations for the Years Ended October 31, 1995 and 1996 and for the period from November 1, 1996 to October 19, 1997 and for the Nine Months Ended July 31, 1996 and 1997 (unaudited)...................................... F-196 Consolidated Statements of Stockholders' Equity for the Years Ended October 31, 1994, 1995 and 1996 and for the period from November 1, 1996 to October 19, 1997 .......................... F-197 Consolidated Statements of Cash Flows for the Years Ended October 31, 1995 and 1996 and for the period from November 1, 1996 to October 19, 1997 and for the Nine Months Ended July 31, 1996 and 1997 (unaudited)...................................... F-198 Notes to Consolidated Financial Statements...................... F-199 XX. Financial Statements of J&J Rental Services, Inc. Report of Independent Auditors................................ F-206 Balance Sheets--December 31, 1996 and October 22, 1997 ....... F-207 Statements of Income for the Years Ended December 31, 1995 and 1996, for the Six Months Ended June 30, 1997 and for the period from July 1, 1997 to October 22, 1997................. F-208 Statements of Stockholders' Equity and Partners' Capital for the Years Ended December 31, 1995 and 1996 and for the Six Months Ended June 30, 1997 and for the period from July 1, 1997 to October 22, 1997..................................... F-209 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996, for the Six Months Ended June 30, 1997 and for the period from July 1, 1997 to October 22, 1997................. F-210 Notes to Financial Statements................................. F-211 XXI. Combined Financial Statements of Coran Enterprises, Inc. dba A-1 Rents and Monterey Bay Equipment Rental, Inc. Report of Independent Certified Public Accountants............ F-218 Combined Statements of Earnings for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997 ............................................ F-219 Combined Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997 ......................... F-220 Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997 ............................................ F-221 Notes to Combined Financial Statements........................ F-222 XXII. Financial Statements of Bronco Hi-Lift, Inc. Report of Independent Auditors................................ F-224 Balance Sheets--December 31, 1996 and October 24, 1997 ....... F-225 Statements of Income for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997......................................................... F-226 Statements of Stockholders' Equity for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997..................................... F-227 Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997..................................................... F-228 Notes to Financial Statements................................. F-229
F-4 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Equipment Supply Co., Inc. and Affiliates Burlington, New Jersey We have audited the accompanying combined balance sheets of Equipment Supply Co., Inc. and Affiliates (see Note 1) as of December 31, 1997 and 1996, and the related combined statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Equipment Supply Co., Inc. and Affiliates as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. BDO Seidman, LLP Philadelphia, Pennsylvania June 19, 1998, except for Notes 9 and 15 which are as of July 10, 1998 F-5 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES COMBINED BALANCE SHEETS
DECEMBER 31, ------------------------- JUNE 30, 1997 1996 1998 ------------ ------------ ------------ (UNAUDITED) ASSETS Cash and cash equivalents............... $ 1,038,086 $ 4,015,527 $ 1,784,124 Marketable securities................... -- 1,103,354 -- Accounts receivable, net of allowance for possible losses of $2,241,339, $1,202,790 and $2,241,339......................... 16,087,730 14,592,845 16,528,382 Inventories............................. 3,234,402 3,249,010 4,507,505 Prepaid expenses and other assets....... 2,365,177 389,234 1,837,531 Due from stockholder.................... 4,310,190 1,637,628 5,184,698 Rental equipment, net................... 122,154,888 127,343,198 111,617,692 Property and equipment, net............. 6,548,778 5,401,275 5,267,210 Goodwill and other intangible assets, net.................................... 3,887,945 4,436,997 3,639,033 ------------ ------------ ------------ Total assets........................ $159,627,196 $162,169,068 $150,366,175 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Debt.................................. $ 94,870,512 $107,460,779 $ 87,577,703 Capital lease obligations............. 8,841,236 11,923,889 7,241,127 Accounts payable...................... 4,909,578 4,116,967 3,648,493 Income taxes payable.................. 1,209,251 1,393,548 1,442,884 Deferred income taxes................. 3,884,669 3,996,763 939,847 Deferred leasing costs................ 4,379,594 -- 5,626,989 Deferred rental income................ 2,404,500 2,016,607 2,653,308 Other liabilities..................... 1,599,427 2,335,963 3,215,431 ------------ ------------ ------------ Total liabilities................... 122,098,767 133,244,516 112,345,782 ------------ ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, no par value Authorized 2,500 shares; Issued and outstanding 581 shares.... 1,500 1,500 1,500 Additional paid-in capital............ 363,808 326,294 363,808 Retained earnings..................... 37,163,121 28,596,758 37,655,085 ------------ ------------ ------------ Total stockholders' equity.......... 37,528,429 28,924,552 38,020,393 ------------ ------------ ------------ Total liabilities and stockholders' equity............................. $159,627,196 $162,169,068 $150,366,175 ============ ============ ============
See accompanying notes to combined financial statements. F-6 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES COMBINED STATEMENTS OF INCOME
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------- ------------------------ 1997 1996 1995 1998 1997 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) REVENUES Equipment rentals..... $78,141,502 $65,226,201 $40,905,725 $34,381,555 $38,110,803 Sales of rental equipment............ 8,102,210 11,935,375 7,968,205 3,280,299 3,150,044 Sales of new equipment, merchandise and other revenues............. 8,314,451 10,129,016 5,246,285 5,678,060 4,111,176 ----------- ----------- ----------- ----------- ----------- TOTAL REVENUES...... 94,558,163 87,290,592 54,120,215 43,339,914 45,372,023 ----------- ----------- ----------- ----------- ----------- COST OF REVENUES Cost of equipment rentals, excluding depreciation......... 23,509,529 19,225,581 14,222,651 12,528,730 7,675,660 Depreciation of rental equipment............ 20,397,030 15,383,114 7,844,434 10,368,052 10,774,115 Cost of rental equipment sold....... 5,049,876 9,834,128 3,291,409 2,131,867 1,975,139 Cost of new equipment and merchandise...... 6,312,172 6,263,969 2,250,037 5,135,293 3,721,652 ----------- ----------- ----------- ----------- ----------- TOTAL COST OF REVENUES........... 55,268,607 50,706,792 27,608,531 30,163,942 24,146,566 ----------- ----------- ----------- ----------- ----------- GROSS PROFIT............ 39,289,556 36,583,800 26,511,684 13,175,972 21,225,457 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES General and administrative expenses............. 17,874,879 15,195,802 10,852,925 9,672,514 9,455,819 Nonrental depreciation and amortization..... 878,342 627,534 237,427 358,520 421,916 ----------- ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES........... 18,753,221 15,823,336 11,090,352 10,031,034 9,877,735 ----------- ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS.. 20,536,335 20,760,464 15,421,332 3,144,938 11,347,722 INTEREST EXPENSE........ (11,185,934) (7,508,226) (3,691,638) (4,220,244) (6,434,136) OTHER INCOME (EXPENSE).. 2,858,438 854,658 (28,356) 198,381 793,290 ----------- ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES.................. 12,208,839 14,106,896 11,701,338 (876,925) 5,706,876 PROVISION FOR INCOME TAX EXPENSE (BENEFIT)...... 1,242,142 2,073,617 1,517,539 (2,637,684) 575,365 ----------- ----------- ----------- ----------- ----------- NET INCOME.............. $10,966,697 $12,033,279 $10,183,799 $ 1,760,759 $ 5,131,511 =========== =========== =========== =========== ===========
See accompanying notes to combined financial statements. F-7 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL ------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ---------- ----------- ----------- BALANCE, January 1, 1995... 581 $1,500 $ -- $14,408,232 $14,409,732 Net income................. -- -- -- 10,183,799 10,183,799 Stockholders' distributions............. -- -- -- (3,861,677) (3,861,677) Capital contributions...... -- -- 170,406 -- 170,406 --- ------ -------- ----------- ----------- BALANCE, December 31, 1995...................... 581 1,500 170,406 20,730,354 20,902,260 Net income................. -- -- -- 12,033,279 12,033,279 Stockholders' distributions............. -- -- -- (4,166,875) (4,166,875) Capital contributions...... -- -- 155,888 -- 155,888 --- ------ -------- ----------- ----------- BALANCE, December 31, 1996...................... 581 1,500 326,294 28,596,758 28,924,552 Net income................. -- -- -- 10,966,697 10,966,697 Stockholders' distributions............. -- -- -- (2,937,557) (2,937,557) Capital contributions...... -- -- 37,514 -- 37,514 Adjustment related to affiliate with different fiscal year..... -- -- -- 537,223 537,223 --- ------ -------- ----------- ----------- BALANCE, December 31, 1997...................... 581 1,500 363,808 37,163,121 37,528,429 Net income (unaudited)..... -- -- -- 1,760,759 1,760,759 Stockholders' distributions (unaudited)............... -- -- -- (1,268,795) (1,268,795) --- ------ -------- ----------- ----------- BALANCE, June 30, 1998 (unaudited)............... 581 $1,500 $363,808 $37,655,085 $38,020,393 === ====== ======== =========== ===========
See accompanying notes to combined financial statements. F-8 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------- ------------------------ 1997 1996 1995 1998 1997 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income............. $ 10,966,697 $ 12,033,279 $ 10,183,799 $ 1,760,759 $ 5,131,511 Adjustments to reconcile net income to net cash flows provided by operating activities Depreciation and amortization........ 21,275,372 16,010,648 8,081,861 10,775,137 11,196,031 Provision for bad debts............... 1,038,549 374,056 828,734 -- -- Loss (Gain) on sale of equipment........ (3,052,334) (2,101,247) (4,555,863) (1,148,432) (1,174,905) Gain on sale of marketable securities.......... (390,410) (126,747) (37,345) -- (413,631) Deferred income taxes............... (112,094) 743,691 961,861 (2,944,822) (127,771) Adjustment related to affiliate with different fiscal year................ 537,223 -- -- -- 537,223 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable.......... (2,533,434) (4,603,457) (4,789,132) (440,653) (1,275,848) (Increase) decrease in inventories...... 14,608 (945,385) (824,220) (1,273,103) (384,360) (Increase) decrease in prepaid expenses and other assets.... (1,975,943) 122,694 587,072 527,646 (233,087) Increase (decrease) in accounts payable............. 792,611 1,436,552 1,560,529 (1,261,085) 3,933,297 Increase (decrease) in income taxes payable............. (184,297) 1,076,242 689,302 233,633 (474,120) Increase in deferred leasing costs....... 4,379,594 -- -- 1,247,395 -- Increase (decrease) in deferred rental income.............. 387,893 627,699 499,251 248,808 175,016 Increase (decrease) in other liabilities......... (736,536) 914,657 1,015,997 1,616,004 (527,352) ------------ ------------ ------------ ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES... 30,407,499 25,562,682 14,201,846 9,341,287 16,362,004 ------------ ------------ ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of equipment............. (21,445,901) (73,822,654) (32,957,168) (664,200) (12,537,761) Acquisitions of affiliated companies............. -- (11,807,987) (7,829,319) -- -- Proceeds from sale of equipment............. 8,102,210 11,935,375 7,741,552 3,280,299 3,150,044 Sales (purchases) of marketable securities............ 1,493,764 (414,665) 397,153 -- (347,750) ------------ ------------ ------------ ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES............. (11,849,927) (74,109,931) (32,647,782) 2,616,099 (9,735,467) ------------ ------------ ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from debt..... $ 12,869,925 $ 79,950,621 $ 28,777,004 $ 2,634,890 $11,729,779 Repayment of capital lease obligations..... (3,341,413) (4,419,085) (2,177,919) (1,774,650) (2,004,361) Repayment of debt...... (25,460,192) (18,525,872) (4,207,118) (9,927,699) (14,536,422) Payment of loan acquisition fees...... (28,728) (299,978) (88,493) (586) (26,183) (Increase) decrease in due to/from stockholders.......... (2,672,562) (1,673,052) 35,425 (874,508) (2,555,699) Capital contributions......... 37,514 155,887 170,406 -- -- Stockholders' distributions......... (2,937,557) (4,166,875) (3,861,677) (1,268,795) (1,809,911) ------------ ------------ ------------ ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. (21,535,013) 51,021,646 18,647,627 (11,211,348) (9,202,797) ------------ ------------ ------------ ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (2,977,441) 2,474,397 201,691 746,038 (2,576,260) CASH AND CASH EQUIVALENTS, beginning of year................ $ 4,015,527 $ 1,541,130 $ 1,339,439 $ 1,038,086 $ 4,015,527 ------------ ------------ ------------ ----------- ----------- CASH AND CASH EQUIVALENTS, end of year................... $ 1,038,086 $ 4,015,527 $ 1,541,130 $ 1,784,124 $ 1,439,267 ============ ============ ============ =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES Acquisition of equipment in exchange for capital lease obligations........... $ 260,760 $ 7,121,669 $ 6,997,926 $ 174,541 $ 228,467 Goodwill related to acquisitions.......... $ -- $ -- $ 1,897,761 $ -- $ -- Assets acquired from purchase of companies............. $ -- $ 13,165,000 $ 9,524,479 $ -- $ -- Liabilities assumed from purchase of companies............. $ -- $ 3,357,013 $ 3,151,101 $ -- $ -- ============ ============ ============ =========== =========== OTHER SUPPLEMENTAL DISCLOSURES Taxes paid............. $ 2,226,828 $ 315,814 $ 276,960 $ 73,505 $ 1,280,867 Interest paid.......... $ 11,116,164 $ 7,250,310 $ 3,568,958 $ 4,401,870 $ 6,572,411 ============ ============ ============ =========== ===========
See accompanying notes to combined financial statements. F-9 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) 1. ORGANIZATION AND BASIS OF PRESENTATION The combined financial statements include the accounts of Equipment Supply Co., Inc. ("Equipment Supply") and its affiliated companies: High Reach Co., Inc. ("High Reach") and Rylan, Inc. ("Rylan") (collectively the "Company") which have common ownership and activities. For financial reporting purposes, Equipment Supply has been treated as the parent company and the purchaser of both High Reach and Rylan during 1995. The 1995 acquisitions of the stock of these companies were made by the stockholders of Equipment Supply. The Company rents, sells and services aerial platform equipment throughout the mid-Atlantic region of the United States. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying balance sheets are presented on an unclassified basis. All significant intercompany balances and transactions have been eliminated in combination. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Statements The combined balance sheet as of June 30, 1998 and the combined statements of income, stockholders' equity and cash flows for the six months ended June 30, 1998 and 1997 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for the interim periods are not necessarily indicative of results for the full year. CASH EQUIVALENTS The Company considers all highly liquid instruments with a maturity of three months or less when purchased to be cash equivalents. MARKETABLE SECURITIES Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" requires investments in debt and equity securities to be classified into one of three categories based on the Company's intent. The Company has classified its investments in marketable securities as available for sale which requires the Company to record these investments at fair market value and record the unrealized gain or loss on the original investment as a separate component of stockholders' equity. Such unrealized gains or losses were not material in any period presented. INVENTORIES Inventories consisting of equipment and parts are stated at the lower of average weighted cost or market. DEPRECIATION AND AMORTIZATION All equipment and property is stated at cost. Depreciation of rental equipment is computed, using an estimated 5% residual value, by the straight- line method at rates adequate to allocate the cost of rental equipment over their estimated useful lives, ranging from five to ten years. F-10 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) Depreciation of property and equipment and amortization of leasehold improvements are computed by the straight-line method at rates adequate to allocate the cost of applicable assets over their estimated useful lives. Ordinary maintenance and repair costs are charged to operations as incurred. DEFERRED FINANCING COSTS Deferred financing costs, which are incurred by the Company in connection with debt, are charged to operations over the life of the underlying indebtedness and are included in goodwill and other intangible assets. The net book value of deferred financing costs at December 31, 1997 and 1996 and June 30, 1998 is $369,421, $340,693 and $321,445, respectively. INCOME TAXES The Company adopted in 1995 the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS No. 109 requires a company to recognize deferred income tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. For all periods presented, Equipment Supply has elected, with the consent of its stockholders, to be taxed as an S Corporation for federal and certain state reporting purposes. In lieu of federal and certain state corporation income taxes, the stockholders are taxed on their proportionate share of the Company's taxable income. Provision has been made for state income taxes for those states not recognizing S Corporation status. During 1998, Rylan elected, with the consent of its stockholders, to be taxed as an S Corporation for federal and state income tax reporting purposes. Consequently, all applicable federal and state deferred income taxes have been reversed during the six months ended June 30, 1998. As a result, the effect on the 1998 combined statement of income was to increase net income by approximately $2.9 million. During 1997, High Reach elected, with the consent of its stockholders, to be taxed as an S Corporation for federal and state income tax reporting purposes. Provision has been made for state income taxes for those states not recognizing S Corporation status. A provision for federal and state income taxes has been recorded for all periods through September 30, 1997. As of October 1, 1997, all applicable federal and state deferred income taxes approximating $81,000 have been reversed in accordance with SFAS 109 and have been recorded in the statement of income. ACQUISITIONS High Reach On April 1, 1995, the stockholders of Equipment Supply purchased all of the capital stock of High Reach for an aggregate purchase price of approximately $3.1 million, of which approximately $2.5 million was paid in cash with the balance in the form of a note maturing no later than March 31, 1997, bearing interest at 7% per annum. F-11 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) The High Reach acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. In accordance with SFAS 109, the Company recorded an additional increase to goodwill of approximately $737,000 and a corresponding increase to a deferred income tax liability, representing the difference between the financial and tax bases of certain assets acquired. The goodwill is being amortized over fifteen years on a straight-line basis. The results of operations of High Reach have been included in the Company's combined financials since the effective date of the acquisition. The stockholders borrowed approximately $2.5 million from the Company and such amounts have been recorded as part of the purchase price. Additionally, other amounts paid by the stockholders in connection with the acquisition have been treated as additional capital contributions and as part of the purchase price. During 1995 and 1996, High Reach was combined using its fiscal year end of September 30. In 1997, the Company reported the results of operations for High Reach on a calendar year basis. Net income for High Reach's three month period ended December 31, 1996 has been reflected as an adjustment to stockholders' equity. No unusual trends or transactions were noted in this three month period. Rylan On April 27, 1995, the stockholders of Equipment Supply purchased all of the capital stock of Rylan for an aggregate cash purchase price of $4.8 million. The Rylan acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. In accordance with SFAS 109, the Company recorded an additional increase to goodwill of approximately $1.2 million and a corresponding increase to a deferred income tax liability, representing the difference between the financial and tax bases of certain assets acquired. The results of operations of Rylan have been included in the Company's combined financial statement since the effective date of the acquisition. Total goodwill arising from the acquisition, in the amount of approximately $1.9 million, is being amortized over fifteen years on a straight-line basis. The stockholders financed the Rylan acquisition in the amount of $4.8 million by obtaining a term loan from a financial institution. Such debt has been recorded on the Company's financial statements, as the Company has been making the required principal and interest payments on behalf of the stockholders and have guaranteed this debt (see Note 9). Freestate Effective May 1, 1996, Rylan acquired substantially all of the assets and assumed certain liabilities of Freestate Industries, Inc. for approximately $11.8 million in cash. Such amount included payments specified for covenants not to compete for three key employees. The acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price was allocated to the net assets acquired based on their estimated fair values. Total goodwill and other intangible assets, amounting to approximately $2,000,000, are being amortized over a period ranging from five to fifteen years on a straight-line basis. The results of operations of Freestate have been included in the Company's combined financial statements since the effective date of the acquisition. F-12 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) The Company borrowed approximately $10.8 million to finance a portion of the purchase price (see Note 9). REVENUE RECOGNITION The Company rents equipment to its customers under agreements not exceeding one month, consequently the rental agreements are classified as operating leases. Revenues from rental leases are recognized over the term of the respective agreements. Revenues from product sales are recognized when the product is shipped. Revenue from equipment repairs is recognized at the time of service. Revenues from maintenance contracts are recognized over the term of the respective contracts as service is provided. Amounts billed in advance are recorded as prebilled rentals which is classified as deferred rental income on the combined balance sheet. DEFERRED LEASING COSTS The Company receives volume rebates for leasing and purchasing certain equipment. The rebates related to operating leases are recognized as a reduction in lease expense over the terms of the respective leases, generally five years. Rebates related to purchased equipment are treated as a reduction in the cost of equipment. The Company amortizes the costs of its leases on a straight-line basis over the respective lease terms. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LONG-LIVED ASSETS The Company follows the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable based on undiscounted estimated future operating cash flows. As of December 31, 1997, the Company has determined that no impairment has occurred. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued two new disclosure standards which are effective for financial statements for periods beginning after December 15, 1997. F-13 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 131, "Disclosure about Segments of a Business Enterprise and Related Information," which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company believes that its operations compose a single segment and there are no components of comprehensive income. 3. FINANCIAL INVESTMENTS AND CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of periodic temporary investments of excess cash and trade receivables. The Company places its temporary excess cash investments in high quality short-term money market instruments and the carrying value approximates market value. A significant portion of the Company's rental sales and equipment sales are to customers in the construction industry and, as such, the Company is directly affected by the well-being of that industry. However, the credit risk associated with trade receivables is minimal due to the Company's large customer base, geographical dispersion and ongoing control procedures which monitor the credit worthiness of its customers. 4. DUE FROM STOCKHOLDERS From time to time, the Company makes advances to its stockholders. Generally, there are no formal repayment terms and the amounts are noninterest-bearing. 5. RENTAL EQUIPMENT Rental equipment consists of the following:
DECEMBER 31, ------------------------- JUNE 30, 1997 1996 1998 ------------ ------------ ------------ Rental equipment................... $168,047,372 $156,891,144 $163,566,080 Less accumulated depreciation...... 45,892,484 29,547,946 51,948,388 ------------ ------------ ------------ $122,154,888 $127,343,198 $111,617,692 ============ ============ ============
F-14 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) Depreciation expense amounted to $18,948,184, $14,385,916, $7,332,808, $9,686,871 and $10,130,648 for the years ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997, respectively. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, ---------------------- JUNE 30, 1997 1996 1998 LIVES ----------- ---------- ----------- ----------- Shop equipment................. $ 834,355 $ 760,669 $ 525,492 5-7 years Transportation equipment....... 9,134,757 6,887,232 8,008,297 5 years Furniture and fixtures......... 1,288,479 962,474 1,071,448 5-7 year Building and lease hold im- provements.................... 635,895 590,132 701,146 15-39 years ----------- ---------- ----------- Total........................ 11,893,486 9,200,507 10,306,383 Less accumulated depreciation and amortization.............. 5,344,708 3,799,232 5,039,173 ----------- ---------- ----------- $ 6,548,778 $5,401,275 $ 5,267,210 =========== ========== ===========
Depreciation and amortization amounted to $1,749,408, $1,180,285, $625,324, $838,767 and $774,830 for the years ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997, respectively. 7. CAPITAL LEASE OBLIGATIONS Capitalized leased assets include machinery and transportation equipment. Interest on the respective capital lease obligations range from 7.3% to 11.4% at December 31, 1997 and 1996 and June 30, 1998. Capital lease obligations, all of which are collateralized by the leased equipment, consist of the following:
DECEMBER 31, ---------------------- JUNE 30, 1997 1996 1998 ---------- ----------- ---------- Various equipment capital lease obligations, lease terms of 60 months with monthly lease payments of $512 to $52,463 ending April 1999 to June 2001.......................... $6,451,715 $8,807,391 $5,290,680 Various vehicle capital lease obligations, lease terms of 60 months with monthly lease payments of $590 to $10,751 ending August 1998 to April 2002......................... 2,204,559 2,826,490 1,825,700 Various vehicle capital lease obligations lease terms of 48 months with monthly lease payments of $578 to $4,049 ending January 1999 to June 2000.......................... 184,962 290,008 124,747 ---------- ----------- ---------- $8,841,236 $11,923,889 $7,241,127 ========== =========== ==========
F-15 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) The future minimum lease payments under capital leases, together with the present value of the net minimum lease payments as of December 31, 1997 is as follows:
YEAR ENDING DECEMBER 31, AMOUNT -------- ----------- 1998........................................................ $ 3,628,913 1999........................................................ 3,416,347 2000........................................................ 2,478,665 2001........................................................ 845,860 2002........................................................ 9,965 ----------- Total minimum lease payments................................. 10,379,750 Less amount representing interest............................ 1,538,514 ----------- Capital lease obligations.................................... $ 8,841,236 ===========
The net book value of equipment under capital leases at December 31, 1997 and 1996 and June 30, 1998 amounted to $11,165,421, $13,800,349 and $9,990,153, respectively. 8. NOTES PAYABLE, BANK At December 31, 1997 and June 30, 1998, the Company had a line of credit with a bank for $2,500,000. Borrowings under the lines bear interest at a rate of 1/2% above the bank's prime rate (9%, at December 31, 1997 and June 30, 1998) and are secured by certain Company assets. At December 31, 1997 and June 30, 1998, $-0- and $1,993,000, respectively, was outstanding under this line. F-16 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) 9. DEBT Debt consists of the following:
DECEMBER 31, ------------------------ JUNE 30, 1997 1996 1998 ----------- ------------ ----------- Notes payable to banks and finance compa- nies with fixed interest rates ranging from prime plus .5% to prime plus 2% (9% and 10.5% at December 31, 1997) due in monthly installments ranging from $546 to $211,242 ending in September 1999 to De- cember 2001 including interest. Collater- alized either by a specific security in- terest in equipment, a general lien on equipment or by all assets owned or here- after acquired by the Company............ $51,164,326 $ 64,098,599 $46,140,944 Term note payable to a finance company with interest of 9.93% due in monthly in- stallments of $221,314, including inter- est, through April 2002. Collateralized by a specific security interest in equip- ment and guaranteed by the President of the Company. (During 1998, the balance of the loan was converted to and is included in the note payable to a finance company noted below.)............................ 9,310,102 -- -- Note payable, bank, in connection with Rylan acquisition, due in monthly in- stallments of $99,519, including interest at 9.25%: collateralized by certain as- sets of Rylan and guaranteed by the stockholders and the Company; final pay- ment due July 2000....................... 391,362 2,041,928 -- Note payable, sellers in connection with the High Reach acquisition, due in monthly installments of $10,213 plus in- terest at 7% with final payment of $377,844 made during March 1997.......... -- 408,523 -- Note payable, bank (see Note 8).......... -- -- 1,993,000 Note payable to a finance company with an interest rate of LIBOR plus 3.25% (9.41% at December 31, 1997) due in varying monthly installments. Collateralized by a specific security interest in equipment and guaranteed by the President of the Company.................................. 34,004,722 40,911,729 39,443,759 ----------- ------------ ----------- $94,870,512 $107,460,779 $87,577,703 =========== ============ ===========
F-17 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) At December 31, 1997, the aggregate maturities of debt are as follows:
YEARS ENDING DECEMBER 31, AMOUNT ------------ ------------ 1998.......................................................... $ 26,007,808 1999.......................................................... 25,586,393 2000.......................................................... 23,492,367 2001.......................................................... 18,116,590 2002.......................................................... 1,208,650 Thereafter.................................................... 458,704 ------------ $ 94,870,512 ============
Certain agreements require the Company to maintain specified minimum net worth and working capital and certain financial ratios. At December 31, 1997, the Company was in violation of certain covenants, including obtaining a specified level of minimum tangible net worth and a debt service coverage ratio. From the proceeds of the sale, more fully described in Note 15, the Company repaid substantially all of its debt. 10. INCOME TAXES Deferred income taxes reflect the net tax effect of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income taxes relate primarily to depreciation and amortization, differences in the accounting treatment of capital leases and bases of certain assets of acquired businesses. The components of income tax expense are summarized as follows:
YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------- --------------------- 1997 1996 1995 1998 1997 ---------- ---------- ---------- ----------- -------- CURRENT INCOME TAXES Federal............... $ 482,568 $ 928,915 $ 277,900 $ -- $232,612 State................. 871,648 401,011 277,778 307,138 470,532 ---------- ---------- ---------- ----------- -------- TOTAL CURRENT INCOME TAX EXPENSE........ 1,354,216 1,329,926 555,678 307,138 703,144 ---------- ---------- ---------- ----------- -------- DEFERRED INCOME TAXES (BENEFIT) Federal............... 393,018 133,507 452,061 -- 311,611 State................. (424,092) 610,184 509,800 (20,000) (439,382) Reversal of deferred income taxes relating to sub S elections... (81,000) -- -- (2,924,822) -- ---------- ---------- ---------- ----------- -------- TOTAL DEFERRED INCOME TAX EXPENSE (BENEFIT).......... (112,074) 743,691 961,861 (2,944,822) (127,771) ---------- ---------- ---------- ----------- -------- TOTAL INCOME TAX EXPENSE (BENEFIT).. $1,242,142 $2,073,617 $1,517,539 $(2,637,684) $575,373 ========== ========== ========== =========== ========
F-18 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) Differences which give rise to a significant portion of deferred income taxes are as follows:
DECEMBER 31, JUNE 30, ----------------------- ----------- 1997 1996 1998 ----------- ----------- ----------- DEFERRED INCOME TAX (ASSETS) LIABILITIES Depreciation and amortization...... $ 2,256,399 $ 2,393,302 $ 1,072,381 Reserves and allowances............ (269,491) (294,300) (132,534) Difference in basis of certain acquired assets................... 1,897,761 1,897,761 -- ----------- ----------- ----------- $ 3,884,669 $ 3,996,763 $ 939,847 =========== =========== ===========
The differences between the income tax provision and the tax that would have resulted from applying federal statutory rates on income before taxes is primarily due to Equipment Supply being taxed as an S Corporation and High Reach being taxed as an S Corporation for the three months ended December 31, 1997. The effect of Rylan's conversion to an S Corporation in 1998 was for the Company to recognize a deferred income tax benefit of approximately $2.9 million. 11. RETIREMENT PLANS The Company participates in several defined contribution plans covering substantially all nonunion employees. The Plans allow matching contributions based on a percentage of the employees' contributions. The Company contributions for the years ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997 amounted to $139,572, $96,931, $30,821, $91,351 and $70,393, respectively. Additionally, the Company participates in a multi-employer plan that provides defined contributions to the Company's union employees. For collectively bargained, multi-employer pension plans, contributions are made in accordance with negotiated labor contracts and generally are based on the number of hours worked. With the passage of the Multi-Employer Pension Plan Amendments Act of 1980 (the "Act"), the Company may, under certain circumstances, become subject to liabilities in excess of contributions made under collective bargaining agreements. Generally, these liabilities are contingent upon the termination, withdrawal or partial withdrawal from the plans. Company contributions for the years ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997 amounted to $96,737, $75,930, $62,372, $57,991 and $43,609, respectively. On January 1, 1998, the Company terminated its defined contribution plans for Equipment Supply, High Reach and Rylan and established a combined defined contribution plan covering substantially all nonunion employees. The plan allows employees to make voluntary contributions processed through payroll deductions. 12. COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company leases various facilities under lease agreements, including those with related parties. Some of these leases require the Company to pay property taxes and other related costs. F-19 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) Future minimum lease payments, by year, and in the aggregate for noncancelable operating leases, including those with related parties, with initial or remaining terms of one year or more are as follows at December 31, 1997:
FACILITIES LEASES YEAR ENDED (SUBSTANTIALLY WITH EQUIPMENT TOTAL OPERATING DECEMBER 31, RELATED PARTIES) LEASES LEASES ------------ ------------------- ----------- --------------- 1998....................... $ 2,120,949 $11,035,372 $13,156,321 1999....................... 1,938,559 10,001,175 11,939,734 2000....................... 1,921,804 7,768,161 9,689,965 2001....................... 1,917,196 6,567,617 8,484,813 2002....................... 1,912,170 4,870,393 6,782,563 Thereafter................. 876,000 -- 876,000 ----------- ----------- ----------- $10,686,678 $40,242,718 $50,929,396 ----------- ----------- -----------
Rent expense under noncancelable operating leases for the years ended December 31, 1997, 1996 and 1995 and the six months ended June 30, 1998 and 1997 amounted to $10,210,657, $6,674,413, $1,179,277, $7,886,107 and $2,405,348, respectively. The following related party transactions including rent expense is summarized as follows:
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------- ----------------- 1997 1996 1995 1998 1997 -------- -------- ------- -------- -------- Rent expense................... $963,600 $756,000 $18,168 $748,200 $515,500 Other expense.................. 79,190 109,173 58,689 80,100 59,300
The Company has guaranteed a personal loan of the stockholders, which is included as a liability in the financial statements. The loan proceeds were used to purchase Rylan (see Note 9). From time to time, the Company is a defendant in various lawsuits incident to the ordinary course of business. It is not possible to determine with any precision the probable outcome or the amount of liability, if any, under these lawsuits; however, in the opinion of the Company and its counsel, the disposition of these lawsuits will not have a material adverse effect on the Company's financial position, results of operations, or cash flows. 13. FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for accounts receivable, accounts payable and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair value of debt approximates cost as interest rates approximate market. 14. SUPPLIER CONCENTRATION During 1997, two suppliers accounted for approximately 73% of total purchases and leased equipment costs. During 1996, three suppliers (of which two were the same in 1997) accounted for approximately 84% of total purchases and lease costs. During 1995, three suppliers (of which two were the same in 1996 and 1997) accounted for approximately 68% of total purchases and lease costs. F-20 EQUIPMENT SUPPLY CO., INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) During 1997, volume activities with one vendor generated approximately $2 million in marketing rebates. Such amount has been recorded as other income. 15. SUBSEQUENT EVENT Sale of Business Operations Subsequent to December 31, 1997, the Company sold its principal business operations, a substantial portion of its net assets and certain stock for approximately $225 million. Additionally, the Company anticipates paying approximately $1.5 million in bonuses to certain of its employees. F-21 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Power Rental Co., Inc. We have audited the balance sheet of Power Rental Co., Inc. as of July 31, 1997 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Power Rental Co., Inc. at July 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey June 24, 1998 F-22 POWER RENTAL CO., INC. BALANCE SHEETS
JULY 31, MAY 31, 1997 1998 ----------- ----------- (UNAUDITED) ASSETS Cash................................................... $ 53,462 $ -- Accounts receivable, net of allowance for doubtful accounts of $200,000 and $170,000 at 1997 and 1998, respectively.. 4,193,529 4,136,551 Due from related parties............................... 612,717 1,173,050 Inventory.............................................. 51,476 63,576 Rental equipment, net.................................. 35,575,067 38,139,754 Property and equipment, net............................ 7,301,836 8,269,235 Prepaid expenses and other assets...................... 1,413,651 1,762,667 Intangible assets, net................................. 378,269 335,289 ----------- ----------- Total assets....................................... $49,580,007 $53,880,122 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable, accrued expenses and other liabili- ties................................................ $ 4,831,620 $ 4,674,375 Debt................................................. 30,841,647 38,067,418 Deferred rent........................................ 72,200 84,800 Deferred income taxes................................ 2,921,231 1,983,119 ----------- ----------- Total liabilities.................................. 38,666,698 44,809,712 Commitments and contingencies Stockholders' equity: Common stock--Class A voting, $1.00 par value, 10,000 shares authorized, 10 issued and outstanding........ 10 10 Common stock--Class B non-voting, $1.00 par value, 90,000 shares authorized, 20,000 issued and outstanding......................................... 20,000 20,000 Additional paid in capital........................... 522,550 522,550 Retained earnings.................................... 10,370,749 8,527,850 ----------- ----------- Total stockholders' equity......................... 10,913,309 9,070,410 ----------- ----------- Total liabilities and stockholders' equity......... $49,580,007 $53,880,122 =========== ===========
See accompanying notes. F-23 POWER RENTAL CO., INC. STATEMENTS OF OPERATIONS
TEN MONTHS ENDED YEAR ENDED MAY 31, JULY 31, ------------------------ 1997 1997 1998 ----------- ----------- ----------- (UNAUDITED) Revenues: Equipment rentals..................... $34,943,308 $28,469,107 $27,578,967 Sales of rental equipment............. 4,484,056 3,428,774 4,020,158 Sales of parts and supplies........... 1,462,391 1,226,682 1,140,346 ----------- ----------- ----------- Total revenues...................... 40,889,755 33,124,563 32,739,471 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation........ 11,392,273 8,867,084 10,726,582 Depreciation, equipment rentals....... 9,753,507 8,150,000 8,967,724 Cost of sales of rental equipment..... 2,915,751 2,402,610 1,898,704 Cost of sales of parts and supplies... 1,316,267 1,032,410 902,963 ----------- ----------- ----------- Total cost of revenues.............. 25,377,798 20,452,104 22,495,973 ----------- ----------- ----------- Gross profit............................ 15,511,957 12,672,459 10,243,498 Selling, general and administrative expenses............................... 11,865,623 9,781,625 10,320,661 Non-rental depreciation................. 1,214,796 913,500 1,242,846 ----------- ----------- ----------- Operating income (loss)................. 2,431,538 1,977,334 (1,320,009) Interest expense........................ 2,171,959 1,593,657 2,389,562 Interest income......................... (176,612) (97,471) (137,826) Other (income), net..................... (398,159) (334,337) (182,304) ----------- ----------- ----------- Income (loss) before provision (benefit) for income taxes....................... 834,350 815,485 (3,389,441) Provision (benefit) for income taxes.... 317,053 282,070 (1,546,542) ----------- ----------- ----------- Net income (loss)....................... $ 517,297 $ 533,415 $(1,842,899) =========== =========== ===========
See accompanying notes. F-24 POWER RENTAL CO., INC. STATEMENTS OF STOCKHOLDERS' EQUITY
CLASS A CLASS B ADDITIONAL ------------- -------------- PAID IN RETAINED SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ------ ------ ------ ------- ---------- ----------- Balance at August 1, 1996.................... 10 $10 20,000 $20,000 $522,550 $ 9,853,452 Net income............. 517,297 --- --- ------ ------- -------- ----------- Balance at July 31, 1997.................... 10 10 20,000 20,000 522,550 10,370,749 Net loss (unaudited)... (1,842,899) --- --- ------ ------- -------- ----------- Balance at May 31, 1998 (unaudited)............. 10 $10 20,000 $20,000 $522,550 $ 8,527,850 === === ====== ======= ======== ===========
See accompanying notes. F-25 POWER RENTAL CO., INC. STATEMENTS OF CASH FLOWS
TEN MONTHS ENDED YEAR ENDED MAY 31, JULY 31, -------------------------- 1997 1997 1998 ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................... $ 517,297 $ 533,414 $ (1,842,899) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..... 11,018,848 9,097,833 10,253,550 Gain on equipment sales........... (1,294,474) (815,756) (1,603,959) Gain on property and equipment sales............................ (29,468) (47,940) (27,709) Deferred income taxes............. 87,846 86,530 (938,112) Changes in assets and liabilities: (Increase) decrease in accounts receivable..................... (135,231) 392,008 56,978 Decrease (increase) in inventory...................... 8,973 (21,226) (12,100) Increase in prepaid expenses and other assets................... (648,001) (486,370) (349,016) Increase (decrease) in accounts payable, accrued expenses and other liabilities 622,048 381,560 (157,244) Increase in deferred rent....... 40,800 29,000 12,600 ------------ ------------ ------------ Total adjustments............. 9,671,341 8,615,639 7,234,988 ------------ ------------ ------------ Cash provided by operating activities......................... 10,188,638 9,149,053 5,392,089 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment........ (1,769,523) (3,339,078) (684,337) Purchase of property and equipment.. (2,757,539) (2,237,093) (903,864) Intangibles associated with purchase of certain assets.................. (110,000) (110,000) Proceeds from sale of rental equipment.......................... 3,882,235 2,956,554 3,243,356 Proceeds from sale of property and equipment.......................... 139,723 65,562 204,980 ------------ ------------ ------------ Cash provided by (used in) investing activities......................... (615,104) (2,664,055) 1,860,135 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt.......... (9,810,236) (7,567,820) (10,800,353) Principal payments on credit facility........................... (26,748,605) (19,096,555) (17,990,000) Borrowings on debt.................. 207,000 207,000 220,000 Borrowings under credit facility.... 26,726,605 20,089,955 21,825,000 Repayments from related parties..... 681,553 352,200 824,504 Advances to related parties......... (599,788) (491,933) (1,384,837) ------------ ------------ ------------ Cash used in financing activities... (9,543,471) (6,507,153) (7,305,686) ------------ ------------ ------------ Increase (decrease) in cash......... 30,063 (22,155) (53,462) Cash balance at beginning of period............................. 23,399 23,399 53,462 ------------ ------------ ------------ Cash balance at end of period....... $ 53,462 $ 1,244 $ -- ============ ============ ============
See accompanying notes. F-26 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Power Rental Co., Inc. (the "Company") rents, sells and repairs construction equipment for use by contractor, industrial and homeowner markets. The rentals are on a daily, weekly or monthly basis. The Company has eighteen locations and their principal market area is the Pacific Northwest of the United States. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheets are presented on an unclassified basis. These financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Company by United Rentals, Inc. ("United") as more fully described in Note 10. Interim Financial Statements The accompanying balance sheet at May 31, 1998 and the statements of operations, stockholders' equity and cash flows for the ten-month periods ended May 31, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim period are not necessarily indicative of results for the full year. Inventory Inventories consist primarily of general replacement parts and are stated at the lower of cost, determined under the first-in, first-out method, or market. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated five-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of equipment and cost of sales of equipment, respectively, in the statement of operations. Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives ranging from three to seven years. Leasehold improvements are amortized using the straight-line method over the estimated lives of the improvements or the remaining life of the lease, whichever is shorter. F-27 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED) Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Intangible Assets Intangible assets are recorded at cost and consist of goodwill of $372,480 and covenants not to compete of $207,000. Accumulated amortization at July 31, 1997 and May 31, 1998 is $201,211 and $244,191, respectively. Goodwill is being amortized by the straight-line method over its estimated useful life of forty years. The covenants not to compete reflect agreements made regarding confidentiality and restricting competitive activity and are being amortized by the straight-line method over the period of the agreements, which is 5 years. Amortization expense was $50,545, $34,333 and $42,980 for the year ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998, respectively. Rental Revenue Rental revenue is recorded as earned under the operating method. Advertising Costs The Companies advertise primarily through sponsorships, trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to approximately $714,680, $609,100 and $653,300 in the year ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998, respectively. Income Taxes The Company uses the "liability method" of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and its credit policy. F-28 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED) 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consisted of the following:
JULY 31, MAY 31, 1997 1998 ----------- ----------- (UNAUDITED) Rental equipment.................................. $61,168,264 $69,016,929 Less accumulated depreciation..................... 25,593,197 30,877,175 ----------- ----------- Rental equipment, net............................. $35,575,067 $38,139,754 =========== ===========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JULY 31, MAY 31, 1997 1998 ----------- ----------- (UNAUDITED) Transportation equipment.......................... $ 5,143,693 $ 5,984,589 Office and shop equipment......................... 2,236,792 2,683,017 Leasehold improvements............................ 3,573,110 4,419,965 ----------- ----------- 10,953,595 13,087,571 Less accumulated depreciation and amortization.... 3,651,759 4,818,336 ----------- ----------- Property and equipment, net....................... $ 7,301,836 $ 8,269,235 =========== ===========
5. DEBT Debt consists of the following:
JULY 31, MAY 31, 1997 1998 --------- ----------- (UNAUDITED) Caterpillar Credit-Note with a monthly payment of $1,668 including interest of 5.6%............................. $ 24,020 $ 9,758 Ingersoll Rand--Various non-interest bearing notes with combined monthly payments of $100,064 and $2,850 in 1997 and 1998, respectively............................ 289,690 26,308 Allegro Escrow--Two notes with combined monthly payments of $4,297 including interest of 9.0%................... 175,653 144,831 Associates Commercial--Various notes with combined monthly payments of $24,451 including interest from 7.6% to 8.9%........................................... 905,505 4,149,252 Case Credit--Various notes with combined monthly payments of $211,021 including interest from 4.9% to 8.9%................................................... 3,823,564 3,079,867 J.D. Fulwiler--Note with monthly payment of $3,134 including interest of 8.0%............................. 27,285 -- Concord Commercial--Various notes with combined monthly payments of $143,858 including interest from 8.1% to 8.9%................................................... 4,019,259 3,365,279 John Deere Credit--Various notes with combined monthly payments of $133,615 including interest from 6.9% to 9.7%................................................... 2,399,434 1,571,762 Ford Motor Credit--Various notes with combined monthly payments of $121,192 including interest from 8.2% to 9.2%................................................... 1,918,226 1,756,489
F-29 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED)
JULY 31, MAY 31, 1997 1998 ----------- ----------- (UNAUDITED) AT&T Credit--Note with monthly payment of $2,599 including interest of 10.6%........................... $ 101,393 $ 77,829 Navistar Financial--Various notes with combined monthly payments of $53,762 including interest from 7.3% to 9.0%.................................................. 1,271,686 922,509 Seafirst Bank--Various notes with combined monthly payments of $523,962 including interest from 7.3% to 8.5%.................................................. 12,075,932 13,420,418 Seafirst Bank--Line of credit up to $19,000,000, expiring in February 1999 with interest payable monthly at 8.5%....................................... 3,810,000 7,645,000 JCB Finance--Note with monthly payment of $8,529 including interest of 8.51%........................... -- 236,637 Pacific Atlantic--Note with monthly payment of $2,610 including interest of 10.9%........................... -- 74,107 PACCAR Financial--Note with monthly payment of $3,663 including interest of 7.8%...................................... -- 150,654 Deutsche Financial--Note with monthly payment of $28,932 including interest of 8.13%..................................... -- 1,436,718 ----------- ----------- $30,841,647 $38,067,418 =========== ===========
Substantially all rental equipment collateralize the above notes. All debt was paid off in June 1998 in connection with the acquisition discussed in Note 10. 6. INCOME TAXES The provision (benefit) for income taxes consists of the following:
YEAR ENDED TEN MONTHS ENDED MAY JULY 31, 31, 1997 1997 1998 ---------- -------- ----------- (UNAUDITED) Current: Federal................................. $229,197 $195,530 $ (608,430) State................................... 10 10 -------- -------- ----------- 229,207 195,540 (608,430) Deferred: Federal................................. 34,832 34,612 (876,200) State................................... 53,014 51,918 (61,912) -------- -------- ----------- 87,846 86,530 (938,112) -------- -------- ----------- $317,053 $282,070 $(1,546,542) ======== ======== ===========
F-30 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED) Significant components of the Company's deferred tax liability at July 31, 1997 and May 31, 1998 are as follows: JULY 31, MAY 31, 1997 1998 ---------- ----------- (UNAUDITED) Net operating loss carryforward.................. $ (469,000) $(1,085,000) Cumulative tax depreciation in excess of book.... 3,390,231 3,068,119 ---------- ----------- Deferred tax liability, net...................... $2,921,231 $ 1,983,119 ========== ===========
At July 31, 1997, the Company has net operating loss carryforwards of $1,142,326 for income tax purposes that expire in 2012. 7. RELATED PARTY TRANSACTIONS During the year ended July 31, 1997 and the ten months ended May 31, 1997 and 1998, the Company paid $628,533, $565,295 and $530,687 for advertising expenses to a partnership controlled by the Company's president and principal stockholder. The accompanying financial statements at July 30, 1997 and May 31, 1998, reflect amounts receivable of $509,473 and $659,174, respectively, from the president of the Company. These advances are made within the framework of a special drawing and loan account which bears interest at 8%. In addition, the Company is owed amounts from relatives of and related entities controlled by the president of the Company totaling $103,244 and $454,406 at July 31, 1997 and May 31, 1998, respectively. These advances are non-interest bearing. The Company conducts its operations primarily from various separate facilities under noncancellable lease agreements. Three of these facilities are owned either by the Company's president and principal stockholder or related entities controlled by the president of the Company. Another facility is leased to a limited partnership in which the general partner is the Company's president and principal stockholder. These leases expire at various dates through the year 2001. All of these agreements require the payment by the Company of property taxes, maintenance and insurance. Total rent expense paid to related parties and charged to current operations totaled $630,000, $516,450 and $704,850 for the year ended July 31, 1997 and ten months ended May 31, 1997 and 1998, respectively. In connection with the acquisition discussed in Note 10, the lease terms with related parties have been renegotiated. The remaining lease agreements are with unrelated third parties. These leases expire at various dates through the year 2006. Most of these agreements contain certain renewal options and provide for first right of refusal toward purchase. These agreements generally require the Company to pay all utilities, insurance, taxes and maintenance. Total rent expense charged to operations on unrelated third party leases for the year ended July 31, 1997 and ten months ended May 31, 1997 and 1998 were $786,928, $609,674 and $644,800, respectively. F-31 POWER RENTAL CO., INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) JULY 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE TEN MONTHS ENDED MAY 31, 1997 AND 1998 IS UNAUDITED) Some leases include scheduled base rent increases over the term of the leases. The total amount of the base rent payments is being charged to expense on a straight-line method over the terms of the leases. The Company recorded a liability for deferred rent to reflect the excess of rent expense over cash payments which is included in the accompanying balance sheets. The future minimum lease commitments under all unrelated third party operating leases that have noncancellable lease terms in excess of one year are as follows: Fiscal 1998.............. $ 868,660 1999.................. 667,360 2000.................. 586,600 2001.................. 449,440 2002.................. 317,940 Thereafter............ 399,030 ---------- $3,289,030 ==========
At July 31, 1997 and May 31, 1998 the Company was contingently liable as a guarantor on bank loans in the amount of $1,662,098 and $1,516,740, respectively, owed to the bank by its president and principal stockholder. These bank loans are also secured by substantial personal and real property assets of such stockholder. 8. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended July 31, 1997 and the ten months ended May 31, 1997 and 1998, total interest paid was $2,019,792, $1,588,185 and $2,394,938, respectively. For the year ended July 31, 1997 and the ten months ended May 31, 1997 and 1998, total taxes paid was $899,655, $899,655 and $0, respectively. For the year ended July 31, 1997 and the ten months ended May 31, 1997 and 1998, the Company purchased $17,555,968, $12,719,662 and $13,971,123, respectively, of equipment which was financed. 9. EMPLOYEE BENEFIT PLAN The Company has a defined contribution 401(k) pension plan which covers substantially all employees. The Company makes discretionary contributions. Company contributions to the plan were $300,000, $300,000 and $0 for the year ended July 31, 1997 and for the ten months ended May 31, 1997 and 1998, respectively. 10. SUBSEQUENT EVENT On June 8, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Company. F-32 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Adco Equipment, Inc. We have audited the combined balance sheet of Adco Equipment, Inc. (see Note 1) (the "Companies") as of December 31, 1997 and the related combined statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Adco Equipment, Inc. at December 31, 1997, and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey July 17, 1998 F-33 ADCO EQUIPMENT, INC. COMBINED BALANCE SHEETS
DECEMBER 31, JUNE 30, ASSETS 1997 1998 ------ ----------- ----------- (UNAUDITED) Cash................................................... $ 1,634,205 $ 2,890,453 Accounts receivable, net of allowance for doubtful accounts of $322,000 at 1997 and 1998................. 2,350,314 3,679,084 Inventory.............................................. 1,263,667 1,372,957 Rental equipment, net.................................. 8,227,480 8,597,740 Property and equipment, net............................ 891,894 821,862 Prepaid expenses and other assets...................... 60,172 61,127 ----------- ----------- Total assets....................................... $14,427,732 $17,423,223 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Accounts payable, accrued expenses and other liabilities......................................... $ 849,960 $ 725,516 Debt................................................. 2,526,175 3,124,603 Stockholder loan..................................... 200,000 200,000 ----------- ----------- Total liabilities.................................. 3,576,135 4,050,119 Commitments and contingencies Stockholders' equity: Common stock, Adco Equipment, Inc., no par value, 7,500 shares authorized, 100 issued and outstanding; Adco Equipment Supply, Inc., no par value, 7,500 shares authorized, 1,000 issued and outstanding..... 20,000 20,000 Retained earnings.................................... 10,831,597 13,353,104 ----------- ----------- Total stockholders' equity......................... 10,851,597 13,373,104 ----------- ----------- Total liabilities and stockholders' equity......... $14,427,732 $17,423,223 =========== ===========
See accompanying notes. F-34 ADCO EQUIPMENT, INC. COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE YEAR ENDED 30, DECEMBER ------------------------ 31, 1997 1997 1998 ----------- ----------- ----------- (UNAUDITED) Revenues: Equipment rentals..................... $16,313,470 $ 8,461,446 $ 9,298,812 Sales of parts, supplies and new equipment............................ 6,968,972 3,619,348 4,012,727 ----------- ----------- ----------- Total revenues.......................... 23,282,442 12,080,794 13,311,539 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation........ 6,191,738 2,689,474 2,906,348 Depreciation, equipment rentals....... 2,465,331 1,232,666 1,393,939 Cost of parts, supplies and new equipment sales...................... 5,932,862 3,111,352 3,467,749 ----------- ----------- ----------- Total cost of revenues.................. 14,589,931 7,033,492 7,768,036 ----------- ----------- ----------- Gross profit............................ 8,692,511 5,047,302 5,543,503 Selling, general and administrative expenses............................... 6,374,453 3,063,353 2,991,891 Non-rental depreciation................. 249,572 124,786 143,020 ----------- ----------- ----------- Operating income........................ 2,068,486 1,859,163 2,408,592 Interest expense........................ 267,639 143,470 141,892 Other (income), net..................... (226,501) (116,398) (254,807) ----------- ----------- ----------- Net income.......................... $ 2,027,348 $ 1,832,091 $ 2,521,507 =========== =========== ===========
See accompanying notes. F-35 ADCO EQUIPMENT, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK -------------- RETAINED SHARES AMOUNT EARNINGS ------ ------- ----------- Balance at January 1, 1997.......................... 1,100 $20,000 $ 8,804,249 Net income.......................................... 2,027,348 ----- ------- ----------- Balance at December 31, 1997........................ 1,100 20,000 10,831,597 Net income (unaudited).............................. 2,521,507 ----- ------- ----------- Balance at June 30, 1998 (unaudited)................ 1,100 $20,000 $13,353,104 ===== ======= ===========
See accompanying notes. F-36 ADCO EQUIPMENT, INC. COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE YEAR ENDED 30, DECEMBER 31, ------------------------ 1997 1997 1998 ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................ $ 2,027,348 $ 1,832,091 $ 2,521,507 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................ 2,714,903 1,357,452 1,536,959 Changes in assets and liabilities: Accounts receivable, net.......... 22,910 (906,199) (1,328,770) Inventory......................... 500,839 229,882 (109,290) Prepaid expenses and other assets........................... (5,733) (25,819) (955) Accounts payable, accrued expenses and other liabilities............ (272,050) (578,559) (124,444) ----------- ----------- ----------- Total adjustments............... 2,960,869 76,757 (26,500) ----------- ----------- ----------- Cash provided by operating activities..................... 4,988,217 1,908,848 2,495,007 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment.......... (3,451,755) (1,797,573) (1,764,199) Purchase of property and equipment.... (400,350) (61,723) (72,988) ----------- ----------- ----------- Cash used in investing activities..... (3,852,105) (1,859,296) (1,837,187) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt............ (1,712,003) (773,727) (1,250,521) Borrowings on debt.................... 867,886 649,784 1,848,949 ----------- ----------- ----------- Cash (used in) provided by financing activities........................... (844,117) (123,943) 598,428 ----------- ----------- ----------- Increase (decrease) in cash........... 291,995 (74,391) 1,256,248 Cash balance at beginning of period... 1,342,210 1,342,210 1,634,205 ----------- ----------- ----------- Cash balance at end of period......... $ 1,634,205 $ 1,267,819 $ 2,890,453 =========== =========== ===========
See accompanying notes. F-37 ADCO EQUIPMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements of Adco Equipment, Inc. include the accounts of Adco Equipment, Inc. ("Equipment") and Adco Equipment Supply, Inc. ("Supply") (collectively the "Companies"). The Companies are affiliated through common ownership. All significant intercompany accounts and transactions have been eliminated in combination. These combined financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Companies by United Rentals, Inc. ("United") as more fully described in Note 9. Business Activity The Companies rent, sell and repair construction equipment for use by construction, industrial, entertainment and municipal markets. The rentals are on a daily, weekly or monthly basis. The Companies have two locations and their principal market area is Southern California. The nature of the Companies' business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the combined balance sheet is presented on an unclassified basis. Interim Financial Statements The accompanying combined balance sheet at June 30, 1998 and the combined statements of operations, stockholders' equity and cash flows for the six- month periods ended June 30, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited combined financial statements included herein. In the opinion of management, such unaudited combined financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The combined results of operations for such interim period are not necessarily indicative of results for the full year. Inventory Inventories consist primarily of general replacement parts and equipment held for resale and are stated at the lower of cost, determined under the first-in, first-out method, or market. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated five-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of equipment and cost of sales of equipment, respectively, in the combined statement of operations. F-38 ADCO EQUIPMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over an estimated five-year useful life. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Rental Revenue Rental revenue is recorded as earned under the operating method. Advertising Costs The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to approximately $50,800, $28,200 and $38,600 in the year ended December 31, 1997 and for the six months ended June 30, 1997 and 1998, respectively. Income Taxes The Companies have elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal purposes. Under those provisions, the Companies do not pay federal income taxes; instead, the shareholders are liable for individual income taxes on the Companies' profits. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Companies maintain cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Companies' customer base and its credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER JUNE 30, 31, 1997 1998 ----------- ----------- (UNAUDITED) Rental equipment................................. $28,619,154 $30,383,353 Less accumulated depreciation.................... 20,391,674 21,785,613 ----------- ----------- Rental equipment, net............................ $ 8,227,480 $ 8,597,740 =========== ===========
F-39 ADCO EQUIPMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Transportation equipment......................... $2,201,586 $2,274,574 Furniture, fixtures and equipment................ 48,820 48,820 ---------- ---------- 2,250,406 2,323,394 Less accumulated depreciation.................... 1,358,512 1,501,532 ---------- ---------- Property and equipment, net...................... $ 891,894 $ 821,862 ========== ==========
5. DEBT AND STOCKHOLDER LOAN Debt and stockholder loan consists of the following:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Bank of America--Various notes with combined monthly payments of $150,000 and $207,000 in 1997 and 1998, respectively, including interest of 8%.............................. $2,526,175 $3,124,603 Stockholder Loan--No set principal payments, nor due date. The loan accrues interest at a rate of 10.25% per year..................... 200,000 200,000 ---------- ---------- $2,726,175 $3,324,603 ========== ==========
Substantially all rental equipment collateralize the above Bank of America notes which are secured by UCC Filings. All debt was paid off in July 1998 in connection with the acquisition discussed in Note 9. 6. RELATED PARTY TRANSACTIONS During the year ended December 31, 1997 and the six months ended June 30, 1997 and 1998, the Companies paid $294,000, $147,000 and $147,000 for equipment rental expenses to the principal stockholder. The Companies conduct their operations primarily from two separate facilities which are owned by the Companies principal stockholder. These leases expire at June 30, 1998. The Companies are required to pay the property taxes, maintenance and insurance for these facilities. Total rent expense paid to related parties and charged to current operations totaled $330,000, $165,000 and $165,000 for the year ended December 31, 1997 and six months ended June 30, 1997 and 1998, respectively. In connection with the acquisition discussed in Note 9, the lease terms with related parties have been renegotiated. F-40 ADCO EQUIPMENT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) 7. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 and the six months ended June 30, 1997 and 1998, total interest paid was approximately $267,600, $121,900 and $106,900, respectively. 8. EMPLOYEE PROFIT SHARING PLAN Equipment maintains a profit-sharing plan which covers substantially all employees. Equipment's contributions are discretionary and amounted to $160,000, $0 and $0 for the year ended December 31, 1997 and for the six months ended June 30, 1997 and 1998, respectively. 9. SUBSEQUENT EVENT On July 2, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Companies. F-41 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of McClinch, Inc.: We have audited the accompanying consolidated balance sheet of McClinch Inc. and Subsidiaries as of January 31, 1998, and the related consolidated statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of McClinch, Inc. and Subsidiaries as of January 31, 1998, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Stamford, Connecticut March 25, 1998 F-42 REPORT OF INDEPENDENT ACCOUNTANTS October 28, 1998 To the Stockholders of McClinch, Inc.: In our opinion, the accompanying consolidated balance sheet presents fairly, in all material respects, the financial position of McClinch, Inc. and Subsidiaries at August 31, 1998 in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP F-43 MCCLINCH, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JANUARY 31, AUGUST 31, 1998 1998 ----------- ----------- ASSETS: Cash and cash equivalents........................... $ 754,000 $ 2,545,000 Accounts receivable, less allowance for doubtful accounts of $106,000 and $151,000.................. 4,168,000 4,334,000 Due from related parties (Note 6)................... 293,000 1,295,000 Inventories......................................... 1,181,000 1,281,000 Net investment in sales-type leases (Note 3)........ 32,000 9,000 Property and rental equipment, net (Note 4)......... 17,249,000 21,230,000 Other assets........................................ 217,000 228,000 ----------- ----------- Total assets...................................... $23,894,000 $30,922,000 =========== =========== LIABILITIES: Notes payable (Note 5).............................. $10,388,000 $15,446,000 Accounts payable and accrued expenses............... 1,759,000 1,631,000 Income taxes payable................................ 1,000 324,000 Deferred income taxes............................... 2,476,000 2,660,000 ----------- ----------- Total liabilities................................. 14,624,000 20,061,000 ----------- ----------- Commitments (Note 9) STOCKHOLDERS' EQUITY: Common stock, no par value; authorized, issued and outstanding, 1,000 shares.......................... 26,000 26,000 Retained earnings................................... 9,862,000 11,453,000 Treasury stock, at cost; 103 shares (Note 6)........ (618,000) (618,000) ----------- ----------- Total stockholders' equity........................ 9,270,000 10,861,000 ----------- ----------- Total liabilities and stockholders' equity........ $23,894,000 $30,922,000 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-44 MCCLINCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31, JANUARY 31, ----------------------- 1998 1998 1997 ----------- ----------- ---------- (UNAUDITED) Revenues: Equipment rentals and service (Note 6).................................... $18,474,000 $12,419,000 $9,776,000 Sales.................................. 4,659,000 3,522,000 2,770,000 ----------- ----------- ---------- 23,133,000 15,941,000 12,546,000 Cost of equipment rentals and service.... 11,672,000 8,221,000 6,138,000 Cost of sales............................ 2,843,000 2,121,000 1,734,000 ----------- ----------- ---------- Gross profit......................... 8,618,000 5,599,000 4,674,000 Selling expenses......................... 1,484,000 890,000 664,000 General and administrative expenses...... 3,136,000 1,503,000 1,336,000 ----------- ----------- ---------- 3,998,000 3,206,000 2,674,000 Other income (expenses): Interest income........................ 134,000 23,000 70,000 Interest expense....................... (1,028,000) (591,000) (589,000) Rental of property, net (Note 9)....... 71,000 18,000 43,000 Other income........................... 44,000 9,000 1,000 Loss on sale of property............... -- (130,000) -- ----------- ----------- ---------- Income before provision for income taxes............................... 3,219,000 2,535,000 2,199,000 Provision for income taxes (Note 7)...... 1,082,000 944,000 964,000 ----------- ----------- ---------- Net income........................... 2,137,000 1,591,000 1,235,000 Retained earnings, beginning of period... 7,793,000 9,862,000 7,793,000 Dividends paid........................... (68,000) -- -- ----------- ----------- ---------- Retained earnings, end of period..... $ 9,862,000 $11,453,000 $9,028,000 =========== =========== ==========
The accompanying notes are an integral part of the consolidated financial statements. F-45 MCCLINCH, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31, JANUARY 31, ------------------------ 1998 1998 1997 ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income $ 2,137,000 $ 1,591,000 $ 1,235,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation......................... 3,387,000 2,343,000 1,916,000 Gain on sale of property and rental equipment........................... (1,313,000) (903,000) (740,000) Deferred income taxes................ 328,000 184,000 385,000 ----------- ----------- ----------- 4,539,000 3,215,000 2,796,000 Changes in assets and liabilities: Accounts receivable................ (643,000) (166,000) (529,000) Due to or from related parties for operating expenses................ 519,000 (837,000) (13,000) Current income taxes receivable.... 58,000 -- 58,000 Inventories........................ (201,000) (100,000) (76,000) Other assets....................... (165,000) (11,000) (18,000) Accounts payable and accrued ex- penses............................ 201,000 (128,000) (402,000) Income taxes payable............... 1,000 323,000 168,000 ----------- ----------- ----------- Net cash provided by operating activities...................... 4,309,000 2,296,000 1,984,000 ----------- ----------- ----------- Cash flows from investing activities: Advances to related parties.......... (318,000) (165,000) (188,000) Acquisition of property and rental equipment........................... (7,227,000) (7,593,000) (5,935,000) Proceeds from sale of property and rental equipment.................... 2,292,000 2,172,000 1,448,000 Net investment in sales-type leases.. 88,000 23,000 80,000 ----------- ----------- ----------- Net cash used in investing activities...................... (5,165,000) (5,563,000) (4,595,000) ----------- ----------- ----------- Cash flows from financing activities: Repayments of notes payable.......... (8,040,000) (4,352,000) (3,788,000) Borrowings of notes payable.......... 7,145,000 9,410,000 6,000,000 Repayment of note payable to related party............................... (41,000) -- (41,000) Dividends paid....................... (68,000) -- -- ----------- ----------- ----------- Net cash (used in) provided by financing activities............ (1,004,000) 5,058,000 2,171,000 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............ (1,860,000) 1,791,000 (440,000) Cash and cash equivalents, beginning of period................................ 2,614,000 754,000 2,614,000 ----------- ----------- ----------- Cash and cash equivalents, end of period.......................... $ 754,000 $ 2,545,000 $ 2,174,000 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest........................... $ 1,029,000 $ 562,000 $ 572,000 Income taxes, net of refunds....... 695,000 437,000 353,000
The accompanying notes are an integral part of the consolidated financial statements. F-46 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 1. BUSINESS AND ORGANIZATION The accompanying consolidated financial statements include the accounts of McClinch, Inc. and its wholly-owned subsidiaries McClinch Leasing Corporation, McClinch Equipment Corporation, McClinch Crane Services, Inc. and McClinch Aviation Corporation, (the "Company"). During August of 1998 McClinch Aviation Corporation was sold to a shareholder for approximately net book value. The Company is an exclusive dealer for JLG Industries, Inc. and Genie Industries in the State of Connecticut, metropolitan New York, Long Island, Westchester County and other counties in New York State. The Company is also an exclusive dealer for Lull Corporation in various counties in the States of Connecticut and New York. In addition, the Company has distribution agreements with other manufacturers in Connecticut and New York. The Company's revenues are derived principally from the rental of aerialift and material handling equipment and the sale of new and used equipment to a diversified customer base including contractors and other users. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated balance sheet is presented on an unclassified basis since it more properly reflects the Company's operations as a rental equipment company. Basis of Consolidation: All intercompany transactions and balances have been eliminated. Interim Financial Statements: The accompanying statements of income and retained earnings and cash flows for the seven month periods ended August 31, 1998 and 1997 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. Revenue Recognition: Operating Leases--Rental revenue is recognized over the lease term (generally less than one year) as earned. Sales-Type Leases--Sales are recorded at amounts equal to the present value of the minimum lease payments at the inception of the lease. The unearned interest income represents the difference between the minimum lease payments and the present value of such payments. Such interest income is recognized over the life of the lease using the interest method. Cash and Cash Equivalents: Cash and cash equivalents consist primarily of cash in banks and temporary cash investments, which consist principally of U.S. Treasury Notes, with original maturities of less than 90 days. Temporary cash investments of $144,000 as of January 31, 1998, are recorded at cost plus accrued interest which approximates market value. The Company maintains all of its cash balances in one institution. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. F-47 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) Inventories: Inventories, consisting principally of aerialift equipment and related spare parts, are recorded at the lower of first-in, first-out cost or market. Property and Rental Equipment: Property and rental equipment, consisting principally of the Company's rental fleet of aerialift and material handling equipment, is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: buildings and building improvements, 30 years; rental equipment, furniture and fixtures and computer equipment, 7 years; and vehicles, 5 years. Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in income. Income Taxes: The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts have been reclassified between balance sheet accounts to more properly reflect the nature of the item. 3. SALES-TYPE LEASES The net investment in sales-type leases consists of the following:
JANUARY 31, AUGUST 31, 1998 1998 ----------- ---------- Minimum lease payments receivable.................... $34,000 $10,000 Lease, Unearned interest income.................... (2,000) (1,000) ------- ------- Net investment in sales-type leases.................. $32,000 $ 9,000 ======= ======= Minimum lease payments as of January 31, 1998 and August 31, 1998 are receivable as follows: ISCAL YEARF - ----------- JANUARY 31, AUGUST 31, 1998 1998 ----------- ---------- 1999................................................. $29,000 $ 5,000 2000................................................. 5,000 5,000
F-48 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 4. PROPERTY AND RENTAL EQUIPMENT Property and rental equipment consists of the following:
JANUARY 31, AUGUST 31, 1998 1998 ------------ ------------ Rental equipment................................. $ 30,965,000 $ 35,119,000 Land............................................. 530,000 130,000 Buildings and improvements....................... 377,000 200,100 Vehicles......................................... 2,381,000 2,652,000 Furniture, fixtures and computer equipment....... 528,000 640,000 ------------ ------------ 34,781,000 38,241,000 Less, Accumulated depreciation................. (17,532,000) (17,511,000) ------------ ------------ Total........................................ $ 17,249,000 $ 21,230,000 ============ ============
5. NOTES PAYABLE Notes payable consists of the following:
JANUARY 31, AUGUST 31, 1998 1998 ----------- ----------- Note payable to a bank syndicate bearing interest at LIBOR plus 1 3/4%.................................. $ 9,695,000 $15,000,000 Note payable to Citicorp Dealer Finance bearing interest at 8.5%, payable in monthly installments of $7,839 through September 2004, including interest........................................... 477,000 446,000 First mortgage to Edith Godwin on real property located in Bridgeport, Connecticut, bearing interest at 9.0%, payable in monthly installments of $3,066 through January 2002, including interest........................................... 123,000 -- Notes payable to Orix Credit Alliance bearing interest at 8.5%, payable in monthly installments of $3,657 through May 2000, including interest..... 93,000 -- ----------- ----------- $10,388,000 $15,446,000 =========== ===========
The Company has available a revolving line of credit with a bank syndicate totaling the lesser of $22,000,000, or an amount based on eligible accounts receivable, parts inventory, new equipment inventory, vehicles and rental equipment. The line of credit includes cross-guarantees of amounts outstanding with affiliates which amounted to approximately $17,935,000 and $22,550,000 at January 31, 1998 and August 31, 1998, respectively. The unused portion of the line of credit was $12,305,000 and $7,000,000 at January 31, 1998 and August 31, 1998, respectively. The Company pays a commitment fee of 1/4% per annum on the unused portion of the line of credit. The outstanding balance bears interest at a fluctuating 30-day LIBOR rate plus 1 3/4% (7.38% and 7.4% at January 31, 1998 and August 31, 1998, respectively). The Company has the option to borrow additional funds and/or convert all or a portion of the outstanding balance to a fluctuating interest rate equal to the lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1 3/4%, for 90, 180 or 360 days. F-49 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) The line of credit terminates on November 30, 1999 and extends automatically every six months unless either party gives written notice to the other. Upon termination or default, amounts outstanding under this line of credit convert to a note which is payable in at least 48 monthly installments. Although no fixed payments are required under the revolving credit agreement, the Company expects aggregate maturities under this agreement and other notes payable at January 31, 1998 to approximate the following:
FISCAL YEAR --------------------------------------------------------------- 1999........................................................... $2,544,000 2000........................................................... 2,554,000 2001........................................................... 2,536,000 2002........................................................... 2,530,000 2003........................................................... 78,000 Thereafter..................................................... 146,000
The lenders require, among other terms, that the Company and its affiliate (see Note 6) on a combined basis meet certain financial ratios and obtain approval prior to the issuing of advances or loans to stockholders or officers which exceed certain amounts, as defined. Substantially all of the assets of the Company have been pledged as collateral under the debt agreement. On September 1, 1998, the notes payable to the bank syndicate and Citicorp were paid in full (see Note 10). 6. RELATED PARTY TRANSACTIONS Due from related parties consists of the following:
JANUARY 31, AUGUST 31, 1998 1998 ----------- ---------- Due (to) from affiliated companies................... $(72,000) $ 764,000 Loans receivable from officer/stockholder............ 365,000 531,000 -------- ---------- $293,000 $1,295,000 ======== ==========
The Company rents equipment from affiliates with common ownership under informal equipment sharing agreements for ultimate rental to customers in New York and Connecticut. In addition, the Company rents equipment to affiliates for ultimate rental to the affiliates' customers. The net expenses incurred or net revenue earned (included in cost of equipment rentals and service) by the Company under these arrangements were net expenses incurred of $744,000 for the year ended January 31, 1998 and $609,000 for the seven months ended August 31, 1998, and net revenues earned of $174,000 for the seven months ended August 31, 1997. In addition, the Company provides services to affiliates in connection with their operations. The primary expenses incurred and paid by the Company, which are allocated or billed to the affiliates include salaries ($2,059,000, for the year ended January 31, 1998 and $750,000 and $416,000 for the seven months ended August 31, 1998 and 1997, respectively, deducted from general and administrative expenses and $154,000 for the year ended January 31, 1998 and $-0- and $104,000 for the seven months ended August 31, 1998 and 1997, respectively, deducted from selling expenses), spare parts inventory, trucking services and insurance expenses ($699,000 for the year ended January 31, 1998 and $522,000 and $478,000 for the seven months ended August 31, 1998 and 1997, respectively, included in cost of equipment rentals and service). F-50 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) During fiscal year 1998, the Company purchased $243,000 ($75,000 and $146,000 during the seven months ended August 31, 1998 and 1997, respectively) of used machinery and equipment from an affiliate for ultimate sale to unrelated third parties. Additionally, the Company sold used machinery and equipment with a selling price of $980,000 ($621,000 and $776,000 during the seven months ended August 31, 1998 and 1997, respectively) to an affiliate for ultimate sale to unrelated third parties. These transactions are settled in the normal course of business. Loans to officer/stockholder are due on demand and bear interest at the applicable federal rate (5.66%) as published by the Internal Revenue Service. The loans were repaid on September 1, 1998 (see Note 10). Pursuant to a stockholders agreement between the Company and certain of its stockholders, a stockholder desiring to sell its shares of common stock must first offer them to the Company. The repurchase price is based on a formula of one and one-half times the Company's consolidated book value at the end of the fiscal year preceding the date on which the sale is made. Refer to Note 9 for commitments with related parties. 7. INCOME TAXES The components of the provision for income taxes are as follows:
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31, JANUARY 31, ------------------ 1998 1998 1997 ----------- -------- -------- Current: State and local............................. $ 232,000 $236,000 $173,000 Federal..................................... 522,000 524,000 406,000 ---------- -------- -------- 754,000 760,000 579,000 Deferred: State and local............................. 57,000 (138,000) 115,000 Federal..................................... 271,000 322,000 270,000 ---------- -------- -------- 328,000 184,000 385,000 ---------- -------- -------- $1,082,000 $944,000 $964,000 ========== ======== ========
The components of deferred tax assets and liabilities are as follows:
JANUARY 31, AUGUST 31, 1998 1998 ----------- ----------- Deferred tax assets: Accounts receivable............................. $ 37,000 $ 62,000 Deferred tax liabilities: Property and rental equipment and other......... (2,513,000) (2,722,000) ----------- ----------- $(2,476,000) $(2,660,000) =========== ===========
No valuation allowance has been recognized for deferred tax assets. F-51 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) The income tax provision differs from the provision computed at the statutory rate as follows:
SEVEN MONTHS ENDED YEAR ENDED AUGUST 31, JANUARY 31, --------------- 1998 1998 1997 ----------- ------ ------ Federal statutory tax rate.................... 34 34 34 Tax effect of state taxes..................... 9 9 9 Reduction for changes in enacted state tax rates........................................ (3) (5) -- Cash surrender value of life insurance........ (2) -- -- Certain adjustments for prior estimates....... (4) (1) -- --- ------ ------ Provision as reported....................... 34% 37% 43% === ====== ======
8. PROFIT-SHARING PLAN The Company participates in a profit sharing plan with its affiliates which provides for a discretionary contribution to a trust fund based on the Company's net income for the year, to be allocated to all eligible employees based on their proportional compensation. Nonunion employees are eligible for participation in the plan after the completion of one year of service, provided they have also reached age 21. After becoming eligible, employees vest at an annual rate of 20%. Discretionary contributions under the plan were $150,000 for the year ended January 31, 1998. There were no discretionary contributions for the six months ended August 31, 1998 and 1997, respectively. The plan also provides for a salary deferral plan pursuant to Section 401(k) of the Internal Revenue Code, as amended. The plan requires the Company to contribute 25% of employee's contributions not to exceed 6% of their annual compensation up to $160,000. Participants vest in the Company's contribution at the rate of 20% annually after becoming eligible. Matching contributions under the plan by the Company were $27,000 for the year ended January 31, 1998 and $20,000 and $13,000 for the seven months ended August 31, 1998 and 1997, respectively. 9. COMMITMENTS The Company has a formal employment agreement with an officer of the Company which extends through February 1999. The agreement provides for a minimum annual salary and a bonus based upon the Company's performance. The Company owns land and buildings which it rents to a third party in the form of an operating lease. Future minimum rental income from this noncancelable operating lease as of January 31, 1998 amounted to approximately $58,000 which is expected to be received as follows: 1999, $30,000; 2000, $28,000. F-52 MCCLINCH, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE SEVEN MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) The Company leases a building from an affiliated company under the terms of a lease expiring on July 31, 1999. The Company guarantees the debt of the affiliated company which was $1,681,000 and $1,627,000 at January 31, 1998 and August 31, 1998, respectively. Additionally, the Company has commitments under an operating lease, expiring in 2002, with Fleet Capital Corporation for an aircraft (See Note 1). The lease provides the Company with certain end of term rights and early purchase options. The following is a schedule of all future minimum lease payments, as of August 31, 1998:
FISCAL YEAR ----------- 1999............................................................ $135,000 2000............................................................ 135,000 -------- $270,000 ========
Total rent expense was $329,000, $192,000 and $192,000 for the year ended January 31, 1998 and the seven months ended August 31, 1998 and 1997, respectively. 10. SUBSEQUENT EVENT On September 1, 1998, United Rentals, Inc. acquired all of the outstanding shares of common stock of the Company. F-53 REPORT OF INDEPENDENT AUDITORS To the Board of Directors Industrial Lift, Inc. Vincentown, New Jersey We have audited the accompanying balance sheets of Industrial Lift, Inc. (a New Jersey State Corporation) as of December 31, 1996 and 1997, and the related statements of income, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Industrial Lift, Inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Schalleur & Surgent, LLC Devon, Pennsylvania February 26, 1998, except for Note J which is as of September 15, 1998 F-54 INDUSTRIAL LIFT, INC. BALANCE SHEETS ASSETS
DECEMBER 31, -------------------------- MAY 12, 1996 1997 1998 ------------ ------------ ------------ (UNAUDITED) Current assets: Cash............................... $ 186,093 $ 533,499 $ 297,689 Accounts receivable--trade......... 1,853,061 2,485,668 1,823,681 Investment in sales--type leases (Note D).......................... 390,009 274,181 336,827 Inventory (Note C)................. 1,468,070 2,501,870 2,854,061 Prepaid expenses................... 45,361 39,289 35,712 ------------ ------------ ------------ Total current assets........... 3,942,594 5,834,507 5,337,980 ------------ ------------ ------------ Property, plant and equipment: (Note A) Rental equipment................... 17,660,046 18,533,702 18,118,513 Land............................... 40,393 40,393 40,393 Building........................... 650,000 650,000 650,000 Machinery and equipment............ 739,126 748,735 666,316 ------------ ------------ ------------ 19,089,565 19,972,830 19,475,222 Less: accumulated depreciation..... (11,049,573) (11,879,828) (11,828,604) ------------ ------------ ------------ Net property, plant and equipment....................... 8,039,992 8,093,002 7,646,618 ------------ ------------ ------------ Other assets: Security deposits.................. 4,443 8,412 8,412 Investment in sales--type leases (Note D).......................... 1,823,833 1,282,955 1,529,343 Notes receivable--officers (Note G)................................ 455,068 438,319 573,319 ------------ ------------ ------------ Total other assets............. 2,283,344 1,729,686 2,111,074 ------------ ------------ ------------ Total assets................... $ 14,265,930 $ 15,657,195 $ 15,095,672 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note E).......................... $ 3,620,426 $ 5,398,778 $ 3,459,388 Accounts payable................... 590,032 352,571 155,957 Accrued expenses (Note G).......... 136,181 182,362 77,581 Deposits and credits............... 74,500 335,441 196,490 ------------ ------------ ------------ Total current liabilities........ 4,421,139 6,269,152 3,889,416 Long-term liabilities: Long-term debt, net of current por- tion (Note E)..................... 8,405,283 7,271,718 9,518,587 ------------ ------------ ------------ Total liabilities................ 12,826,422 13,540,870 13,408,003 ------------ ------------ ------------ Stockholders' equity: Capital stock, no par value, 1,000 shares authorized, 200 shares issued and outstanding............ 220,000 220,000 220,000 Retained earnings.................. 1,219,508 1,896,325 1,467,669 ------------ ------------ ------------ Total stockholders' equity....... 1,439,508 2,116,325 1,687,669 ------------ ------------ ------------ Total liabilities & equity....... $ 14,265,930 $ 15,657,195 $ 15,095,672 ============ ============ ============
See accountant's audit report and notes to the financial statements. F-55 INDUSTRIAL LIFT, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED FOR THE PERIOD ENDED DECEMBER 31, MAY 12, 1998 ----------------------- ---------------------- 1996 1997 1997 1998 ----------- ----------- ---------- ---------- (UNAUDITED) Income Sales, rentals, services, and interest on leases.......... $15,873,782 $21,502,996 $8,221,446 $7,754,774 Cost of sales Beginning inventory.......... 1,341,337 1,468,070 1,468,070 2,501,870 Purchases.................... 5,527,726 11,027,711 2,932,170 3,842,272 Direct labor................. 826,677 710,655 470,211 545,665 Cost of used equipment sales....................... 471,293 900,367 374,284 329,470 Other costs.................. 4,016,301 4,005,126 2,601,818 1,543,505 ----------- ----------- ---------- ---------- Total goods available for sale...................... 12,183,334 18,111,929 7,846,553 8,762,782 Less: ending inventory..... 1,468,070 2,501,870 1,724,926 2,854,061 ----------- ----------- ---------- ---------- Total cost of sales........ 10,715,264 15,610,059 6,121,627 5,908,721 ----------- ----------- ---------- ---------- Gross profit................... 5,158,518 5,892,937 2,099,819 1,846,053 Operating expenses............. 5,146,620 5,264,130 1,903,993 2,314,803 ----------- ----------- ---------- ---------- Net income from operations..... 11,898 628,807 195,826 (468,750) ----------- ----------- ---------- ---------- Other income Gain on disposal of non- rental assets............... 24,228 14,861 8,807 24,482 Miscellaneous income......... 707 1,219 (2,814) 1,809 Interest income.............. 18,909 31,930 304 13,803 ----------- ----------- ---------- ---------- Total other income......... 43,844 48,010 6,297 40,094 ----------- ----------- ---------- ---------- Net income .................... 55,742 676,817 202,123 (428,656) Retained earnings--beginning... 1,163,766 1,219,508 1,219,508 1,896,325 ----------- ----------- ---------- ---------- Retained earnings--ending...... $ 1,219,508 $ 1,896,325 $1,421,631 $1,467,669 =========== =========== ========== ==========
See accountant's audit report and notes to the financial statements. F-56 INDUSTRIAL LIFT, INC. STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED FOR THE PERIOD ENDED DECEMBER 31, MAY 12, ---------------------- --------------------- 1996 1997 1997 1998 ---------- ---------- ---------- ---------- (UNAUDITED) Cash flows from operating activities: Net income................... $ 55,742 $ 676,817 $ 202,123 $ (428,656) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................. 1,717,389 1,639,844 616,669 655,600 Gain on sale of assets....... (436,420) (477,760) (198,633) (171,595) (Increase)/decrease in: Accounts receivable--trade... 136,810 (632,607) (414,358) 661,987 Inventory.................... (126,733) (1,033,800) (256,856) (352,191) Prepaid expenses............. 4,682 6,072 3,577 Security deposits............ -- (3,969) (4,014) -- Increase/(decrease) in: Accounts payable............. (94,283) (237,461) (329,106) (196,614) Accrued expenses............. 22,068 46,181 19,864 (104,781) Deposits and credits......... 74,500 260,941 (60,376) (138,952) ---------- ---------- --------- ---------- Net cash provided/(used) operating activities.......... 1,353,755 244,258 (424,687) (71,625) ---------- ---------- --------- ---------- Cash flows from investing activities: Capital expenditures-- property, plant and equipment................... (2,066,163) (2,153,839) (897,450) (346,778) Proceeds on sale of equipment................... 1,076,908 1,465,872 247,485 367,519 Investment in sales--type leases...................... (966,008) (185,545) (91,209) (458,764) Proceeds received on lease payments.................... 352,191 315,124 103,956 101,359 ---------- ---------- --------- ---------- Net cash provided/(used) by investing activities.......... (1,603,072) (558,388) (637,218) (336,664) ---------- ---------- --------- ---------- Cash flows from financing activities: Net borrowing/(repayments) on note payable................ 258,175 644,787 975,812 307,479 (Advances)/repayments on note receivable--officers........ (2,156) 16,749 (100,000) (135,000) ---------- ---------- --------- ---------- Net cash provided/(used) by financing activities.......... 256,019 661,536 875,812 172,479 ---------- ---------- --------- ---------- Net inc/(decrease) in cash and cash equivalents.............. 6,702 347,406 (186,093) (235,810) Cash--Beginning of the year.... 179,391 186,093 186,093 533,499 ---------- ---------- --------- ---------- Cash--End of the year.......... $ 186,093 $ 533,499 $ 0 $ 297,689 ========== ========== ========= ========== Supplementary disclosure of cash flow information: Interest paid................ $1,097,114 $1,179,133 $ 334,261 $ 493,040 ========== ========== ========= ==========
See accountant's audit report and notes to the financial statements F-57 INDUSTRIAL LIFT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 (THE INFORMATION AS OF MAY 12, 1998 AND FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED) NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY Industrial Lift, Inc. (the Company) is engaged in selling, rental and leasing of commercial lift equipment. The Company's headquarters are located in Vincentown, New Jersey and also has plant locations in Odenton, Maryland, Newport News, Virginia, and Ashland, Virginia. INTERIM FINANCIAL STATEMENTS The accompanying balance sheet as of May 12, 1998 and the statements of income and retained earnings and cash flows for the period ended May 12, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim period are not necessarily indicative of results for the full year. METHOD OF ACCOUNTING The Company maintains its books and records, and files its tax returns on the accrual basis of accounting. The financial statements have been prepared on that basis, in which revenue and gains are recognized when earned and expenses and losses are recognized when incurred. Preparation of the financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. INCOME TAXES The Company, with the consent of its shareholders, elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code, which provides that, in lieu of corporation income taxes, the stockholders are taxed on the Company's taxable income. Therefore, no provision or liability for income taxes is reflected in these financial statements. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Improvements and betterments that materially extend the life of the asset are capitalized. Expenditures for maintenance and repairs that do not add materially to productive capacity or extend the life of an asset are expensed as incurred. The Company computes depreciation for financial reporting purposes using the straight line method over the estimated useful lives of the related assets. Both the straight-line and accelerated methods are utilized for tax purposes. When non-rental assets are retired, sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any gain or loss thereon is reflected in the current year as other income. F-58 INDUSTRIAL LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 (THE INFORMATION AS OF MAY 12, 1998 AND FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED) NOTE B--CONCENTRATION OF CREDIT RISK The Company has concentrated its credit risk for cash by maintaining deposits in banks located within the same geographic region. The maximum loss that would have resulted from that risk totaled $196,567 and $301,682 at December 31, 1996 and 1997, respectively, and $197,688 as of May 12, 1998 for the excess of the deposit liabilities reported by the banks over the amounts that would have been covered by federal insurance. The Company provides sales on credit to substantially all of their customers, the majority of which are construction companies. As of December 31, 1996 and 1997, outstanding credit to customers is $1,853,061 and $2,485,668, respectively, and $1,823,681 as of May 12, 1998. NOTE C--INVENTORIES Inventories, which are stated at the lower of cost (first in/first out) or market, consist of the following:
DECEMBER 31, --------------------- MAY 12, 1996 1997 1998 ---------- ---------- ----------- (UNAUDITED) New equipment............................ $ 850,650 $1,892,561 $2,296,124 Used equipment........................... 6,590 22,632 16,841 Parts, accessories and labor............. 610,830 586,677 541,096 ---------- ---------- ---------- Total.................................. $1,468,070 $2,501,870 $2,854,061 ========== ========== ==========
NOTE D--INVESTMENT IN LEASES The Company leasing operations consist of leasing commercial lift equipment under short term and long term rental agreements. Certain of these long term leases fall under the classification as sales-type leases, whereby the lease gives rise to a dealers profit at the inception of the lease. The Company's net investment in sales-type leases consist of:
DECEMBER 31, ---------------------- MAY 12, 1996 1997 1998 ---------- ---------- ----------- (UNAUDITED) Minimum lease payment receivable..... $1,576,242 $1,034,885 $1,183,128 Estimated residual value of leased property............................ 637,600 522,251 673,052 ---------- ---------- ---------- 2,213,842 1,557,136 1,856,180 Less current portion................. (390,009) (274,181) (326,837) ---------- ---------- ---------- $1,823,833 $1,282,955 $1,529,343 ========== ========== ==========
Future annual minimum lease payments receivable on these leases are: 1998.............................................................. $274,181 1999.............................................................. 235,026 2000.............................................................. 193,609 2001.............................................................. 152,611 2002.............................................................. 87,532
F-59 INDUSTRIAL LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 (THE INFORMATION AS OF MAY 12, 1998 AND FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED) The Company retains title to the leased equipment. The lessees pay taxes, licenses and insurance costs on the equipment. SHORT-TERM RENTALS The value of future minimum rental payments under operating lease agreements is not determinable. The Company does not maintain the accounting to summarize this information due to the short term nature of the leases and the high volume of which leases are entered. NOTE E--NOTES PAYABLE The Company has entered into various security agreements whereby they finance the equipment they purchased for leasing, rental and resale. The maturity dates vary according to the purchase date of the equipment and range between three to eight years. Equipment financing agreements consist of the following:
DECEMBER 31, ----------------------- MAY 12, 1996 1997 1998 ----------- ----------- ----------- (UNAUDITED) 1. Security agreement with Gehl Company, payable in monthly installments of interest only payments, interest rate averaging between 8.0% to 10.0%, secured by inventory and accounts receivable... $ 451,355 $ 968,098 $ 989,196 2. Security agreement with Associates Commercial Corporation, payable in monthly installments, floating interest rate averaging between 7.5% to 9.5%, secured by inventory, accounts receivable and rights to equipment financed.................. 10,622,836 10,006,648 9,600,997 3. Security agreement with CitiCorp, payable in monthly installments, interest averaging between 8.0% to 10.0%, secured by new and used inventory and rights to equipment financed............................ 153,428 -- -- 4. Mortgage payable to Associates Commercial Corporation payable in monthly installments of $9,544, interest at 10%, secured by property and plant. Effective April 1, 1998 the payment will be $8,870 as a result of a change in the interest rate to 8.4%........................ 798,089 761,728 748,475 5. Security agreement with Grove North America is payable within 360 days of original invoice date. Interest is calculated by Grove North America when the invoice is issued based on 360 day repayment terms. Interest is calculated at 8.25%, secured by inventory........................... -- 934,022 1,639,307 ----------- ----------- ----------- 12,025,708 12,670,496 12,977,975 Less: Current Portion................ 3,620,426 5,398,776 3,459,388 ----------- ----------- ----------- $ 8,405,282 $ 7,271,720 $ 9,518,587 =========== =========== ===========
F-60 INDUSTRIAL LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 (THE INFORMATION AS OF MAY 12, 1998 AND FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED) Long-Term Maturities at December 31, 1997 are as follows: 1999.................................. $ 2,311,740 2000.................................. 2,282,507 2001.................................. 1,832,837 2002.................................. 308,428 Thereafter............................ 536,208 ----------- $ 7,271,720 ===========
NOTE F--PROFIT SHARING CONTRIBUTION PAYABLE The Company has a profit sharing plan that provides coverage for all eligible employees who have been employed by the Company for at least six months at the end of the year. Each participant receives a proportionate share of the contribution based on his or her compensation to total compensation. The amount of the employer contributions is determined by the board of directors during the course of the year. Profit sharing contributions for the years ended December 31, 1996 and 1997 was $30,000 and $35,000, respectively, and $13,416 and $15,133 for the period ended May 12, 1997 and 1998, respectively. NOTE G--RELATED PARTY TRANSACTIONS Included in other assets as of December 31, 1996 and 1997 and May 12, 1998 is $455,068, $438,319 and $573,319 in loans to shareholders including $34,694, $17,946 and $18,710 of accrued interest respectively. The notes have no repayment terms and are accruing interest at 4%. Repayment of $34,694 was made on the loans in 1997. NOTE H--OPERATING LEASES The Company, as lessee, leases certain equipment and plant facilities under operating lease agreements. The Company entered into a three year lease agreement in April, 1997 for its facilities located in Odenton, Maryland. This lease calls for monthly rental payments of $4,213 and $4,424 over the next two consecutive years of the lease. The Company also rents its facilities located in Newport News, Virginia. The two year lease agreement was entered into in August, 1996. Monthly payments for the next year lease is $3,800 per month. The Company has a lease agreement for their Ashland, Virginia facility which began in June, 1997. The monthly lease payments for the 1998-1999 lease year are $1,200 per month. Certain commercial lift equipment rented to customers under the company's leasing operations are leased under the following operating lease agreements: . Eighty-four month lease beginning in December, 1997--First two payments at $3,235 per month--Eighty-two payments at $9,185 per month . Seventy-two month lease beginning in December, 1997--First two payments at $18,858 per month--Seventy payments at $28,578 per month . Seventy-two month lease beginning in November, 1997--First two payments at $5,703 per month--Seventy payments at $18,598 per month F-61 INDUSTRIAL LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 (THE INFORMATION AS OF MAY 12, 1998 AND FOR THE PERIOD ENDED MAY 12, 1997 AND 1998 IS UNAUDITED) The company has a lease agreement for their telephone and computer system which began in December, 1997. The agreement is for sixty months at $4,667 per month. Rent expense associated with the above leases was approximately $438,548 for the year ending December 31, 1997. Future rental payments under these operating leases at December 31, 1997 is as follows: 1998................................... $1,094,000 1999................................... 1,002,460 2000................................... 857,531 2001................................... 805,448 2002................................... 795,580 Thereafter............................. 751,182 ---------- $5,306,201 ==========
NOTE I--LITIGATION In 1996 the Company settled a claim with the State of New Jersey and was assessed $1,700 in sales tax, which it paid. During 1995 the Company had been in a personal injury claim based upon theories of negligence, product liability, and willful and wanton disregard. This claim was settled in 1996 at no cost to the Company. NOTE J--SUBSEQUENT EVENT On May 12 , 1998, United Rentals, Inc. purchased all of Industrial Lift, Inc.'s issued and outstanding common stock. F-62 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Able Equipment Rental, Inc. We have audited the combined balance sheet of Able Equipment Rental, Inc. (See Note 1) (the "Companies") as of December 31, 1997 and the related combined statements of income, stockholders' equity and partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Able Equipment Rental, Inc. at December 31, 1997 and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey April 15, 1998 F-63 ABLE EQUIPMENT RENTAL, INC. COMBINED BALANCE SHEETS
DECEMBER FEBRUARY 31, 1997 28, 1998 ----------- ----------- (UNAUDITED) ASSETS Cash.................................................. $ 489,330 $ 273,090 Accounts receivable, net of allowance for doubtful accounts of $166,000 and $181,000 in 1997 and 1998, respectively......................................... 2,725,794 2,670,554 Unbilled receivables.................................. 359,000 395,000 Inventory............................................. 583,013 413,617 Rental equipment, net................................. 9,413,628 9,518,678 Property and equipment, net........................... 696,070 1,008,900 Prepaid expenses and other assets..................... 145,742 116,589 ----------- ----------- Total assets...................................... $14,412,577 $14,396,428 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Liabilities: Accounts payable, accrued expenses and other liabilities........................................ $ 989,038 $ 784,412 Debt................................................ 8,120,710 8,395,970 Stockholder loan.................................... 364,600 364,600 Deferred rent....................................... 18,247 18,247 Deferred tax liability.............................. 86,348 113,735 ----------- ----------- Total liabilities................................. 9,578,943 9,676,964 Commitments and contingencies Stockholders' equity and partners' capital: Stockholders' equity: Common stock........................................ 17,000 17,000 Additional paid-in capital.......................... 102,978 102,978 Retained earnings................................... 4,278,962 4,151,355 ----------- ----------- 4,398,940 4,271,333 Partners' capital.................................... 434,694 448,131 ----------- ----------- Total stockholders' equity and partners' capital.. 4,833,634 4,719,464 ----------- ----------- Total liabilities and stockholders' equity and partners' capital.................................... $14,412,577 $14,396,428 =========== ===========
See accompanying notes. F-64 ABLE EQUIPMENT RENTAL, INC. COMBINED STATEMENTS OF INCOME
TWO MONTHS TWO MONTHS YEAR ENDED ENDED ENDED DECEMBER FEBRUARY 28, FEBRUARY 31, 1997 1997 28, 1998 ----------- ------------ ---------- (UNAUDITED) Revenues: Equipment rentals........................ $17,081,826 $1,631,226 $2,633,136 Sales of rental equipment................ 365,670 -- -- Sales of parts, supplies and new equipment............................... 1,847,708 503,961 757,212 ----------- ---------- ---------- Total revenues............................. 19,295,204 2,135,187 3,390,348 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation........... 6,944,226 1,005,933 1,306,857 Depreciation, equipment rentals.......... 1,667,366 201,010 302,678 Cost of rental equipment sales........... 293,238 -- -- Cost of parts, supplies and new equipment sales................................... 1,518,807 239,576 272,657 ----------- ---------- ---------- Total cost of revenues..................... 10,423,637 1,446,519 1,882,192 ----------- ---------- ---------- Gross profit............................... 8,871,567 688,668 1,508,156 Selling, general and administrative expenses.................................. 6,438,632 627,098 1,241,182 Non-rental depreciation.................... 172,489 14,440 27,130 ----------- ---------- ---------- Operating income........................... 2,260,446 47,130 239,844 Interest expense........................... 591,701 42,099 113,995 ----------- ---------- ---------- Income before provision for income taxes... 1,668,745 5,031 125,849 Provision for income taxes................. 61,235 19,436 36,269 ----------- ---------- ---------- Net income (loss).......................... $ 1,607,510 $ (14,405) $ 89,580 =========== ========== ==========
See accompanying notes. F-65 ABLE EQUIPMENT RENTAL, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
COMMON STOCK ADDITIONAL -------------- PAID-IN RETAINED PARTNERS' SHARES AMOUNT CAPITAL EARNINGS CAPITAL ------ ------- ---------- ---------- --------- Balance at January 1, 1997... 1,700 $17,000 $102,978 $3,290,014 $ 483,975 Capital contributions...... -- 6,000 Stockholders and capital distributions............. (322,246) (351,597) Net income................. 1,311,194 296,316 ----- ------- -------- ---------- --------- Balance at December 31, 1997........................ 1,700 $17,000 $102,978 $4,278,962 $ 434,694 Stockholders distributions (unaudited)............... (203,750) -- Net income (unaudited)..... 76,143 13,437 ----- ------- -------- ---------- --------- Balance at February 28, 1998 (unaudited)................. 1,700 $17,000 $102,978 $4,151,355 $ 448,131 ===== ======= ======== ========== =========
See accompanying notes. F-66 ABLE EQUIPMENT RENTAL, INC. COMBINED STATEMENTS OF CASH FLOWS
TWO MONTHS ENDED YEAR ENDED FEBRUARY 28, DECEMBER 31, -------------------- 1997 1997 1998 ------------ --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................... $ 1,607,510 $ (14,405) $ 89,580 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................ 1,839,855 215,450 329,808 Gain on sale of property and equipment.. (72,432) (6,556) (559) Deferred tax liability.................. 26,340 19,436 27,387 Changes in assets and liabilities: (Increase) Decrease in accounts receivable........................... (956,085) 57,264 55,240 Increase in unbilled receivables...... (142,000) (23,000) (36,000) Increase (Decrease) in inventory...... (346,085) 102,170 169,396 Decrease (Increase) in prepaid expenses and other assets............ 5,467 (62,149) 29,153 Increase (Decrease) in accounts payable, accrued expenses and other liabilities.......................... 724,666 (29,375) (204,627) Increase in deferred rent............. 18,247 -- -- ----------- --------- --------- Cash provided by operating activities......................... 2,705,483 258,835 459,378 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment.............. (5,395,221) (399,294) (407,728) Proceeds from sale of rental equipment.... 365,670 22,249 613 Purchases of property and equipment....... (468,927) (54,417) (340,014) ----------- --------- --------- Cash used in investing activities... (5,498,478) (431,462) (747,129) CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions..................... 6,000 -- -- Stockholders and capital distributions.... (673,843) -- (203,750) Principal payments on debt................ (2,495,519) (343,900) (311,207) Borrowings under credit facility.......... 6,116,144 346,667 586,468 ----------- --------- --------- Cash provided by financing activities......................... 2,952,782 2,767 71,511 ----------- --------- --------- Increase (Decrease) in cash............... 159,787 (169,860) (216,240) Cash balance at beginning of period....... 329,543 329,543 489,330 ----------- --------- --------- Cash balance at end of period....... $ 489,330 $ 159,683 $ 273,090 =========== ========= =========
See accompanying notes. F-67 ABLE EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (THE INFORMATION AS OF FEBRUARY 28, 1998 AND FOR THE TWO MONTHS ENDED FEBRUARY 28, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements of Able Equipment Rental, Inc. include the accounts of the following entities: Rental Equipment, Inc.; Butler & Son, Inc.; Butler & Derbyshire, Inc.; Butler & O'Connor; Butler & Butler; Butler, Rollins & Butler; Butler, Schlerf & Butler; Butler, Westbrook & Butler; Butler, Binder & Butler; Butler, Cook & Butler; Butler, Henkle & Butler; Butler, McKenney & Butler; Butler, Breitenstein & Butler; Butler, Escalante & Butler; and Butler, Paeper & Butler (collectively the "Companies"). The Companies are affiliated through common ownership. All significant intercompany accounts and transactions have been eliminated in combination. These combined financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Companies by United Rentals, Inc. ("United") as more fully described in Note 10. Business Activity The Companies rent, sell and repair construction equipment for use by contractor, industrial and homeowners markets. The rentals are on a daily, weekly or monthly basis. The Companies have six locations and their principal market area is Southern California. The nature of the Companies' business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheet is presented on an unclassified basis. On March 29, 1997 Rental Equipment, Inc. acquired for $1,500,000 a substantial amount of rental equipment and fixed assets from Sam's-U-Rent, Inc. and assumed all operations. The Company utilized the funds available under its line of credit to finance the purchase. The acquisition has been accounted for as a purchase and, accordingly, at such date the Company recorded the assets acquired at their estimated fair values. Interim Financial Statements The accompanying combined balance sheet at February 28, 1998 and the combined statements of income, stockholders' equity and partners' capital and cash flows for the two-month periods ended February 28, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited combined financial statements included herein. In the opinion of management, such unaudited combined financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim period are not necessarily indicative of results for the full year. Inventory Inventory consists primarily of general replacement parts, fuel and equipment held for resale and are stated at the lower of cost, determined under the first-in, first-out method, or market. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated seven-year useful life with no salvage value. F-68 ABLE EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of rental equipment and cost of sales of rental equipment, respectively, in the combined statement of income. Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over an estimated useful life of seven years. Leasehold improvements are amortized using the straight- line method over the estimated lives of the leasehold improvement or the remaining life of the lease, whichever is shorter. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Rental Revenue Rental revenue is recorded as earned under the operating method. Advertising Costs The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to approximately $144,000, $17,000 and $24,000 in the year ended December 31, 1997 and in the two months ended February 28, 1997 and 1998, respectively. Income Taxes Rental Equipment, Inc. and Butler & Son, Inc. have elected, by unanimous consent of their shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code for both federal and state purposes. Under those provisions, the Companies do not pay federal or state income taxes; instead, the shareholders are liable for individual income taxes on their profits. Butler & Derbyshire, Inc., a C Corporation for federal tax purposes, applied an asset and liability approach to accounting for income taxes. Deferred income tax assets and liabilities arise from differences between the tax basis of an asset or liability and its reported amount in the combined financial statements. Deferred tax balances are determined by using tax rates to be in effect when the taxes will actually be paid or refunds received. All the other entities included in these combined financial statements are partnerships. No provision has been made in the accompanying financial statements for any federal, state, or local income taxes since they are the liability of the individual partners. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-69 ABLE EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 2. CONCENTRATIONS OF CREDIT RISK The Companies maintain cash balances with a quality financial institution and consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Companies' customer base and their credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER 31, FEBRUARY 28, 1997 1998 ------------ ------------ (UNAUDITED) Rental equipment................................... $16,709,153 $17,116,881 Less accumulated depreciation...................... 7,295,525 7,598,203 ----------- ----------- Rental equipment, net.............................. $ 9,413,628 $ 9,518,678 =========== ===========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, FEBRUARY 28, 1997 1998 ------------ ------------ (UNAUDITED) Transportation equipment........................... $ 901,400 $1,228,870 Furniture and fixtures............................. 321,638 330,289 Leasehold improvements............................. 259,854 259,854 ---------- ---------- 1,482,892 1,819,013 Less accumulated depreciation...................... 786,822 810,113 ---------- ---------- Total............................................ $ 696,070 $1,008,900 ========== ==========
5. DEBT AND STOCKHOLDER LOAN Debt and stockholder loan consists of the following:
DECEMBER 31, FEBRUARY 28, 1997 1998 ------------ ------------ (UNAUDITED) Sanwa Bank--Various lines of credit with combined monthly payments of $122,452 and $163,958, in 1997 and 1998 respectively including interest from 8.1% to 9.5%............................... $8,120,710 $8,395,970 Stockholder Loan--No set principal payments. Loan is due on December 13, 1999. The loan accrues interest at a rate of 10% per year. ............ 364,600 364,600 ---------- ---------- $8,485,310 $8,760,570 ========== ==========
Substantially all rental equipment collateralized the above bank notes. All debt was paid off in connection with the acquisition discussed in Note 10. F-70 ABLE EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES The provision for income taxes consists of the following:
TWO MONTHS ENDED YEAR ENDED FEBRUARY 28, DECEMBER 31, --------------- 1997 1997 1998 ------------ ------- ------- (UNAUDITED) Current: Federal....................................... $20,009 $ -- $ 7,023 State......................................... 14,886 -- 1,859 ------- ------- ------- 34,895 -- 8,882 Deferred: Federal....................................... -- -- State......................................... 26,340 19,436 27,387 ------- ------- ------- 26,340 19,436 27,387 ------- ------- ------- $61,235 $19,436 $36,269 ======= ======= =======
Significant components of the Companies deferred tax liability are as follows:
DECEMBER 31, FEBRUARY 28, 1997 1998 ------------ ------------ (UNAUDITED) Difference in basis of accounting................. $34,375 $ 54,566 Cumulative tax depreciation in excess of book..... 51,973 59,169 ------- -------- Deferred tax liability............................ $86,348 $113,735 ======= ========
7. OPERATING LEASES The Companies lease six store locations on long-term leases. The Companies are responsible for all operating expenses of the facilities including property taxes, assessments, insurance, repairs and maintenance. These leases have various terms and extend through May 2007 and include scheduled base rent increases over the term of the leases. The total amount of the base rent payments is being charged to expense on the straight-line method over the terms of the leases. The Companies recorded a liability for deferred rent to reflect the excess of rent expense over cash payments which is included in the accompanying combined balance sheet. Total rent expense for the year ended December 31, 1997 and for the two months ended February 28, 1997 and 1998 was approximately $846,000, $66,000 and $182,000, respectively. At December 31, 1997, minimum lease commitments under all operating leases, with initial or remaining lease terms of more than one year, are as follows: 1998......................................................... $ 918,000 1999......................................................... 851,000 2000......................................................... 810,000 2001......................................................... 810,000 2002......................................................... 810,000 Thereafter................................................... 3,230,000 ---------- Total...................................................... $7,429,000 ==========
F-71 ABLE EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 8. COMMON STOCK The common stock of the Companies at December 31, 1997 and February 28, 1998 (unaudited) is summarized as follows:
SHARES ---------------------- ISSUED AND PAR VALUE AUTHORIZED OUTSTANDING AMOUNT --------- ---------- ----------- ------- Rental Equipment, Inc. ............ $10 7,500 500 $ 5,000 Butler & Son, Inc. ................ no par 5,000 200 2,000 Butler & Derbyshire, Inc........... no par 5,000 1,000 10,000 ----- ------- 1,700 $17,000 ===== =======
9. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 and for the two months ended February 28, 1997 and 1998, total interest paid was $554,701, $48,666 and $114,822, respectively. For the year ended December 31, 1997 and for the two months ended February 28, 1997 and 1998, total income taxes paid was $9,000, $0 and $0, respectively 10. SUBSEQUENT EVENT On March 23, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of Rental Equipment Inc., Butler & Son, Inc. and Butler & Derbyshire, Inc. as well as the net assets of the partnerships included herein. F-72 INDEPENDENT AUDITORS' REPORT ON COMBINED FINANCIAL STATEMENTS Board of Directors Grand Valley Equipment Co., Inc. and Kubota of Grand Rapids, Inc. We have audited the accompanying combined balance sheet of Grand Valley Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997 and the related combined statements of income and retained earnings and cash flows for the year then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Grand Valley Equipment Co., Inc. and Kubota of Grand Rapids, Inc. as of December 31, 1997 and the results of operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Beene Garter LLP July 23, 1998 Grand Rapids, Michigan F-73 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. COMBINED BALANCE SHEETS
DECEMBER 31, MAY 31, 1997 1998 ------------ ----------- (UNAUDITED) ASSETS Current Assets Cash................................................ $ 440,146 $1,304,088 Accounts receivable................................. 911,325 1,402,058 Refundable income taxes............................. 63,287 -- Inventories......................................... 1,296,093 2,231,832 ---------- ---------- TOTAL CURRENT ASSETS.................................. 2,710,851 4,937,978 Rental Equipment, net................................. 4,724,733 3,438,583 Property, Plant and Equipment, net.................... 238,388 237,995 ---------- ---------- $7,673,972 $8,614,556 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank overdraft...................................... $ 311,917 $ -- Notes payable....................................... 2,070,106 1,526,658 Accounts payable.................................... 289,310 275,169 Accrued expenses Federal income tax................................ -- 637,560 Other............................................. 215,915 142,869 Customer deposits................................... 154,472 6,769 Deferred income taxes............................... 150,000 150,000 ---------- ---------- TOTAL CURRENT LIABILITIES............................. 3,191,720 2,739,025 Stockholders' Equity Common stock, no par value; authorized 50,000 shares; issued and outstanding 6,000............... 6,000 6,000 Common stock, $1 par value; authorized 50,000 shares; issued and outstanding 21,750.............. 21,750 21,750 Retained earnings................................... 4,454,502 5,847,781 ---------- ---------- 4,482,252 5,875,531 ---------- ---------- $7,673,972 $8,614,556 ========== ==========
See accompanying notes F-74 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FIVE MONTHS FIVE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, MAY 31, MAY 31, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues Equipment rentals....................... $3,082,730 $1,255,473 $1,123,104 Sales of new, used and rental equipment, parts and other........................ 15,188,885 6,921,749 6,007,118 ---------- ---------- ---------- 18,271,615 8,177,222 7,130,222 Cost of Sales Rental equipment depreciation........... 1,697,339 748,000 635,000 Cost of sales........................... 11,509,080 4,393,854 4,783,983 ---------- ---------- ---------- 13,206,419 5,141,854 5,418,983 ---------- ---------- ---------- GROSS PROFIT.............................. 5,065,196 3,035,368 1,711,239 Selling, General and Administrative Expenses................................. 3,420,352 902,584 1,139,258 Non-rental Depreciation and Amortization.. 102,359 35,350 38,250 ---------- ---------- ---------- Operating Income.......................... 1,542,485 2,097,434 533,731 ---------- ---------- ---------- Other Income (Expense) Interest income......................... 45,631 33,621 5,503 Gain on sale of non-rental equipment.... 38,471 -- -- Other income............................ 75,857 22,028 34,293 Interest expense........................ (111,927) (32,804) (51,729) ---------- ---------- ---------- 48,032 22,845 (11,933) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES................ 1,590,517 2,120,279 521,798 Provision for Income Taxes................ 544,138 727,000 187,000 ---------- ---------- ---------- NET INCOME................................ 1,046,379 1,393,279 334,798 Beginning Retained Earnings............... 3,408,123 4,454,502 3,408,123 ---------- ---------- ---------- ENDING RETAINED EARNINGS.................. $4,454,502 $5,847,781 $3,742,921 ========== ========== ==========
See accompanying notes F-75 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. COMBINED STATEMENTS OF CASH FLOWS
FIVE MONTHS FIVE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, MAY 31, MAY 31, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows from Operating Activities Net income............................. $ 1,046,379 $1,393,279 $ 334,798 Adjustments to reconcile net income to net cash provided by operating activities............................ Depreciation and amortization........ 1,799,698 783,350 673,250 Gain sale of non-rental equipment.... (38,741) -- -- Gain on sale of rental equipment..... (604,752) (912,841) (209,378) Deferred income taxes................ 185,000 -- -- Changes in assets and liabilities Accounts receivable................ (187,919) (427,446) (540,038) Inventories........................ 313,739 (935,739) (315,768) Accounts payable, accrued expenses and other liabilities............. (575,471) 402,670 22,895 ----------- ---------- ----------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.............................. 1,937,933 303,273 (34,241) Cash Flows from Investing Activities Purchase of rental equipment........... (9,056,754) (902,990) (1,948,032) Purchase of non-rental equipment....... (73,591) (34,958) (56,649) Proceeds from sale of rental equipment............................. 7,205,622 2,353,982 2,239,869 Proceeds from sale of non-rental equipment............................. 81,873 -- -- ----------- ---------- ----------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES.............................. (1,842,850) 1,416,034 235,188 Cash Flows from Financing Activities Bank overdraft......................... (156,626) (311,917) (468,543) Change in notes payable................ 285,939 (543,448) 142,528 ----------- ---------- ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.............................. 129,313 (855,365) (326,015) ----------- ---------- ----------- INCREASE (DECREASE) IN CASH.............. 224,396 863,942 (125,068) Cash Balance at Beginning of Period...... 215,750 440,146 215,750 ----------- ---------- ----------- CASH BALANCE AT END OF PERIOD............ $ 440,146 $1,304,088 $ 90,682 =========== ========== =========== Supplemental Cash Flow Information Cash paid for interest................. $ 111,927 $ 32,804 $ 51,729 Cash paid for income taxes............. $ 415,280 $ 26,153 $ 103,820
See accompanying notes F-76 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (THE INFORMATION AS OF MAY 31, 1998 AND FOR THE THREE MONTHS ENDED MAY 31, 1998 AND 1997 IS UNAUDITED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business and Basis of Presentation The combined financial statements include the accounts of Grand Valley Equipment Co., Inc. and Kubota of Grand Rapids, Inc. (collectively the "Company"). Grand Valley Equipment Co., Inc. ("GVE") and Kubota of Grand Rapids, Inc. ("KGR") are combined due to common ownership and operations which are complimentary. The financial statements of GVE as of October 31, 1997 (GVE's fiscal year end) are combined with the financial statements of KGR as of December 31, 1997. The financial statements of GVE as of March 31, 1998 and 1997 are combined with the financial statements of KGR as of May 31, 1998 and 1997. The Company rents and sells heavy and light machinery and equipment primarily in the Western Michigan area. All significant intercompany accounts and transactions have been eliminated on combination. Interim Financial Statements The accompanying combined balance sheets at May 31, 1998, and the combined statements of income, and retained earnings and cash flows for the five month periods ended May 31, 1998 and 1997 are unaudited and have been prepared on the same basis as the audited combined financial statements included herein. In the opinion of management, such unaudited combined financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. Inventories Inventories, which consist of heavy and light machinery and equipment, are valued at the lower of cost or net realizable value. Revenue Recognition Revenue related to the sale of heavy and light machinery and equipment is recognized at the point of sale. Revenue related to the rental of heavy and light machinery is recognized at the time of return for rentals of one month or less, and ratably over the contract term for rentals in excess of one month. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using an accelerated method over an estimated five-year useful life with no salvage value. Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is provided on accelerated methods over the estimated useful lives of the respective assets. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Ordinary maintenance and repair costs are charged to operations as incurred. F-77 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The Company uses the "liability method" of accounting for income taxes. Accordingly, deferred tax assets and liabilities would be determined based on the difference between the financial statement and tax basis of assets and liabilities, primarily due to differences in the carrying value of rental equipment, using enacted tax rates in effect for the year in which the differences are expected to reverse. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2--CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances with quality financial institutions and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and its credit policy. NOTE 3--RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER 31, MAY 31, 1997 1998 ------------ ----------- (UNAUDITED) Rental equipment.................................. $ 7,694,776 $ 7,156,627 Less: Accumulated depreciation.................... (2,970,043) (3,718,044) ----------- ----------- Rental Equipment, net............................. $ 4,724,733 $ 3,438,583 =========== ===========
NOTE 4--PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, MAY 31, 1997 1998 ------------ ----------- (UNAUDITED) Land................................................ $ 5,000 $ 5,000 Buildings........................................... 60,957 60,957 Machinery and equipment............................. 270,759 270,759 Office furniture and equipment...................... 17,066 10,434 Vehicles............................................ 368,476 410,065 --------- --------- 722,258 757,215 Less: Accumulated depreciation...................... (483,870) (519,220) --------- --------- $ 238,388 $ 237,995 ========= =========
F-78 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 5--NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, MAY 31, 1997 1998 ------------ ----------- (UNAUDITED) $2,500,000 line-of-credit, providing for interest at prime rate (8.5% at December 31, 1997), due in March, 1999, secured by the assets of the Company.......................................... $1,605,000 $ 480,000 Amounts due under manufacturer floor plan arrangement represent amounts on which principle and interest are not yet due..................... 465,106 1,046,658 ---------- ---------- $2,070,106 $1,526,658 ========== ==========
NOTE 6--LEASES The Company leases operating facilities under operating leases from entities under similar ownership. Rent expense under these leases totaled $184,000 for the year ended December 31, 1997 and $30,000 and $77,000 for five months ended May 31, 1998 and 1997, respectively. Under the lease agreements, aggregate rent is payable in monthly installments of $6,000. The agreements provide for an increase in annual rent based on the Consumer Price Index of the previous five years. Future minimum rent commitments are $72,000 each for years ended December 31, 1998 to December 31, 2004, to be adjusted based on the increase in the Consumer Price Index. There is no formal lease agreement for the GVE lease, they are leasing on a month to month basis. NOTE 7--INCOME TAXES The provision for income taxes consists of the following:
MAY 31, DECEMBER 31, ----------------------- 1997 1997 1998 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Currently payable....................... $359,138 $187,000 $727,000 Deferred................................ 185,000 -- -- -------- -------- -------- Federal income tax...................... $544,138 $187,000 $727,000 ======== ======== ========
The effective rate for income tax expense differs from the statutory rate of 34% when applied to income from continuing operations before income taxes due to certain nondeductible expenses of the Company. NOTE 8--RETIREMENT PLAN The Company has adopted a profit-sharing plan and a 401(k) plan that covers substantially all employees and provides for discretionary employer and voluntary employee contributions. KGR has established a defined contribution 401(k) retirement plan which covers substantially all full-time employees. The employees may contribute up to $9,500 annually. Company contributions are discretionary. Company contributions to the plan were $20,102, $6,114 and $6,057 for the year ended December 31, 1997 and for the five month periods ended May 31, 1998 and 1997, respectively. GVE has established a Profit-Sharing Plan under section 401 and 501 of the Internal Revenue Code. Substantially all full-time employees are eligible for the plan. Yearly employer contributions are discretionary. F-79 GRAND VALLEY EQUIPMENT CO., INC. AND KUBOTA OF GRAND RAPIDS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Employees may also elect to contribute to the plan. Company contributions to the plan were $151,152 for the year ended December 31, 1997. Company contributions to the plan were $63,000 and $62,500 for the five month periods ended May 31, 1998 and 1997, respectively. NOTE 9--CONTINGENCIES The Company may occasionally be subject to certain liability claims resulting from the normal course of business. NOTE 10--SUBSEQUENT EVENT On June 9, 1998, the Company entered into a stock purchase agreement with United Rentals, Inc. ("United"). Under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of both GVE and KGR. F-80 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders of McClinch Equipment Services, Inc: We have audited the accompanying balance sheet of McClinch Equipment Services, Inc. as of December 31, 1997, and the related statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of McClinch Equipment Services, Inc. as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Stamford, Connecticut March 6, 1998. F-81 REPORT OF INDEPENDENT ACCOUNTANTS October 28, 1998 To the Stockholders of McClinch Equipment Services, Inc.: In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of McClinch Equipment Services, Inc. at August 31, 1998 in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Company's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this statement in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP F-82 MCCLINCH EQUIPMENT SERVICES, INC. BALANCE SHEETS
DECEMBER 31, AUGUST 31, 1997 1998 ------------ ----------- ASSETS: Cash and cash equivalents............................ $ 314,000 $ 1,160,000 Accounts receivable, less allowance for doubtful accounts of $75,000................................. 3,611,000 3,388,000 State income taxes receivable........................ 1,000 11,000 Inventories.......................................... 354,000 499,000 Net investment in sales-type leases (Note 2)......... 49,000 114,000 Fixed assets, net (Note 3)........................... 18,631,000 24,031,000 Other assets......................................... 29,000 24,000 Due from related parties............................. 151,000 -- ----------- ----------- Total assets....................................... $23,140,000 $29,227,000 =========== =========== LIABILITIES: Notes payable (Note 4)............................... $16,200,000 $20,600,000 Accounts payable and accrued expenses................ 1,237,000 940,000 Due to related parties............................... -- 248,000 Deferred state income taxes (Note 6)................. 500,000 389,000 ----------- ----------- Total liabilities.................................. 17,937,000 22,177,000 ----------- ----------- Commitments (Note 8) STOCKHOLDERS' EQUITY: Common stock, no par value; authorized, 6,000 shares; issued and outstanding, 100 shares.................. -- -- Additional paid-in capital........................... 10,000 10,000 Retained earnings.................................... 5,193,000 7,040,000 ----------- ----------- Total stockholders' equity......................... 5,203,000 7,050,000 ----------- ----------- Total liabilities and stockholders' equity......... $23,140,000 $29,227,000 =========== ===========
The accompanying notes are an integral part of the financial statements. F-83 MCCLINCH EQUIPMENT SERVICES, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
EIGHT MONTHS ENDED YEAR ENDED AUGUST 31, DECEMBER 31, ---------------------- 1997 1998 1997 ------------ ---------- ---------- (UNAUDITED) Revenues: Equipment rentals and service........... $12,141,000 9,341,000 $7,205,000 Sales................................... 4,759,000 2,958,000 2,936,000 ----------- ---------- ---------- 16,900,000 12,299,000 10,141,000 ----------- ---------- ---------- Cost of equipment rentals and service (Note 5)................................. 6,520,000 5,080,000 3,954,000 Cost of sales............................. 3,642,000 2,267,000 2,280,000 ----------- ---------- ---------- Gross profit.......................... 6,738,000 4,952,000 3,907,000 Selling expenses (Note 5)................. 1,540,000 1,006,000 921,000 General and administrative expenses (Note 5)....................................... 2,445,000 1,359,000 909,000 ----------- ---------- ---------- 2,753,000 2,587,000 2,077,000 Other income (expense): Other income............................ 410,000 52,000 300,000 Interest income......................... 56,000 16,000 32,000 Interest expense........................ (1,167,000) (913,000) (722,000) ----------- ---------- ---------- Income before provision for state in- come taxes........................... 2,052,000 1,742,000 1,687,000 Provision (benefit) for state income taxes: Current................................. 7,000 6,000 5,000 Deferred................................ 100,000 (111,000) 95,000 ----------- ---------- ---------- Net income............................ 1,945,000 1,847,000 1,587,000 Retained earnings, beginning of period.... 3,248,000 5,193,000 3,248,000 ----------- ---------- ---------- Retained earnings, end of period...... $ 5,193,000 $7,040,000 $4,835,000 =========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-84 MCCLINCH EQUIPMENT SERVICES, INC. STATEMENTS OF CASH FLOWS
EIGHT MONTHS ENDED YEAR ENDED AUGUST 31, DECEMBER 31, ------------------------ 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income............................ $ 1,945,000 $ 1,847,000 $ 1,587,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................ 3,215,000 2,772,000 2,033,000 Gain on sale of equipment........... (180,000) (143,000) (91,000) Deferred state income taxes......... 100,000 (111,000) 95,000 ----------- ----------- ----------- 5,080,000 4,365,000 3,624,000 Changes in assets and liabilities: Accounts receivable................. (1,460,000) 223,000 (352,000) State income taxes receivable....... 1,000 (10,000) (1,000) Inventories......................... (2,000) (145,000) 69,000 Other assets........................ (9,000) 5,000 -- Accounts payable and accrued expenses........................... 449,000 (297,000) 99,000 Due to or from related parties...... (243,000) 399,000 162,000 ----------- ----------- ----------- Net cash provided by operating activities....................... 3,816,000 4,540,000 3,601,000 ----------- ----------- ----------- Cash flows from investing activities: Acquisition of property and rental equipment............................ (8,814,000) (8,394,000) (7,934,000) Net investment in sales-type leases... 26,000 (65,000) 46,000 Proceeds from the sale of equipment... 495,000 365,000 220,000 ----------- ----------- ----------- Net cash used in investing activities....................... (8,293,000) (8,094,000) (7,668,000) ----------- ----------- ----------- Cash flows from financing activities: Borrowings under line of credit....... 8,750,000 7,700,000 7,550,000 Repayments under line of credit....... (4,050,000) (3,300,000) 2,650,000 ----------- ----------- ----------- Net cash provided by financing activities....................... 4,700,000 4,400,000 4,900,000 ----------- ----------- ----------- Net increase in cash and cash equivalents...................... 223,000 846,000 833,000 Cash and cash equivalents, beginning of period................................. 91,000 314,000 91,000 ----------- ----------- ----------- Cash and cash equivalents, end of period........................... $ 314,000 $ 1,160,000 $ 924,000 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest............................. $ 1,131,000 $ 892,000 $ 704,000 State income taxes................... 6,000 9,000 6,000
The accompanying notes are an integral part of the financial statements. F-85 MCCLINCH EQUIPMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS (ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Company's Business: McClinch Equipment Services, Inc. (the "Company") is an exclusive dealer for JLG Industries in New Jersey, Delaware, Maryland, Washington D.C., and Northern Virginia. The Company also has distribution agreements with other manufacturers in New Jersey, Delaware, Maryland, Pennsylvania, Washington, D.C. and Virginia. Revenues are derived principally from the rental of aerialift equipment and material handling equipment and the sale of new and used aerialift equipment to a diversified customer base including contractors and other users. Basis of Presentation: The balance sheet is presented on an unclassified basis since it more properly reflects the Company's operations as an equipment rental company. Interim Financial Statements: The accompanying statements of income and retained earnings and cash flows for the eight month periods ended August 31, 1998 and 1997 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. Revenue Recognition: a. Operating Leases. Rental revenue is recognized over the lease term (generally less than one year) as earned. b. Sales-Type Leases: Sales are recorded at amounts equal to the present value of the minimum lease payments at the inception of the lease. The unearned interest income represents the difference between the minimum lease payments and the present value of such payments. Such interest income is recognized over the life of the lease using the interest method. Cash and Cash Equivalents: Cash and cash equivalents consist primarily of cash in banks and temporary cash investments with original maturities of less than 90 days. These balances are insured by the Federal Deposit Insurance Corporation up to $100,000. Inventories: Inventories, consisting principally of aerialift equipment and related spare parts, are recorded at the lower of first-in, first-out cost or market. Fixed Assets: Fixed assets, consisting principally of the Company's fleet of aerialift equipment, primarily held for rental under operating leases, is stated at cost and is depreciated using the straight-line method over the following estimated useful lives: rental equipment, shop equipment, furniture and fixtures and computer equipment, 7 years; vehicles, 5 years; and leasehold improvements, over the remaining term of the lease. F-86 MCCLINCH EQUIPMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) Upon retirement or sale, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are included in income. Income Taxes: The Company has elected to be taxed as a Small Business Corporation under the Internal Revenue Code. Under this regulation the Company's income is reported for federal income tax purposes by the stockholders on their individual tax returns. Accordingly, the financial statements reflect no provision or liability for federal income taxes. The small business corporation election can be made in some of the states in which the Company does business and accordingly, the financial statements only reflect state income tax provisions for the states in which the election can not be made. The Company recognizes deferred tax assets and liabilities for the expected future state tax consequences of events that have been recognized in the Company's financial statements or state tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. A valuation allowance is established when it is more likely than not that deferred tax assets will not be realized. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications: Certain amounts have been reclassified between balance sheet accounts to more properly reflect the nature of the item. 2. SALES-TYPE LEASES The net investment in sales-type leases consists of the following:
DECEMBER 31, AUGUST 31, 1997 1998 ------------ ---------- Minimum lease payments receivable.................... $53,000 $125,000 Less, Unearned interest income..................... (4,000) (11,000) ------- -------- Net investment in sales-type leases.................. $49,000 $114,000 ======= ========
All future minimum lease payments are receivable during 1998 and 1999. F-87 MCCLINCH EQUIPMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 3. FIXED ASSETS Fixed assets consist of the following:
DECEMBER 31, AUGUST 31, 1997 1998 ----------- ----------- Land and building.................................. $ -- $ 242,000 Rental equipment................................... 24,854,000 32,175,000 Vehicles........................................... 1,043,000 1,290,000 Shop equipment..................................... 35,000 79,000 Office equipment................................... 28,000 31,000 Leasehold improvements............................. -- 32,000 ----------- ----------- 25,960,000 33,849,000 Less, Accumulated depreciation................... (7,329,000) (9,818,800) ----------- ----------- $18,631,000 $24,031,000 =========== ===========
4. NOTES PAYABLE The Company has available a revolving line of credit with a bank syndicate totaling the lesser of $28,000,000 or an amount based on eligible accounts receivable, parts inventory, new equipment inventory, vehicles and rental equipment. The unused portion of the line of credit was $11,800,000 and $7,400,000 at December 31, 1997 and August 31, 1998, respectively. At December 31, 1997, the outstanding balance bears interest at fluctuating 30-day LIBOR rate plus 2 1/4% (8.2% at December 31, 1997). Effective in January 1998, the outstanding balance bears interest at the fluctuating 30-day LIBOR rate plus 1 3/4% (7.4% at August 31, 1998) and the Company pays a commitment fee of 1/4% per annum on the unused portion of the line of credit. The Company has the option to borrow additional funds and/or convert all or a portion of the outstanding balance to a fluctuating interest rate equal to the lender's prime rate plus 1/2% or a fixed LIBOR rate plus 1 3/4% for 90, 180 or 360 days. The line of credit terminates on November 30, 1999 and extends automatically every six months unless either party gives written notice to the other. Upon termination or default, amounts outstanding under this line of credit convert to a note which is payable in 48 monthly installments. Although there are no fixed payments on the principal, the Company expects the aggregate maturities of debt outstanding at December 31, 1997 to approximate the following: 1998........................................................... $4,050,000 1999........................................................... 4,050,000 2000........................................................... 4,050,000 2001........................................................... 4,050,000
Substantially all of the assets of the Company have been pledged as collateral under the debt agreement. In addition, an affiliate of the Company has guaranteed this debt. The lenders require, among other terms, that the Company and its affiliate on a combined basis meet certain financial ratios and obtain approval prior to issuing of advances or loans to stockholders or officers which exceed certain amounts, as defined. On September 1, 1998, the note payable was paid in full (see Note 9). F-88 MCCLINCH EQUIPMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 5. RELATED PARTY TRANSACTIONS An affiliate (through common ownership) provides services to the Company in connection with its operations. The primary expenses, which are incurred and paid by the affiliate and allocated to the Company, include salaries ($1,750,000 for the year ended December 31, 1997 and $750,000 and $520,000 for the eight months ended August 31, 1998 and 1997, respectively, included in general and administrative expenses) and spare parts inventory, trucking services and insurance expenses ($850,000, for the year ended December 31, 1997, and $590,000 and $489,000 for the eight months ended August 31, 1998 and 1997, respectively, included in cost of equipment rentals and service). The Company rents equipment to the affiliate under an informal equipment sharing agreement for ultimate rental to the affiliate's customers in New York and Connecticut. In addition, the Company rents equipment from the affiliate for ultimate rental to customers in its operating areas. The net revenue earned (included in equipment rentals and service revenues) by the Company under these arrangements for the year ended December 31, 1997 was $178,000 and $352,000 and $127,000 for the eight months ended August 31, 1998 and 1997, respectively. The Company purchased used rental equipment from an affiliate for ultimate sale to unrelated third parties amounting to $964,000 for the year ended December 31, 1997 and $657,000 and $795,000 for the eight months ended June 30, 1998 and 1997, respectively. Additionally, the Company sold used rental equipment to the affiliate for ultimate sale to unrelated third parties. The selling price of such equipment amounted to $239,000 for the year ended December 31, 1997 and $75,000 and $153,000 for the eight months ended August 31, 1998 and 1997, respectively. These transactions are settled in the normal course of business. 6. INCOME TAXES Deferred state income taxes are recorded to reflect primarily the tax consequences on future years of temporary differences between the tax bases of assets and liabilities, principally fixed assets and accounts receivable, and their financial reporting amounts at each year-end and for tax operating loss carryforwards. The components of deferred state tax assets and liabilities are as follows:
DECEMBER 31, AUGUST 31, 1997 1998 ------------ ---------- Deferred tax assets: Net operating loss carryforward................... $ 22,000 $ 10,000 Accounts receivable............................... 5,000 4,000 Deferred tax liabilities: Fixed assets...................................... (377,000) (303,000) Other............................................. (150,000) (100,000) --------- --------- $(500,000) $(389,000) ========= =========
No valuation allowance has been recognized for deferred tax assets. The Company has various state net operating loss carryforwards at December 31, 1997 of approximately $357,000 which expire from 2002 through 2012. F-89 MCCLINCH EQUIPMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (ALL INFORMATION FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998 AND 1997 IS UNAUDITED) 7. PROFIT-SHARING PLAN The Company participates in a profit sharing plan with its affiliates which provides for a discretionary contribution to a trust fund based on the Company's net income for the year, to be allocated to all eligible employees based on their proportional compensation. Nonunion employees are eligible for participation in the plan after the completion of one year of service, provided they have also reached age 21. After becoming eligible, employees vest at an annual rate of 20%. Discretionary contributions under the plan by the Company were $75,000 for the year ended December 31, 1997. There were no discretionary contributions under the plan by the Company for the eight months ended August 31, 1998 and 1997. The plan also provides for a salary deferral plan pursuant to Section 401(k) of the Internal Revenue Code, as amended. The plan requires the Company to contribute an amount equal to 25% of employees' contributions not to exceed 6% of their annual compensation up to $160,000. Participants vest in the Company's contribution at the rate of 20% annually after becoming eligible. Matching contributions under the plan by the Company were $12,000 for the year ended December 31, 1997 and $14,000 and $10,000 for the eight months ended August 31, 1998 and 1997, respectively. 8. COMMITMENTS The Company leases buildings in Delaware, Virginia, Maryland and New Jersey from unrelated parties in the form of operating leases which expire in 1998 and 1999. Total future minimum lease payments of $190,000 are as follows: 1998, $163,000; and 1999, $27,000. In addition, the Company leases buildings in New Jersey and Virginia on a month-to-month basis. Total rent expense of $243,000 was incurred for the year ended December 31, 1997 and $178,000 and $152,000 for the eight months ended August 31, 1998 and 1997, respectively. 9. SUBSEQUENT EVENT On September 1, 1998, United Rentals, Inc. acquired all of the outstanding shares of common stock of the Company. F-90 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Valley Rentals, Inc. We have audited the combined balance sheet of Valley Rentals, Inc. (see Note 1) (the "Companies") as of December 31, 1997 and the related combined statements of income, stockholders' equity and partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Valley Rentals, Inc. at December 31, 1997, and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey April 20, 1998, except for Note 10, as to which the date is April 22, 1998 F-91 VALLEY RENTALS, INC. COMBINED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) ASSETS Cash................................................. $ 663,540 $ 86,842 Accounts receivable, net of allowance for doubtful accounts of $117,275................................ 2,116,829 1,955,545 Inventory............................................ 169,514 171,114 Rental equipment, net................................ 9,696,900 9,846,963 Property and equipment, net.......................... 1,791,348 1,763,087 Prepaid expenses and other assets.................... 94,146 50,945 ----------- ----------- Total assets..................................... $14,532,277 $13,874,496 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Liabilities: Accounts payable, accrued expenses and other liabilities....................................... $ 1,684,216 $ 1,436,169 Stockholder loan................................... 137,385 103,675 Debt............................................... 1,109,707 1,432,271 ----------- ----------- Total liabilities................................ 2,931,308 2,972,115 Commitments and contingencies Stockholders' equity and partners' capital: Stockholders' equity: Common stock, Valley Rentals, Inc., no par value, 10,000 shares authorized, 3,633 shares issued and outstanding....................................... 58,650 58,650 Additional paid-in capital......................... 1,854,431 1,854,431 Retained earnings.................................. 9,691,223 8,992,635 Partners' capital (deficit)--Valley Equipment Leasing, LLC ...................................... (3,335) (3,335) ----------- ----------- Total stockholders' equity and partners' capital......................................... 11,600,969 10,902,381 ----------- ----------- Total liabilities and stockholders' equity and partners' capital............................... $14,532,277 $13,874,496 =========== ===========
See accompanying notes. F-92 VALLEY RENTALS, INC. COMBINED STATEMENTS OF INCOME
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------- 1997 1997 1998 ------------ ---------- ---------- (UNAUDITED) Revenues: Equipment rentals....................... $12,998,863 $2,984,396 $2,835,547 Sales of rental equipment............... 663,776 201,797 351,103 Sales of parts, supplies and new equipment.............................. 1,965,431 203,804 226,372 ----------- ---------- ---------- Total revenues........................ 15,628,070 3,389,997 3,413,022 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation.......... 3,809,895 834,400 1,051,236 Depreciation, equipment rentals......... 3,475,710 758,568 783,393 Cost of rental equipment sales.......... 336,664 186,153 170,128 Cost of parts, supplies and new equipment sales........................ 1,001,695 138,994 159,831 ----------- ---------- ---------- Total cost of revenues................ 8,623,964 1,918,115 2,164,588 ----------- ---------- ---------- Gross profit.......................... 7,004,106 1,471,882 1,248,434 Selling, general and administrative expenses................................. 4,725,084 1,159,283 1,226,219 Non-rental depreciation................... 304,895 69,072 91,525 ----------- ---------- ---------- Operating income (loss)............... 1,974,127 243,527 (69,310) Interest expense.......................... 159,488 23,739 12,321 Interest (income)......................... (61,651) (15,784) (19,445) Other (income), net....................... (37,427) 7,053 9,785 ----------- ---------- ---------- Net income (loss)..................... $ 1,913,717 $ 228,519 $ (71,971) =========== ========== ==========
See accompanying notes. F-93 VALLEY RENTALS, INC. COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
COMMON STOCK ADDITIONAL PARTNERS' -------------- PAID-IN RETAINED CAPITAL SHARES AMOUNT CAPITAL EARNINGS (DEFICIT) ------ ------- ---------- ----------- --------- Balance at January 1, 1997.... 3,633 $58,650 $1,854,431 $ 8,819,142 $(10,877) Net income.................. 1,906,175 7,542 Stockholder distributions... (1,034,094) ----- ------- ---------- ----------- -------- Balance at December 31, 1997.. 3,633 58,650 1,854,431 9,691,223 (3,335) Net loss (Unaudited)........ (71,971) Stockholder distributions (Unaudited)................ (626,617) ----- ------- ---------- ----------- -------- Balance at March 31, 1998 (Unaudited).................. 3,633 $58,650 $1,854,431 $ 8,992,635 $ (3,335) ===== ======= ========== =========== ========
See accompanying notes. F-94 VALLEY RENTALS, INC. COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ----------------------- 1997 1997 1998 ------------ ---------- ----------- (UNAUDITED) Cash flows from operating activities Net income (loss)...................... $ 1,913,717 $ 228,519 $ (71,971) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation......................... 3,780,605 827,640 874,918 Gain on rental equipment sales....... (327,112) (15,644) (180,975) Changes in assets and liabilities: (Increase) decrease in accounts receivable......................... (245,964) (72,829) 161,284 Decrease (increase) in inventory.... 1,557 (2,500) (1,600) (Increase) decrease in prepaid expenses and other assets.......... (27,197) 34,521 43,201 Decrease in accounts payable, accrued expenses and other liabilities........................ (26,197) (358,397) (248,047) ----------- ---------- ----------- Cash provided by operating activities.. 5,069,409 641,310 576,810 Cash flows from investing activities Purchase of rental equipment........... (3,479,228) (287,751) (1,006,687) Proceeds from sale of rental equipment............................. 663,776 201,797 351,103 Purchases of property and equipment.... (364,461) (127,632) (63,264) ----------- ---------- ----------- Cash used in investing activities...... (3,179,913) (213,586) (718,848) Cash flows from financing activities Stockholder distribution............... (1,034,094) (1,471,458) (626,617) Principal payments on debt............. (2,706,431) (178,032) (253,043) Borrowings under credit facilities..... 2,193,000 1,000,000 445,000 ----------- ---------- ----------- Cash used in financing activities...... (1,547,525) (649,490) (434,660) ----------- ---------- ----------- Increase (decrease) in cash............ 341,971 (221,766) (576,698) Cash balance at beginning of period.... 321,569 321,569 663,540 ----------- ---------- ----------- Cash balance at end of period.......... $ 663,540 $ 99,803 $ 86,842 =========== ========== ===========
See accompanying notes. F-95 VALLEY RENTALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 (THE INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The combined financial statements of Valley Rentals, Inc. include the accounts of Valley Rentals, Inc. ("Valley") and Valley Equipment Leasing, LLC ("Valley Equipment") (collectively the "Companies"). The Companies are affiliated through common ownership. All significant intercompany accounts and transactions have been eliminated in combination. These combined financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Companies by United Rentals, Inc. ("United") as more fully described in Note 10. BUSINESS ACTIVITIES The Companies rent, sell and repair construction equipment for use by contractor, industrial and homeowners markets. The rentals are on a daily, weekly or monthly basis. The Companies have three locations (Longview, Vancouver and Turnwater) and the principal market area is Washington State. The nature of the Companies' business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheet is presented on an unclassified basis. INTERIM FINANCIAL STATEMENTS The accompanying combined balance sheet at March 31, 1998 and the combined statements of income, stockholders' equity and partners' capital and cash flows for the three-month periods ended March 31, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited combined financial statements included herein. In the opinion of management, such unaudited combined financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim period are not necessarily indicative of results for the full year. INVENTORY Inventories consists primarily of equipment, general replacement parts and fuel for the equipment and are stated at the lower of cost, determined under the first-in, first-out method, or market. RENTAL EQUIPMENT Rental equipment is recorded at cost. Rental equipment costing less than $1,500 is immediately expensed at the date of purchase. Depreciation for rental equipment is computed using the straight-line method over an estimated five to seven-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of rental equipment and cost of sales of rental equipment, respectively, in the combined statement of income. F-96 VALLEY RENTALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. The Company capitalizes all property and equipment purchases greater than $1,500. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives of 5 to 10 years with no salvage value. Leasehold improvements are amortized using the straight-line method over the estimated lives of the improvements or the remaining life of the lease, whichever is shorter. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. RENTAL REVENUE Rental revenue is recorded as earned under the operating method. ADVERTISING COSTS The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to $250,984, $49,386 and $51,026 in the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998, respectively. INCOME TAXES Valley has elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal purposes. Under those provisions, Valley does not pay federal income taxes; instead, the shareholders are liable for individual income taxes on Valley's profits. Valley Equipment, an LLC, is not a taxable entity and, therefore, incurs no income tax liability. Any profits and losses of Valley Equipment flow through to the individual members. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Companies maintain cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Companies' customer base and their credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Rental equipment................................... $22,504,852 $22,858,436 Less accumulated depreciation...................... 12,807,952 13,011,473 ----------- ----------- Rental equipment, net.............................. $ 9,696,900 $ 9,846,963 =========== ===========
F-97 VALLEY RENTALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Land................................................ $ 463,000 $ 463,000 Building and building improvements.................. 431,313 431,313 Transportation equipment............................ 1,360,766 1,424,030 Furniture, fixtures and equipment................... 487,153 487,153 Leasehold improvements.............................. 557,781 557,781 ---------- ---------- 3,300,013 3,363,277 Less accumulated depreciation....................... 1,508,665 1,600,190 ---------- ---------- Total............................................... $1,791,348 $1,763,087 ========== ==========
5. DEBT Debt consists of the following:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Columbia State Bank--Various notes with combined monthly payments of $21,148 including interest of 9%................................................ $ 779,050 $ 739,337 Columbia State Bank--Revolving line of credit loan of $1,500,000 expiring on June 1, 1998 and bearing interest at 0.5% over prime....................... 0 445,000 John Deere Credit--Various notes with combined monthly payments of $31,093 including interest from 5.5% to 5.9%................................. 262,918 206,202 Ingersoll Rand--Various non-interest bearing notes with combined monthly payments of $14,253......... 67,739 41,732 ---------- ---------- $1,109,707 $1,432,271 ========== ==========
Substantially all assets collateralize the above notes. All debt was paid off in connection with the acquisition discussed in Note 10. 6. OPERATING LEASES The Companies lease two store locations on long term leases. The Companies are responsible for all operating expenses of the facilities including property taxes, assessments, insurance, repairs and maintenance. These leases have various terms and extend through December 2001. Total rent expense for the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998 was approximately $136,100, $33,900 and $33,900, respectively. F-98 VALLEY RENTALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1997, minimum lease commitments under all operating leases, with initial or remaining lease terms of more than one year, are as follows: 1998................................................................ $225,452 1999................................................................ 218,252 2000................................................................ 204,300 2001................................................................ 58,710 2002................................................................ 0 -------- Total............................................................... $706,714 ========
7. RELATED PARTY TRANSACTIONS The Companies lease two of its three operating facilities from the president and a majority stockholder of the Companies on a five year lease basis expiring October 31, 2000 and December 31, 2001. The Companies are responsible for all operating expenses of the facilities including property taxes, assessment, insurance, repairs and maintenance. Total rent expense for the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998 was approximately $124,800, $31,200 and $31,200, respectively. In connection with the acquisition discussed in Note 10, the lease terms have been renegotiated. The Companies paid $50,000, $0 and $0 during the year ended December 31, 1997, and the three months ended March 31, 1997 and 1998, respectively, to the members of the board of directors, who are also shareholders. The Companies also have a note payable to its majority stockholder totaling $137,385 and $103,675 at December 31, 1997 and March 31, 1998, respectively, bearing interest at 8.75%. No repayment schedule has been established. In January and April 1998, the Companies made payments of $627,542 on behalf of its Stockholders to the Internal Revenue Service. 8. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998 total interest paid was $159,517, $25,499 and $14,050, respectively. During 1997 the Companies purchased $508,830 of equipment which was financed and $72,993 of equipment which was traded in like-kind exchanges. During the three months ended March 31, 1997 and 1998 the Companies purchased $187,737 and $96,897 of equipment, respectively, which was financed. 9. PENSION AND PROFIT-SHARING PLANS The Companies have a defined contribution 401(k) pension plan which covers substantially all employees. The Companies match 10% up to the first six percent of the employees contribution. Companies contributions to the plan were $9,773, $2,762 and $3,577 for the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998, respectively. In addition, Valley maintains a profit-sharing plan which covers substantially all employees. Valley's contributions are discretionary and amounted to $140,000, $30,000 and $34,500 for the year ended December 31, 1997 and for the three months ended March 31, 1997 and 1998, respectively. 10. SUBSEQUENT EVENT On April 22, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Companies. F-99 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Lift Systems, Inc. We have audited the balance sheet of Lift Systems, Inc. as of December 31, 1997 and the related statements of income, changes in stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lift Systems, Inc. as of December 31, 1997 and the results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ Altschuler, Melvoin and Glasser LLP Chicago, Illinois March 12, 1998, except for Note 8 as to which the date is July 28, 1998 F-100 LIFT SYSTEMS, INC. BALANCE SHEETS
DECEMBER JULY 28, 31, 1997 1998 ----------- ----------- ASSETS (UNAUDITED) Rental Equipment: Cost................................................. $20,050,950 $22,132,912 Less accumulated depreciation........................ 8,931,693 9,912,355 ----------- ----------- 11,119,257 12,220,557 ----------- ----------- Cash and Cash Equivalents.............................. 176,993 48,043 Accounts Receivable, Net of Allowances of $135,000 (1997) and $135,000 (1998)............................ 3,359,585 3,129,623 Equipment Held for Resale.............................. 233,152 188,830 Other Assets........................................... 619,874 603,766 ----------- ----------- 4,389,604 3,970,262 ----------- ----------- Other Depreciable Equipment, At Cost: Vehicles............................................. 1,624,753 1,660,927 Mobile radio equipment............................... 19,134 19,134 Shop tools and equipment............................. 158,615 167,260 Maintenance equipment................................ 160,783 157,927 Office furniture and equipment....................... 162,785 162,864 Computer systems..................................... 390,873 390,502 ----------- ----------- 2,516,943 2,558,614 Less accumulated depreciation........................ 1,293,400 1,449,459 ----------- ----------- 1,223,543 1,109,155 ----------- ----------- Land, Building and Improvements: Cost................................................. 1,532,442 1,545,120 Less accumulated depreciation........................ 111,194 136,355 ----------- ----------- 1,421,248 1,408,765 ----------- ----------- $18,153,652 $18,708,739 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Long-term Debt Secured by Rental Equipment............. $ 9,267,350 $ 8,965,510 Bank Line of Credit Note Payable....................... 0 Trade Accounts Payable................................. 198,935 857,523 Other Accrued Liabilities.............................. 543,229 378,427 Deferred State Income Taxes............................ 93,475 35,025 Other Long-term Debt................................... 1,366,636 1,337,888 ----------- ----------- 11,469,625 11,574,373 ----------- ----------- Stockholders' Equity: Common stock: $1.00 par value; 100,000 shares authorized; 800 shares issued and outstanding..................... 800 800 Additional paid-in capital........................... 79,200 114,225 Retained earnings.................................... 6,604,027 7,019,341 ----------- ----------- 6,684,027 7,134,366 ----------- ----------- $18,153,652 $18,708,739 =========== ===========
The accompanying notes are an integral part of this statement. F-101 LIFT SYSTEMS, INC. STATEMENT OF INCOME
YEAR ENDED 209 DAY PERIODS DECEMBER 31, ENDED JULY 28, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Operating Revenue: Equipment sales...................... $2,812,545 $2,077,354 $ 1,655,935 Rentals.............................. 10,020,489 5,994,508 5,479,955 Transport............................ 1,030,373 647,914 555,513 Service and parts sales.............. 651,546 476,161 421,372 Other................................ 23,998 42,674 4,568 ---------- ---------- ----------- 14,538,951 9,238,611 8,117,344 Less cost of equipment sold.......... 1,734,679 1,200,550 981,070 ---------- ---------- ----------- Gross Operating Profit................. 12,804,272 8,038,061 7,136,274 ---------- ---------- ----------- Operating Expenses: Direct cost of rental revenue (except depreciation)....................... 1,817,749 964,109 1,049,802 External costs of transport revenue.. 29,767 31,982 605 Costs of service revenue and parts sales............................... 427,230 261,500 269,604 Personnel costs, not charged to di- rect costs above.................... 3,093,421 2,259,844 1,683,850 General and administrative expenses.. 940,036 727,807 525,820 Insurance based on revenue........... 113,627 80,424 78,176 Occupancy expenses................... 123,877 76,307 60,998 Provision for bad debts.............. 73,076 89,713 34,672 ---------- ---------- ----------- 6,618,783 4,491,686 3,703,527 ---------- ---------- ----------- Income from Operations................. 6,185,489 3,546,375 3,432,747 Other Income (Expense): Interest expense..................... (857,800) (512,066) (476,376) Interest income...................... 28,897 17,737 15,705 Discretionary compensation........... (435,900) (113,301) (162,000) Profit-sharing contribution.......... (212,622) (1,098) (86,274) Gain (Loss) on sale of property and equipment........................... 9,335 6,665 13,498 Other................................ 6,926 23,372 3,695 ---------- ---------- ----------- Income before Depreciation, Amortization and Income Taxes......... 4,724,325 2,967,684 2,740,994 Depreciation and Amortization.......... (3,824,466) (2,499,153) 2,128,033 Provision for Deferred State Income Taxes................................. (15,000) 46,783 (10,000) ---------- ---------- ----------- Net Income............................. $ 884,859 $ 515,314 $ 602,961 ========== ========== ===========
The accompanying notes are an integral part of this statement. F-102 LIFT SYSTEMS, INC. STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ---------- ---------- ---------- Balance, January 1, 1997............ $800 $ 79,200 $5,823,929 $5,903,929 Net Income for 1997................. 884,859 884,859 Redemption of Common Stock.......... (4,761) (4,761) Dividends........................... (100,000) (100,000) ---- -------- ---------- ---------- Balance, December 31, 1997.......... 800 79,200 6,604,027 6,684,027 Net Income for the 209 day Period Ended July 28, 1998 (unaudited).... 515,314 515,314 Additional paid-in capital pledged.. 35,025 Dividends........................... (100,000) (100,000) ---- -------- ---------- ---------- Balance, July 28, 1998 (unaudited).. $800 $114,225 $7,019,341 $7,134,366 ==== ======== ========== ==========
The accompanying notes are an integral part of this statement. F-103 LIFT SYSTEMS, INC. STATEMENT OF CASH FLOWS
209 DAY PERIOD YEAR ENDED ENDED JULY 28, DECEMBER 31, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Cash Flows from Operating Activities: Collections from customers............ $12,312,047 $ 8,315,773 $ 6,630,049 Interest income collected............. 28,897 16,365 15,704 Commissions collected................. 23,997 42,674 4,568 Other income collected................ 6,926 23,372 3,695 Cash paid to suppliers................ (5,357,199) (3,313,052) (1,863,642) Cash paid to employees................ (3,534,083) (2,146,085) (1,861,019) Interest paid......................... (857,800) (517,375) (511,443) State income taxes paid............... (6,000) (11,667) (6,000) ----------- ----------- ----------- Net cash provided by operating activities........................... 2,616,785 2,410,005 2,411,912 ----------- ----------- ----------- Cash Flows from Investing Activities: Proceeds from sales of rental equipment............................ 1,453,297 1,203,051 1,200,245 Proceeds from sale of nonrental property............................. 45,391 29,736 43,891 Purchases of rental equipment......... (5,274,037) (3,191,723) (3,640,472) Purchases of other depreciable property............................. (309,438) (136,753) (231,137) Payments for land and building improvements......................... 0 (12,678) 0 ----------- ----------- ----------- Net cash used in investing activities........................... (4,084,787) (2,108,367) (2,627,473) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from bank loans for rental equipment............................ 4,149,000 1,406,000 1,221,000 Proceeds from line of credit.......... 1,699,000 883,000 650,000 Payments on rental equipment loans.... (2,989,158) (1,707,840) (1,806,365) Payments on line of credit............ (2,199,000) (883,000) (800,000) Payments on other long-term debt...... (20,183) (6,416) (16,580) Payments on real estate mortgage loan................................. (13,987) (8,332) (8,016) Payments on noncompete agreement...... (14,000) (14,000) 0 Payments on stock purchase............ (4,761) 0 0 Payments of dividends................. (100,000) (100,000) (100,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities................. 506,911 (430,588) (859,961) ----------- ----------- ----------- Net (Decrease) Increase in Cash and Cash Equivalents............................ (961,091) (128,950) (1,075,522) Cash and Cash Equivalents, Beginning of Period................................. 1,138,084 176,993 1,138,084 ----------- ----------- ----------- Cash and Cash Equivalents, End of Period................................. $ 176,993 $ 48,043 $ 62,562 =========== =========== ===========
The accompanying notes are an integral part of this statement. F-104 LIFT SYSTEMS, INC. STATEMENT OF CASH FLOWS (CONTINUED)
209 DAY PERIODS ENDED JULY 28, YEAR-ENDED DECEMBER 31, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Reconciliation of Net Income to Net Cash Provided by Operating Activities: Net income.......................... $ 884,859 $ 515,314 $ 602,961 ----------- ---------- ---------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization... 3,824,466 2,499,153 2,128,034 Provision for bad debts......... 73,076 (123,733) (126,920) Provision for profit-sharing contribution................... 212,622 1,098 86,273 Loss (Gain) on sale of other depreciable property........... (9,335) (6,665) (13,498) Purchases of equipment for resale ........................ (233,152) (475,212) -- Proceeds from sales of rental equipment...................... (1,453,297) (1,203,051) (1,200,245) Original cost of rental equipment sold................. 2,037,886 1,779,810 1,573,096 Accumulated depreciation of rental equipment sold.......... (1,366,834) (1,206,748) (988,856) Decrease (Increase) in accounts receivable..................... (1,139,008) 140,249 (418,222) Decrease (Increase) in other assets......................... (57,006) (157,894) 192,684 Increase (Decrease) in accounts payable........................ (6,875) 658,588 509,626 Increase (Decrease) in deferred state income taxes............. 9,000 (58,450) 4,000 Decrease in other accrued liabilities.................... (159,617) 47,546 62,979 ----------- ---------- ---------- Total adjustments............. 1,731,926 1,894,691 1,808,951 ----------- ---------- ---------- Net Cash Provided by Operating Activities........................... $ 2,616,785 $2,410,005 $2,411,912 =========== ========== ========== Supplemental Schedule of Noncash Financing Activities: During 1997, the Company did like- kind exchanges of rental equipment - one with a customer and nine with a manufacturer/supplier. The gross acquired cost and accumulated depreciation of the equipment given up in these exchanges were $121,965 and $38,326, respectively, yielding a capitalized cost of $83,639 for the items of equipment acquired. During 1997, the Company entered into financing leases totaling $214,255 (see Note 5).
The accompanying notes are an integral part of this statement. F-105 LIFT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE 209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED) Lift Systems, Inc. sells, services, rents and transports aerial lift equipment. Its primary customers are specialty construction contractors and industrial maintenance departments in Northeast Illinois, Southeast Wisconsin and Northwest Indiana. In management's opinion, the Company has no current risk of significant vulnerability due to dependence on individual suppliers or concentrations of revenue streams or receivables in a single or a limited number of customers. NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. These financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Company by United Rentals, Inc. ("United") as more fully described in Note 8. Interim Financial Statements The accompanying balance sheet at July 28, 1998 and the statements of income, stockholders' equity and cash flows for the 209-day periods ended July 28, 1998 and 1997 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. Rental Revenue Rental revenue is recognized on a daily basis under operating leases covering rental equipment. Such leases typically range from one day to several months. Depreciation and Amortization Amounts capitalized to components of the headquarters facility, other than land, are being depreciated on a straight-line basis with lives ranging from 5 to 39 years for both financial and tax reporting purposes. For financial reporting purposes, all other depreciation is provided on a straight-line basis over seven years for shop tools and equipment and office furniture and equipment, and over five years for rental equipment and most other depreciable assets. Total depreciation expense reflected in these financial statements for 1997 and for the 209-day periods ended July 28, 1998 and 1997 is $3,789,843, $2,478,956 and $2,107,836, respectively. For tax purposes, equipment depreciation is computed over the same lives but using the maximum rates allowed by the Internal Revenue Code. The cost of the noncompete agreement (see Note 3) is being amortized monthly on a straight-line basis over five years, the term of the agreement. The amount of such amortization reflected in these financial statements for 1997 and for the 209-day periods ended July 28, 1998 and 1997 is $34,000, $19,833 and $19,833, respectively. F-106 LIFT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE 209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED) Total mortgage acquisition costs of $15,594 (see Note 5) are being amortized over 25 years on a straight line basis. Income Taxes Lift Systems, Inc. has elected to be taxed as a Subchapter S corporation whereby corporate taxable income is allocated to the stockholders and reported on their individual income tax returns. Accordingly, no provision for federal income taxes is required in the accompanying financial statements. However, the Company is subject to Illinois, Wisconsin and Indiana state income taxes. For income tax purposes, the Company reports income on a modified cash basis and uses accelerated methods of depreciation as described above. Accordingly, deferred state income taxes have been provided on the temporary differences in reporting income for financial statement and tax reporting purposes. Cash and Cash Equivalents Cash and cash equivalents consist of unrestricted funds in checking accounts and an interest bearing money market account. NOTE 2--LAND AND BUILDING On September 13, 1994, the Company purchased eight acres of land and a masonry building of 22,500 square feet to serve as the Company's headquarters and primary operating facility for the foreseeable future. The primary financing for this property was provided by a purchase money mortgage secured by a promissory note as more fully described in Note 5 below. The closing purchase price of this property was $1.2 million. Operations recommenced from the new location on Monday, January 30, 1995. At December 31, 1997 the capitalized costs consisted of the following:
ACCUMULATED NET BOOK COST DEPRECIATION VALUE ---------- ------------ ---------- Land................................... $ 407,512 -- $ 407,512 Building............................... $ 804,524 $ 59,137 $ 745,387 Land Improvements...................... $ 320,406 $ 52,057 $ 268,349 ---------- -------- ---------- $1,532,442 $111,194 $1,421,248 ========== ======== ==========
NOTE 3--NONCOMPETE AGREEMENT Included in Other Assets is the cost of a noncompete agreement, net of accumulated amortization, which amortization method is described above. The gross cost of this agreement was $170,000 consisting of an immediate payment of $100,000 and annual installments of $14,000 to be paid on or about July 1 of each year for five years with the first installment due on July 1, 1994, provided that the former shareholder is in compliance with the terms of the agreement. The noncompete agreement arose concurrently with, as an integral part of, and in partial consideration for, a Stock Redemption Agreement as more fully described in Note 6 below. The liability related to the noncompete agreement was $14,000 at December 31,1997 and zero at July 28, 1998. This liability is included in Other Long-Term Debt. F-107 LIFT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE 209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED) NOTE 4--SHORT-TERM LINES OF CREDIT The Company has in place an overall credit facility as further described in Note 5 below, under which the Company has available a $500,000 revolving line of credit for working capital purposes. Amounts borrowed under this credit agreement bear interest at a floating rate of .25% over the bank's prime rate. There were no amounts outstanding under this line of credit at December 31, 1997 or at July 28, 1998. Under the same bank credit facility, the Company may borrow up to $400,000 under a revolving equipment loan agreement. The purpose of this facility is to provide short-term rental equipment financing until the total borrowed under this facility reaches at least $350,000 or amounts have been outstanding under this facility for six months. At such times, the total outstanding under this revolving equipment loan will be converted to a five or seven year term note bearing a fixed interest rate as further described below. Amounts outstanding under this revolving agreement bear interest computed daily at a floating rate of .25% over the bank's prime rate. There were no amounts outstanding under this line of credit at December 31, 1997 or at July 28, 1998. These credit facilities were renewed on April 30, 1998 for 90 days at the same terms. NOTE 5--LONG TERM DEBT AND LINES OF CREDIT As of December 31, 1997, Lift Systems, Inc. had established an overall credit facility of $12,000,000. This consists of a $500,000 revolving loan commitment as described under Note 4 above and an $12,000,000 equipment loan commitment. The $12,000,000 commitment amount is the maximum amount of principal that may be outstanding under the short-term revolving equipment loan arrangement and any long-term equipment loans owed to the bank. Long-term equipment loans, other than "Large Equipment Term Loans", are repayable in sixty equal monthly installments of principal and interest fixed at a rate of 2.5% or 2.25% over the five year Treasury rate at the time the loan is established. Large Equipment Term Loans are defined as term loans up to the aggregate maximum principal amount of $750,000, the proceeds of which are used to finance or refinance the purchase price of booms and scissors-lifts that are 50 feet and over in height and have a net cost exceeding $60,000. Such Large Equipment Term Loans will be repayable over five years based on a seven year amortization in equal monthly installments of principal and interest fixed at a rate of 2.5% over the five year Treasury rate at the time the loan is established. The proceeds of all amounts borrowed under the equipment loan commitment must be used to finance or refinance the purchase price of new rental equipment inventory at not more than 80% of the net cost of such equipment. Any term loan may be voluntarily prepaid in whole or in part, at any time, provided that any voluntary prepayment in full prior to maturity must be accompanied by a voluntary prepayment penalty of 3% if paid within one year of original funding, 2.5% if between one and two years, 2% between two and three years and 1% between three and four years. Mandatory prepayments, with no penalty, must be made when any item of equipment listed as specific collateral on a term loan is sold. Among other covenants, the Company must maintain its principal accounts at the lending bank, furnish the bank with audited annual financial statements and unaudited quarterly financial statements and at all times maintain; a tangible net worth of at least $4,500,000; a ratio of Unsubordinated Liabilities to Tangible Net Worth of not more than 3 to 1; and a Debt Service Coverage Ratio of at least 1.25 to 1.0. F-108 LIFT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE 209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED) In addition to the equipment term loans being specifically collateralized by various items of rental equipment any amounts borrowed under the overall credit facility are secured by a blanket security interest in substantially all the assets of the Company and the personal guarantee of the majority stockholder of Lift Systems, Inc. On September 13, 1994, the Company purchased property as more fully described in Note 2 above. The funds to close this purchase were obtained through a purchase money mortgage secured by a promissory note with a variable rate. Installment payments of principal and interest are payable on the first day of each calendar month beginning November 1, 1994, and all principal and interest must be paid on or before 25 years from the date of the Note, September 13, 1994. The variable interest rate is determined as 2% over the prime rate as published in the Wall Street Journal. The first business day of each calendar quarter constitutes an interest rate change date. The initial interest rate from September 13 through October 2, 1994, was 9.25% per annum. On December 31, 1997 and June 30, 1998, the interest rate in effect was 10.5% per annum. Under Section 7(a) of the Small Business Act, the U.S. Small Business Administration has guaranteed 62.5% of this loan to the lender. This loan is also secured by the personal guarantee of each of the three officer/employee/stockholders of Lift Systems, Inc. The remaining principal balance of $1,162,394 and $1,154,083 at December 31, 1997 and July 28, 1998, respectively, is also included under Other Long-term Debt. During 1997, Lift Systems, Inc. entered into a Term Lease Master Agreement with IBM Credit Corporation to provide financing for many of the out-of-pocket costs incurred in acquiring and converting to the Company's new central computer system. The first funding under this arrangement was a principal amount of $186,040 on June 26, 1997 to be repaid at a monthly total amount of $3,720 over 60 months (through June 2002) which includes interest at an effective annual rate of 7.67%. The second funding occurred on October 21, 1997 for a principal amount of $28,215 to be repaid at a monthly total amount of $601 over 59 months (through September 2002) which includes interest at an effective annual rate of 9.97%. Inasmuch as these leases provide for $1 purchase options on the hardware items, these transactions have been recorded as financing leases in these financial statements with the assets acquired capitalized under Computer Systems and the net principal balance owing included under Other Long-Term Debt on the balance sheet. Principal amounts of all long-term debt outstanding at December 31, 1997, are due as follows: 1998........................................................ $ 2,705,148 1999........................................................ 2,460,496 2000........................................................ 2,112,185 2001........................................................ 1,524,455 2002........................................................ 760,020 2003 through 2007........................................... 153,000 2008 through 2012........................................... 258,048 2013 through 2017........................................... 435,224 2018 through 2022........................................... 225,410 ----------- $10,633,986 ===========
NOTE 6--COMMITMENTS Lease Commitments Rental expenses on all facilities leased by Lift Systems, Inc. during 1997 and through July 28, 1998 were immaterial. On February 13, 1998 Lift Systems, Inc. entered into a lease for a branch facility F-109 LIFT SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1997 (THE INFORMATION AS OF JULY 28, 1998 AND FOR THE 209-DAY PERIODS ENDED JULY 28, 1998 AND 1997 IS UNAUDITED) in Rockford, Illinois commencing April 1, 1998 for a fixed term of three years. Annual basic rents are $48,000 for the first year payable $4,000 on the first day of each month, $51,600 for the second year payable $4,300 on the first day of each month, and $55,200 for the third year payable $4,600 on the first day of each month. There is one option to extend the lease for two years at the same rental amount as the third year stated above. The Company is responsible for all real estate taxes, utility expenses, and all routine maintenance and operating costs during the lease term and any extensions thereof. The lessor is responsible for certain structural and mechanical systems repair and maintenance costs. The Company has the option to purchase the leased property during the first three years of the lease for $430,000 with a binding contract for purchase and sale to be completed six months prior to the expiration of the initial lease term. The Company has an additional option to purchase the property on these same conditions during the option period at a purchase price $445,000. Redemption Agreement On July 1, 1993, Lift Systems, Inc. acquired and retired all 200 shares of stock owned by a then 20% stockholder. Concurrently with and as conditions of the Stock Redemption Agreement, the selling stockholder entered into a Noncompete Agreement with Lift Systems, Inc. and the Company executed a Contingent Promissory Note for the purchase price of the stock. The potential maximum consideration for the stock is $330,000 (all of which has been paid or accrued as of December 31, 1997), payable in accordance with the terms and provisions and subject to the conditions, restrictions and contingencies provided for in the Contingent Promissory Note. The Contingent Promissory Note provides, in general, for an annual anniversary payment to be made on or after July 1, of each year until the total payments equal $330,000 or until July 1, 2001, at which time any amount not computed to be payable up to the Maximum Aggregate Amount of $330,000 would be extinguished as an obligation of Lift Systems, Inc. The amount to be paid each year is defined as the lesser of 50% of modified net income or the Annual Amount (as defined). For each of the years ended December 31, 1993 through 1997, the Annual Amount was due under this agreement on or after July 1 of the following year. At December 31, 1997, the $4,761 present value of the final payment has been recorded in Other Accrued Liabilities and as a cost of the stock redemption. NOTE 7--PROFIT SHARING PLAN The Company established a qualified profit-sharing plan effective January 1, 1993, primarily to provide retirement benefits for substantially all full time employees with a minimum of one year of service. Contributions to the plan are made in discretionary amounts as determined by the Company's Board of Directors, limited to the maximum amount deductible for federal income tax purposes. NOTE 8--SUBSEQUENT EVENTS The Company is defendant in certain litigation matters arising in the normal course of business. In the opinion of management, the ultimate resolution of such matters will not have a material effect on the financial position or results of operations of the Company. The stockholders of Lift Systems, Inc. sold all of the outstanding stock in the Company to United Rentals, Inc. on July 28, 1998. F-110 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Perco Group Ltd. We have audited the consolidated balance sheet of Perco Group Ltd. as at December 31, 1997 and the consolidated statements of earnings, retained earnings and changes in financial position for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Perco Group Ltd. as at December 31, 1997 and the results of its operations and the changes in its financial position for the year then ended in accordance with generally accepted accounting principles in Canada. Generally accepted accounting principles in Canada vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations for the year ended December 31, 1997 and stockholders' equity as at December 31, 1997 to the extent summarized in note 12 to the consolidated financial statements. KPMG Montreal, Canada February 2, 1998, except as to note 14 which is as of May 22, 1998 F-111 PERCO GROUP LTD. CONSOLIDATED BALANCE SHEET (EXPRESSED IN CANADIAN DOLLARS)
DECEMBER 31, MAY 19, 1997 1998 ------------ ----------- (UNAUDITED) ASSETS Current assets: Cash............................................... $ 373,650 $ 530,617 Accounts receivable (note 2)....................... 4,373,577 3,256,006 Income taxes receivable............................ 183,914 693,930 Inventories........................................ 1,588,724 1,792,572 Prepaid expenses................................... 75,770 34,217 ----------- ----------- 6,595,635 6,307,342 Fixed assets (note 3)................................ 12,915,691 14,791,687 Deferred financing costs, at cost less accumulated amortization........................................ 85,807 74,307 ----------- ----------- $19,597,133 $21,173,336 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank indebtedness (note 4)......................... $ 771,465 $ 2,013,896 Accounts payable................................... 993,820 861,171 Accrued liabilities................................ 582,365 602,670 Current portion of long-term debt (note 5)......... 2,295,000 2,453,000 Current portion of obligation under capital leases (note 6).......................................... 229,678 197,678 ----------- ----------- 4,872,328 6,128,415 Long-term debt (note 5).............................. 6,742,512 7,430,691 Obligation under capital leases (note 6)............. 171,042 150,579 Deferred income taxes................................ 1,753,145 1,823,983 Non-controlling interest............................. 1,004,523 916,084 Redeemable shares (note 7)........................... 1,062,500 1,062,500 Shareholders' equity: Capital stock (note 8)............................. 312,500 862,500 Retained earnings.................................. 3,678,583 2,798,584 ----------- ----------- 3,991,083 3,661,084 Commitments (note 9)................................. Subsequent event (note 14)........................... ----------- ----------- $19,597,133 $21,173,336 =========== ===========
See accompanying notes to consolidated financial statements. F-112 PERCO GROUP LTD. CONSOLIDATED STATEMENT OF EARNINGS (EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM PERIOD FROM JANUARY 1, JANUARY 1, 1998 1997 YEAR ENDED THROUGH THROUGH DECEMBER 31, MAY 19, MAY 19, 1997 1998 1997 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues: Rental income......................... $14,509,900 $3,806,126 $4,190,553 Sales................................. 4,334,959 1,950,448 1,584,392 Gain on disposal of fixed assets...... 647,352 231,616 324,940 ----------- ---------- ---------- 19,492,211 5,988,190 6,099,885 Direct rental expenses, excluding equipment rental depreciation.......... 5,659,124 1,664,660 1,931,926 Depreciation on rental equipment........ 1,776,368 747,819 660,160 Cost of goods sold...................... 3,344,842 1,484,590 1,263,506 ----------- ---------- ---------- 10,780,334 3,897,069 3,855,592 ----------- ---------- ---------- Earnings before undernoted items........ 8,711,877 2,091,121 2,244,293 Operating expenses: Selling and administrative expenses... 5,516,606 2,305,247 2,097,712 Non-rental depreciation............... 411,626 134,082 152,915 Interest on long-term debt and obligation under capital leases...... 837,963 348,449 279,915 Other financial expenses.............. 37,907 13,683 43,915 ----------- ---------- ---------- 6,804,102 2,801,461 2,574,457 ----------- ---------- ---------- Earnings (loss) before income taxes and non-controlling interest............... 1,907,775 (710,340) (330,164) Income taxes: Current (notes 10 and 11)............. 767,053 (362,740) (126,927) Deferred.............................. 103,371 70,838 5,000 ----------- ---------- ---------- 870,424 (291,902) (121,927) ----------- ---------- ---------- Earnings (loss) before non-controlling interest............................... 1,037,351 (418,438) (208,237) Non-controlling interest................ 131,507 (88,439) (52,524) ----------- ---------- ---------- Net earnings (loss)..................... $ 905,844 $ (329,999) $ (155,713) =========== ========== ==========
See accompanying notes to consolidated financial statements. F-113 PERCO GROUP LTD. CONSOLIDATED STATEMENT OF RETAINED EARNINGS (EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, MAY 19, 1997 1998 ------------ ----------- (UNAUDITED) Retained earnings, beginning of period................ $2,772,739 $3,678,583 Net earnings (loss)................................... 905,844 (329,999) Transfer to paid-up capital of the outstanding Class B shares (note 8)............................................. -- (550,000) ---------- ---------- Retained earnings, end of period...................... $3,678,583 $2,798,584 ========== ==========
See accompanying notes to consolidated financial statements. F-114 PERCO GROUP LTD. CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION (EXPRESSED IN CANADIAN DOLLARS)
PERIOD FROM PERIOD FROM JANUARY 1, JANUARY 1, YEAR ENDED 1998 1997 DECEMBER THROUGH MAY THROUGH MAY 31, 1997 19, 1998 19, 1997 ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Cash provided by (used in): Operations: Net earnings (loss)................... $ 905,844 $ (329,999) $ (155,713) Items not involving cash: Gain on disposal of fixed assets..... (647,352) (231,616) (324,940) Depreciation of fixed assets......... 2,187,994 881,901 813,074 Amortization of deferred charges..... 27,600 11,500 9,200 Deferred income taxes................ 103,371 70,838 5,000 Non-controlling interest............. 131,507 (88,439) (52,524) Net change in non-cash operating working capital: Accounts receivable.................. (296,315) 1,117,571 702,850 Income taxes receivable.............. (183,914) (510,016) (288,650) Inventories.......................... (168,676) (203,848) (308,566) Prepaid expenses..................... (27,975) 41,553 (97,906) Accounts payable..................... 14,272 (132,649) 309,283 Accrued liabilities.................. 56,010 20,305 82,393 Income taxes payable................. (165,307) -- (165,307) ----------- ----------- ----------- 1,937,059 647,101 528,194 Financing: Increase in long-term debt............ 2,199,387 1,593,853 1,539,000 Decrease in long-term debt............ (2,008,686) (747,674) (498,098) Decrease in obligation under capital leases............................... (163,372) (52,463) (56,896) ----------- ----------- ----------- 27,329 793,716 984,006 Investing: Acquisition of fixed assets........... (3,561,771) (2,982,984) (2,297,799) Proceeds of disposal of fixed assets.. 895,007 456,703 420,142 ----------- ----------- ----------- (2,666,764) (2,526,281) (1,877,657) ----------- ----------- ----------- Decrease in cash........................ (702,376) (1,085,464) (365,457) Cash (bank indebtedness net of cash), beginning of period................................. 304,561 (397,815) 304,561 ----------- ----------- ----------- Bank indebtedness net of cash, end of period................................. $ (397,815) $(1,483,279) $ (60,896) =========== =========== ===========
See accompanying notes to consolidated financial statements. F-115 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN CANADIAN DOLLARS) YEAR ENDED DECEMBER 31, 1997 (THE INFORMATION AT MAY 19, 1998 AND FOR THE PERIOD FROM JANUARY 1, THROUGH MAY 19, 1998 AND 1997 IS UNAUDITED.) The Company, incorporated under Part 1A of the Quebec Companies Act, is involved primarily in the rental of industrial and building equipment in Canada. 1. SIGNIFICANT ACCOUNTING POLICIES: (a) Basis of presentation: The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in Canada (Canadian GAAP). As described in note 14, the Company was acquired by United Rentals of Canada (Quebec), Inc. These financial statements are prepared on the basis of their predecessor historical costs and do not include any adjustments that may result from the acquisition of the Company by United Rentals of Canada (Quebec), Inc. (b) Basis of consolidation: The consolidated financial statements include the accounts of Perco Group Ltd. and its subsidiary, 2633-4680 Quebec Inc. (c) Interim financial statements: The accompanying balance sheet at May 19, 1998 and the statements of earnings, retained earnings and changes in financial position for the period from January 1, through May 19, 1998 and 1997 are unaudited and have been prepared on a basis that is consistent with the audited consolidated financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operation for such interim periods are not necessarily indication of results for a full year. (d) Inventories: Goods and equipment for resale and supplies are valued at the lower of cost and net realizable value. Spare parts and supplies are valued at the lower of cost and replacement cost less an allowance for obsolescence. Cost is determined using the first in, first out method. (e) Fixed assets: Fixed assets are stated at cost. Depreciation and amortization are provided using the following methods and annual rates:
ASSET METHOD RATE/PERIOD ----- ----------------- ------------- Buildings.................................. Declining balance 4% Rental equipment........................... Straight-line 6 2/3% to 100% Cars and trucks............................ Declining balance 30% Furniture and fixtures..................... Declining balance 20% Leasehold improvements..................... Straight-line 5 years Computer hardware and software............. Declining balance 30% Cars and trucks under capital leases....... Declining balance 30%
F-116 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): (f) Deferred financing costs: The costs of obtaining bank and other debt financing are deferred and amortized on a straight-line basis over the effective life of the debt to which they relate. (g) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. ACCOUNTS RECEIVABLE: Accounts receivable are net of allowance for doubtful accounts of $380,837 at December 31, 1997 and $443,318 at May 19, 1998. 3. FIXED ASSETS:
DECEMBER 31, MAY 19, 1997 1998 ------------ ----------- Land............................................... $ 901,503 $ 901,503 Buildings.......................................... 2,439,276 2,446,545 Rental equipment................................... 23,225,446 25,282,753 Cars and trucks.................................... 1,376,234 2,109,987 Furniture and fixtures............................. 466,277 476,007 Leasehold improvements............................. 752,424 809,584 Computer hardware and software..................... 382,148 402,221 Cars and trucks under capital leases............... 1,134,888 460,015 ----------- ----------- 30,678,196 32,888,615 Less accumulated depreciation and amortization..... 17,762,505 18,096,928 ----------- ----------- $12,915,691 $14,791,687 =========== ===========
4. BANK INDEBTEDNESS GUARANTEES: The bank indebtedness and the long-term debt of the Company described in note 5 are secured by hypothecs on inventories and accounts receivable, a movable hypothec of $10,700,000 on all corporeal and incorporeal movable property, including a hypothec of $10,700,000 on the all-risks insurance coverage relating to the assets pledged as security to the bank. F-117 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 5. LONG-TERM DEBT:
DECEMBER 31, MAY 19, 1997 1998 ------------ ---------- Revolving term loan maturing in 2000, bearing interest at the bank's Canadian base rate plus 1.5%, payable in 24 monthly instalments of principal of $84,524, with a final payment covering the principal balance.. $2,178,437 $2,393,086 Term loan maturing in 2000, bearing interest at the bank's Canadian base rate plus 1%, payable in 35 equal monthly instalments of $20,286, (principal only) with a final payment of $507,159............... 1,217,174 1,136,032 Loan from the Federal Business Development Bank maturing in 1999, bearing interest at the bank's base rate plus 2.5% and additional interest equal to 0.25% of the Company's total annual revenue, payable in monthly instalments of $16,700 (principal only)...... 388,200 321,400 Term loan maturing in 2001, bearing interest at the bank's Canadian base rate plus 1%, payable in 47 equal monthly instalments of $18,335, (principal only) with a final payment of $458,325............... 1,320,070 1,246,730 Term loan maturing in 2002, bearing interest at the bank's Canadian base rate plus 1%, payable in 59 monthly instalments of $25,000 (principal only), with a final payment of $625,000 covering the principal balance.............................................. 2,100,000 2,000,000 Credit facility for acquisition of fixed assets convertible in December 1998 into a term loan maturing in 2003, bearing interest at the bank's Canadian base rate plus 1%, payable in equal monthly instalments (principal only), with a final payment to be determined covering the principal balance......... -- 729,000 First mortgage loan in the amount of $1,000,000 and second mortgage in the amount of $450,000 secured by land and buildings with a net book value of $1,222,596 as at December 31, 1997, 8.75%, payable in monthly instalments of $15,137 (principal and interest combined), renegotiable in December 1999, maturing in April 2004............................... 871,903 835,826 First mortgage loan in the amount of $1,200,000 secured by land and a building with a net book value of $1,113,832 as at December 31, 1997, 7.3%, payable in monthly instalments of $10,770 (principal and interest combined), renegotiable in December 1999, maturing in December 2005............................ 784,480 753,905 Term loan maturing in 2003, bearing interest at the bank's Canadian base rate plus 1% in 60 monthly instalments of $2,893 (principal only), with a final payment of $69,420 covering the principal balance.... -- 237,214 Conditional sale contracts maturing in 2001 and 2002, bearing interest at various rates from 7% to 8.70%, payable in monthly instalments of $4,274, including interest. These debts are secured by trucks and equipment............................................ 177,248 230,498 ---------- ---------- 9,037,512 9,883,691 Less current portion of long-term debt................ 2,295,000 2,453,000 ---------- ---------- $6,742,512 $7,430,691 ========== ==========
F-118 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) The term loans and the Federal Business Development Bank loan are secured by various assets, as described in note 4. Under the term loan agreements, the Company is committed to maintain certain financial ratios. 5. LONG-TERM DEBT (CONTINUED): Repayments of the long-term debt for each of the next five years are as follows:
DECEMBER 31, MAY 19, 1997 1998 ------------ --------- 1998.................................................. $2,295,000 $ -- 1999.................................................. 2,210,000 2,453,000 2000.................................................. 1,573,000 2,530,000 2001.................................................. 1,240,000 1,608,000 2002.................................................. 1,165,000 1,338,000 2003.................................................. -- 1,431,000
6. OBLIGATION UNDER CAPITAL LEASES: Total future minimum payments under capital leases are as follows as at:
DECEMBER 31, MAY 19, 1997 1998 ------------ -------- 1998................................................. $263,371 $ -- 1999................................................. 100,242 228,410 2000................................................. 62,846 98,401 2001................................................. 26,066 51,171 2002................................................. -- 5,641 -------- -------- Total minimum lease payments......................... 452,525 383,623 Less amount representing interest at rates varying from 9% to 12.2%.................................... 51,805 35,366 -------- -------- Balance of obligation................................ 400,720 348,257 Less current portion................................. 229,678 197,678 -------- -------- Obligation under capital leases...................... $171,042 $150,579 ======== ========
7. REDEEMABLE SHARES: An unlimited number of authorized: Class C shares, voting, without par value, mandatorily redeemable by the Company at death of holder Class D shares, non-voting, without par value, conveying one monthly preferred, non-cumulative 1% dividend on the redemption value, redeemable at the option of the holder and issuer at the paid-up capital and in the case of Class A shares being converted into Class D shares equal to the difference between the paid-up capital and the fair market value at the time of exchange Class E shares, non-voting, without par value, conveying one monthly preferred, non-cumulative 1% dividend on the redemption value, redeemable at the option of the holder and issuer at the fair market value of the consideration received at issuance F-119 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 7. REDEEMABLE SHARES (CONTINUED): Class F shares, non-voting, without par value, conveying one yearly, preferred, non-cumulative dividend of $1 per share, redeemable at the option of the holder and issuer at the paid-up capital Class G shares, non-voting, without par value, conveying one yearly, preferred, non-cumulative dividend of $1 per share, redeemable at the option of the issuer at the paid-up capital Issued and fully paid:
DECEMBER 31, MAY 19, 1997 1998 ------------ ---------- 62,500 Class D shares, redeemable at $62,500........ $ 62,500 $ 62,500 100,000 Class G shares, redeemable at $1,000,000.... 1,000,000 1,000,000 ---------- ---------- $1,062,500 $1,062,500 ========== ==========
8. CAPITAL STOCK: An unlimited number of authorized: Class A shares, voting, participating, without par value, convertible into Class D shares only with the joint approval of the Board and positive vote of Class A and D holders Class B shares, voting, participating, without par value Issued and fully paid:
DECEMBER 31, MAY 19, 1997 1998 ------------ -------- 312,500 Class A shares (250,000 shares on May 19, 1998).............................................. $312,500 $250,000 62,500 Class B shares .............................. -- 612,500 -------- -------- $312,500 $862,500 ======== ========
During the period ended May 19, 1998, 62,500 Class A shares were converted into 62,500 Class B shares and the paid-up capital of these shares was increased by $550,000. 9. COMMITMENTS: The Company is committed under lease contracts for premises expiring at various dates from January 1, 1998 to January 31, 2001. The minimum lease payments for each of the next four years are as follows:
DECEMBER 31, MAY 19, 1997 1998 ------------ -------- 1998................................................... $163,000 $ -- 1999................................................... 153,000 176,000 2000................................................... 61,000 139,000 2001................................................... 4,000 58,000 -------- -------- $381,000 $373,000 ======== ========
F-120 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 10. INCOME TAXES: The effective income tax rate differs from the statutory rate that would be obtained by applying the combined basic federal and provincial tax rate to earnings before income taxes. These differences result from the following items:
DECEMBER 31, MAY 19, MAY 19, 1997 1998 1997 ------------ ------- ------- Combined basic federal and provincial tax rate.... 38.7% 38.7% 38.7% Increase (decrease) in income tax rate resulting from: Permanent differences as a result of purchase accounting and non-deductible expenses......... (4.8) 2.4 3.4 Previous years' reassessment.................... 11.7 -- -- Manufacturing and processing profits deduction.. -- -- (5.2) ---- ---- ---- Effective income tax rate......................... 45.6% 41.1% 36.9% ==== ==== ====
11. INCOME TAXES REASSESSMENT: The Company has been reassessed for the tax credits (manufacturing and processing profits deduction) it claimed in 1996 and in respect of the years 1994 to 1996 inclusive. The reassessment amounts to $224,000 and is included in the December 31, 1997 current income taxes. 12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES: The company follows Canadian generally accepted accounting principles (Canadian GAAP) which are different in some respects from those applicable in the United States (U.S. GAAP). (a) The following table presents a reconciliation of stockholder's equity from Canadian GAAP to U.S. GAAP:
PERIOD FROM JANUARY 1, 1998 YEAR ENDED THROUGH DECEMBER 31, MAY 19, 1997 1998 ------------ ---------- Stockholders' equity: Per Canadian GAAP................................. $3,991,083 $3,661,084 Decrease in fixed assets net (i).................. (820,253) (721,123) Decrease in deferred income taxes (ii)............ 784,933 743,298 ---------- ---------- Per U.S. GAAP....................................... $3,955,763 $3,683,259 ========== ==========
(i) Under Canadian GAAP, as a result of negative goodwill from a business combination accounted for as a purchase, the Company reduced the value of fixed assets. Under U.S. GAAP, assets acquired in a purchase business combination are recorded at their gross fair values, with separate deferred tax assets and liabilities recognized for the tax effect of the differences between such fair values and the tax bases. (ii) The income tax provision in Canada is based on the deferral method and adjustments are generally not made for changes in income tax rates. Under U.S. GAAP, deferred tax liabilities are measured using the enacted tax rate expected to apply to taxable income in the periods in which the deferred tax asset on liability is expected to be settled. A U.S. GAAP difference arises for the Company due to timing differences resulting from the application of the purchase accounting adjustments described above. F-121 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 12. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED): (b) The following table presents a reconciliation of net earnings from Canadian GAAP to U.S. GAAP:
PERIOD FROM PERIOD FROM JANUARY 1, 1998 JANUARY 1, 1997 YEAR ENDED THROUGH THROUGH DECEMBER 31, MAY 19, MAY 19, 1997 1998 1997 ------------ --------------- --------------- Net (loss) earnings under Canadian GAAP................ $ 905,844 $(329,999) $(155,713) Income tax adjustment under the asset and liability method....................... (154,252) (41,635) (36,540) Lower depreciation on fixed assets....................... 258,546 99,130 99,389 ---------- --------- --------- Net earnings (loss) under U.S. GAAP......................... $1,010,138 $(272,504) $ (92,864) ========== ========= =========
(c) Statement of change in financial position: Under U.S. GAAP, a statement of cash flow is required while a statement of changes in financial position is required under Canadian GAAP. There are no differences in the amounts presented in the accompanying statement of changes in financial position from a cash flow statement prepared under U.S. GAAP, except for the presentation of bank indebtedness. Under Canadian GAAP, cash in the statement of changes in financial position is shown net of bank indebtedness. Under U.S. GAAP, the net change in bank indebtedness, with original maturities of 90 days or less, is presented as a financing activity.
PERIOD FROM PERIOD FROM JANUARY 1, 1998 JANUARY 1, 1997 YEAR ENDED THROUGH THROUGH DECEMBER 31, MAY 19, MAY 19, 1997 1998 1997 ------------ --------------- --------------- Financing activity under Canadian GAAP............... $ 27,329 $ 793,716 $ 984,006 Bank indebtedness increase... 724,833 1,242,431 353,368 -------- ---------- ---------- Financing activity under U.S. GAAP........................ $752,162 $2,036,147 $1,337,374 ======== ========== ========== The reclassification results in: Cash at end of year under U.S. GAAP................. $373,650 $ 530,617 $ 339,104 ======== ========== ==========
13. FINANCIAL INSTRUMENTS: (a) Fair value: The carrying value of the Company's accounts receivable, bank indebtedness, accounts payable and accrued liabilities approximates their fair values due to their demand nature or relatively short periods to maturity. The fair value of the Company's long-term debt and obligation under capital leases has been determined to be equal to their carrying values, as the current financing arrangements represent the borrowing rate presently available to the Company for loans with similar terms and maturities. F-122 PERCO GROUP LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (EXPRESSED IN CANADIAN DOLLARS) 13. FINANCIAL INSTRUMENTS: (CONTINUED) (b) Credit risk: Financial instruments that potentially subject the Company to significant concentration risk consist principally of trade accounts receivable. Credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising the Company's customer base. The Company performs ongoing credit evaluations of its customers' financial condition. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions regarding the provision for doubtful accounts. However, actual results could differ from those estimates. 14. SUBSEQUENT EVENT: On May 21, 1998, all of the outstanding Class G shares were redeemed for a cash consideration of $1,000,000. On May 19, 1998 the Company entered into a stock purchase agreement with United Rentals, Inc. Under the terms of the stock purchase agreement, the transaction closed on May 22, 1998 and all of the remaining outstanding capital stock described in notes 7 and 8 and all the shares held in 2633-4680 Quebec Inc. by the non-controlling interest were acquired by United Rentals of Canada (Quebec), Inc. after Perco Group Ltd. amalgamated with its subsidiary, 2633-4680 Quebec Inc., and all outstanding shares were converted into shares of the amalgamated company. F-123 AUDITORS' REPORT To the Directors of Reitzel Rentals Ltd. We have audited the balance sheet of Reitzel Rentals Ltd. as at February 28, 1998 and the statements of operations, shareholders' equity and cash flow for the year then ended. These audited financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at February 28, 1998 and the results of its operations and cash flows for the year then ended in accordance with generally accepted accounting principles in the United States. PricewaterhouseCoopers Chartered Accountants Kitchener, Canada July 27, 1998 F-124 REITZEL RENTALS LTD. BALANCE SHEETS (IN CANADIAN DOLLARS)
FEBRUARY 28, MAY 31, 1998 1998 ----------- ----------- (UNAUDITED) ASSETS Cash................................................... $ 46,301 $ -- Accounts receivable--trade, net of allowance for doubtful accounts of $84,980 ($93,292 as of May 31, 1998)............... 2,033,118 2,204,300 Inventory.............................................. 1,175,302 1,833,371 Rental equipment, net (Note 3)......................... 11,003,382 11,906,195 Property and equipment, net (Note 4)................... 2,264,061 1,552,663 Other assets........................................... 1,088,343 1,322,032 ----------- ----------- $17,610,507 $18,818,561 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Bank operating line (Note 5)........................... $ -- $ 891,005 Accounts payable--trade................................ 860,221 1,969,854 Accrued management and staff bonuses................... 2,014,079 503,070 Other liabilities...................................... 348,468 1,415,692 Long-term debt (Note 6)................................ 5,423,076 5,008,469 Due to shareholders and related party (Note 7)......... 707,278 280,058 Deferred income taxes (Note 9)......................... 2,778,000 2,931,000 ----------- ----------- 12,130,122 12,999,148 Mandatorily redeemable shares (Note 8)................. 947,990 947,990 Commitments (Note 10) Share capital (Note 8)................................. 56,050 56,050 Retained earnings...................................... 4,475,345 4,815,373 ----------- ----------- 4,531,395 4,871,423 ----------- ----------- $17,610,507 $18,818,561 =========== ===========
See accompanying notes to financial statements. F-125 REITZEL RENTALS LTD. STATEMENTS OF OPERATIONS (IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS THREE MONTHS FEBRUARY ENDED ENDED 28, MAY 31, MAY 31, 1998 1997 1998 ---------- ------------ ------------ (UNAUDITED) Revenues: Equipment rentals....................... $9,695,641 $1,832,811 $2,278,718 Sales of rental equipment............... 1,544,982 517,409 303,742 Sales of new equipment, merchandise and other revenues......................... 5,977,848 1,712,996 1,469,432 ---------- ---------- ---------- Total revenues........................ 17,218,471 4,063,216 4,051,892 Cost of revenues: Cost of equipment rentals, excluding depreciation........................... 3,639,956 688,077 855,481 Depreciation of rental equipment........ 857,104 214,276 214,276 Cost of rental equipment sales.......... 668,717 223,951 131,469 Cost of new equipment and merchandise sales and other operating costs........ 4,232,725 1,212,918 1,040,458 ---------- ---------- ---------- Total cost of revenues................ 9,398,502 2,339,222 2,241,684 ---------- ---------- ---------- Gross profit............................. 7,819,969 1,723,994 1,810,208 Selling, general and administrative expenses................................ 3,154,852 1,031,807 732,798 Non-rental depreciation and amortization............................ 376,240 76,585 76,400 ---------- ---------- ---------- Operating income......................... 4,288,877 615,802 1,001,010 Interest expense......................... 515,705 115,218 197,154 Management and staff bonuses............. 2,014,445 -- -- (Gain) loss on sale of property and equipment............................... (363,928) (362,784) 31,847 ---------- ---------- ---------- Income before provision for income taxes................................... 2,123,015 863,368 772,009 Provision for income taxes............... 918,470 385,000 344,000 ---------- ---------- ---------- Net income............................... $1,204,545 $ 478,368 $ 428,009 ========== ========== ==========
See accompanying notes to financial statements. F-126 REITZEL RENTALS LTD. STATEMENTS OF SHAREHOLDERS' EQUITY (IN CANADIAN DOLLARS)
COMMON RETAINED SHARES EARNINGS TOTAL ------- ---------- ---------- Balance, March 1, 1997.......................... $56,050 $3,270,800 $3,326,850 Net income...................................... -- 1,204,545 1,204,545 ------- ---------- ---------- Balance, February 28, 1998...................... 56,050 4,475,345 4,531,395 Cash dividends.................................. -- (87,981) (87,981) Net income (unaudited).......................... -- 428,009 428,009 ------- ---------- ---------- Balance, May 31, 1998 (unaudited)............... $56,050 $4,815,373 $4,871,423 ======= ========== ==========
See accompanying notes to financial statements. F-127 REITZEL RENTALS LTD. STATEMENTS OF CASH FLOWS (IN CANADIAN DOLLARS)
YEAR ENDED THREE MONTHS THREE MONTHS FEBRUARY ENDED ENDED 28, MAY 31, MAY 31, 1998 1997 1998 ----------- ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income............................. $ 1,204,545 $ 478,368 $ 428,009 Items not requiring cash Amortization.......................... 1,233,344 290,661 290,676 Gain on sale of rental equipment...... (876,265) (293,458) (172,273) (Gain) loss on disposal of property and equipment........................ (363,928) (362,784) 31,847 Deferred income taxes................. 842,000 211,000 153,000 Changes in non-cash operating items Accounts receivable--trade............ (175,759) 114,617 (171,182) Inventory............................. (122,884) (668,672) (658,069) Accounts payable--trade and other liabilities.......................... 554,478 (130,275) 1,095,828 ----------- --------- ----------- 2,295,531 (360,543) 997,836 Cash flows from investing activities Purchase of property and equipment..... (161,975) (20,188) (90,017) Proceeds of disposal of property and equipment............................. 309,604 299,604 189,793 Proceeds on sale of rental equipment... 1,544,982 517,409 303,742 Purchase of rental equipment........... (1,863,221) (689,756) (502,709) (Increase) decrease in other assets.... 20,956 40,634 (160,314) ----------- --------- ----------- (149,654) 147,703 (259,505) Cash flows from financing activities Increase in bank operating line........ -- 877,892 891,005 Repayment of long-term debt............ (2,222,275) (593,973) (1,160,436) Increase (decrease) in shareholder loans................................. 122,699 (71,079) (427,220) Cash dividend.......................... -- -- (87,981) ----------- --------- ----------- (2,099,576) 212,840 (784,632) ----------- --------- ----------- Net cash increase (decrease) during the period................................. 46,301 -- (46,301) Cash beginning of period................ -- -- 46,301 ----------- --------- ----------- Cash end of period...................... $ 46,301 $ -- $ -- =========== ========= ===========
See accompanying notes to financial statements. F-128 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) 1.ORGANIZATION AND BASIS OF PRESENTATION Reitzel Rentals Ltd. (the "Company") was incorporated in January 1987 under the laws of Ontario, Canada. The Company rents a broad array of equipment to a diverse customer base that includes construction industry participants, industrial companies, homeowners and others in Ontario. The Company also engages in related activities such as selling used rental equipment, acting as a distributor for certain new equipment and selling related merchandise and parts. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying balance sheet is presented on an unclassified basis. Comparative financial statements have not been presented as these financial statements have been prepared solely for inclusion in the offering memorandum issued by United Rentals Holdings, Inc. and management of United Rental Holdings, Inc. have advised that comparative information is not required. The financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles. All amounts are in Canadian dollars. 2.SIGNIFICANT ACCOUNTING POLICIES Inventory Inventory consists of equipment, tools, parts, fuel and related supply items. Inventory is stated at the lower of average weighted cost or market. Rental equipment Rental equipment is recorded at cost and depreciated over the estimated useful lives of the equipment using the straight-line method. The range of useful lives estimated by management for rental equipment is two to ten years. Rental equipment is depreciated to a salvage value of zero to ten percent of cost. Rental equipment having a cost of $500 or less is expensed at the time of purchase. Maintenance and repair costs are charged to operations as incurred. Revenue recognition Revenue related to the sale of equipment is recognized at the time of sale which coincides with delivery. Revenue related to rental equipment is recognized over the contract term on a straight-line basis. Property and equipment Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The range of useful lives estimated by management for property and equipment is two to ten years. Maintenance and repair costs are charged to operations as incurred. Fair value of financial instruments The carrying amounts reported in the balance sheet for accounts receivable, accounts payable, and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair value of long-term debt and amounts due to shareholders and related party are determined using current interest rates for similar instruments as of period ended. F-129 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) Income taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between financial statement and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Recognition of deferred tax assets is limited to amounts considered by management to be more likely than not of realization in future periods. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of accounts receivable. Concentrations of credit risk with respect to accounts receivable are limited because a large number of customers make up the Company's customer base. The Company controls credit risk through credit approvals, credit lines, and monitoring procedures. Twelve customers represent ten percent of revenues in the year ended February 28, 1998 (nine customers as of May 31, 1998 and one as of May 31, 1997) and twelve customers represented ten percent of accounts receivable-- trade as of February 28, 1998 (twelve customers as of May 31, 1998 and eleven as of May 31, 1997). Impact of recently issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is required to adopt the provisions of these Statements in fiscal year 1999. The Company is currently evaluating the reporting formats recommended under both these Statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employer Disclosure about Pensions and other Post Retirement Benefits" and SFAS No. 133, "Accounting for Derivatives and Other Hedging Activities." The Company is currently evaluating the effects of these Statements. Interim financial statements The accompanying balance sheet and statement of shareholders' equity at May 31, 1998 and the statement of operations, shareholders' equity and cash flows for the three months ended May 31, 1997 and 1998 are unaudited and have been prepared on a basis that is consistent with the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. F-130 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) 3.RENTAL EQUIPMENT
MAY 31, FEBRUARY 28, 1998 1998 ----------------- ----------- (UNAUDITED) Rental equipment.............................. $13,186,212 $13,769,978 Amortization.................................. (2,182,830) (1,863,783) ----------- ----------- Net......................................... $11,003,382 $11,906,195 =========== ===========
4.PROPERTY AND EQUIPMENT
FEBRUARY 28, 1998 ---------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE ---------- ------------ ---------- Land..................................... $ 370,717 $ -- $ 370,717 Buildings................................ 2,268,773 1,328,578 940,195 Vehicles................................. 1,277,240 933,579 343,661 Furniture and equipment.................. 1,055,267 784,614 270,653 Radio equipment.......................... 156,124 136,902 19,222 Pavement................................. 122,914 47,687 75,227 Leasehold improvements................... 476,480 240,887 235,593 Electric signs........................... 36,647 27,854 8,793 ---------- ---------- ---------- $5,764,162 $3,500,101 $2,264,061 ========== ========== ==========
MAY 31, 1998 ---------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE ---------- ------------ ---------- (UNAUDITED) Land..................................... $ 90,892 $ -- $ 90,892 Buildings................................ 1,632,137 1,048,338 583,799 Vehicles................................. 1,208,838 905,959 302,879 Furniture and equipment.................. 988,582 734,813 253,769 Radio equipment.......................... 156,124 138,103 18,021 Pavement................................. 115,414 46,153 69,261 Leasehold improvements................... 477,910 251,813 226,097 Electric signs........................... 31,558 23,613 7,945 ---------- ---------- ---------- $4,701,455 $3,148,792 $1,552,663 ========== ========== ==========
5.AVAILABLE LINE OF CREDIT The Company has available a $1,500,000 line of credit that bears interest of prime rate plus 3/4% per annum which was 5.65% as of February 28, 1998 and is secured, together with Bank Loans (Note 6) by a general assignment of accounts receivable--trade, a general security agreement and a fixed charge debenture of $4,000,000 over all property and equipment subordinated to the First Mortgages in the amount of $299,000. No amount was outstanding under the line of credit at February 28, 1998 and no standby fees apply. F-131 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) 6.LONG-TERM DEBT
FEBRUARY MAY 31, 28, 1998 1998 ---------- ----------- (UNAUDITED) Equipment Loans, secured by the equipment financed, repayable in monthly instalments of principal and interest at floating and fixed annual rates ranging from 4.0% to 10.35%, maturing in 1998 to 2002....... $2,296,720 $2,149,606 Bank Loans, secured by a fixed charge over the Company's land and buildings, including a general assignment of accounts receivable and acknowledged assignment of fire insurance coverage, repayable in monthly instalments of principal and interest at floating and fixed annual rates ranging from 7.45% demand in certain circumstances..................... 1,850,245 2,105,152 First Mortgages, secured by certain of the Company's real estate, repayable in monthly instalments of principal and interest at annual rates ranging from 8.25% to 11.875%, maturing 1998 to 1999............. 835,300 378,103 Note Payable, repayable in monthly instalments of principal and interest of $8,155 per month at annual interest rate of 7.2%, maturing July 2002........... 375,185 375,608 Promissory Note, repayable in monthly principal payments of $4,375 plus interest, calculated monthly at prime plus 1%, maturing in May 1999.............. 65,626 -- ---------- ---------- $5,423,076 $5,008,469 ========== ==========
Cash interest paid on long-term debt during the period amounted to $447,326 ($159,950 in the three months ended May 31, 1998 and $115,218 in the three months ended May 31, 1997). Approximate principal payments as of February 28, 1998 due with the next five years are as follows: 1999.............................................................. $1,806,860 2000.............................................................. 1,599,398 2001.............................................................. 1,090,079 2002.............................................................. 293,154 2003.............................................................. 110,325
7.DUE TO SHAREHOLDERS AND RELATED PARTY
FEBRUARY 28, MAY 31, 1998 1998 ------------ ----------- (UNAUDITED) Notes payable to shareholders, no specified repayment terms, with interest calculated monthly at the Company's average annual cost of borrowing and paid annually within six months of the year- end............................................... $699,278 $280,058 Note payable to affiliated company, interest-free with no specified repayment terms................. 8,000 -- -------- -------- $707,278 $280,058 ======== ========
In the period ended May 31, 1998, obligations to certain shareholders were satisfied by the transfer of the other assets and certain equipment at fair market value as determined by independent appraisal. F-132 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) 8.SHARE CAPITAL The Company is authorized to issue 251 non-voting, Class A shares and no Class A shares were outstanding (none outstanding as of May 31, 1998). The Class A shares rank in priority over Class B and common shares. Dividends are cumulative on the Class A shares and are payable at a rate that will provide the holder, assuming the holder is in the highest Ontario personal income tax bracket, with the same after-tax rate of return on the Class A share dividend as if the holder had received interest from a Canadian Chartered Bank at the average of that Bank's prime lending rate each month for the twelve months in the Company's fiscal year minus 20% of that average rate. The dividends paid on Class A shares in any year may not exceed net earnings of the Company or ten percent of the retained earnings of the Company as of the preceding fiscal year-end. The Class A shares are redeemable and retractable at the price of $470 per Class A share (the "Redemption Price") subject to certain restrictions. The number of Class A shares to be redeemed is limited (the "Redemption Limit") in any one year to one-eighteen of $117,970 or the lesser of one-third of the After-Tax Net Profits of the Company for the fiscal year previous to the redemption notice and the After-Tax Net Profits of the Company for the fiscal year previous to the redemption notice less dividends paid on Class A shares in that previous fiscal year or an amount that will not contravene any banking covenants the Company entered into at that particular time. Where the redemption request exceeds the Redemption Limit, the Company will only redeem Class A shares such that the total of Class A shares redeemed and the dividends paid on Class A shares in the year of request falls below the Redemption Limit. Notwithstanding the foregoing, all Class A shares must be redeemed before December 31, 2007. Class A shareholders are entitled to the same redemption amount as Class B shareholders in any one year without regard to the Redemption Limit. Class A shares are redeemable only at the end of the fiscal year. The Company is authorized to issue 2,017 non-voting Class B shares of which 2,017 were outstanding at February 28, 1998 (2,017 outstanding as of May 31, 1998). The Class B shares are subordinate to Class A shares but rank in priority to common shares. Class B shares are entitled to non-cumulative dividends at a rate of 10% of the Redemption Amount, being $470 per Class B share. The Aggregate Redemption Amount of Class A shares is $947,990. The number of Class B shares redeemable in any one year is limited to an amount that will not contravene any banking covenants the Company entered into at that particular time. Class B shares are redeemable only at the end of the fiscal year. The Class B shares have been disclosed as a liability of the Company at their redemption amount of $947,990 as Mandatorily Redeemable Shares with a corresponding charge at their date of issue. The Company is authorized to issue 37,000 common shares at no par value of which 3,250 were outstanding at February 28, 1998 (3,250 were outstanding as of May 31, 1998). 9.INCOME TAXES
FEBRUARY 28, MAY 31, MAY 31, 1998 1997 1998 ------------ ------- ------- (UNAUDITED) Combined federal and provincial income tax rate........................................ 44.6% 44.6% 44.6% Reduction by the small business deduction.... (2.0) -- -- Other differences............................ 0.6 -- -- ---- ---- ---- Effective income tax rate.................... 43.3% 44.6% 44.6% ==== ==== ====
The Company is taxable in one jurisdiction. F-133 REITZEL RENTALS LTD. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO THE PERIODS ENDED MAY 31, 1997 AND 1998) The provision for income taxes consists of current tax expense of $76,470 ($191,000 as of May 31, 1998 and $174,000 as of May 31, 1997) and deferred tax expense of $842,000 ($153,000 as of May 31, 1998 and $211,000 as of May 31, 1997). The deferred tax credit balance of $2,778,000 ($2,931,000 as of May 31, 1998 and $2,147,000 as of May 31, 1997) represents amounts deducted for tax depreciation in excess of accounting depreciation of $6,229,000 ($6,572,000 as of May 31, 1998 and $4,814,000 as of May 31, 1997). There are no other differences in accounting and tax basis. 10.LEASE COMMITMENTS Minimum rental commitments under operating leases are as follows: 1999................................................................ $442,000 2000................................................................ 420,000 2001................................................................ 374,000 2002................................................................ 300,000 2003................................................................ 264,000
Operating lease expense for the year ended February 28, 1998 was $356,000 ($110,000 as of May 31, 1998 and $89,000 as of May 31, 1997). 11.SUPPLEMENTAL CASH DISCLOSURES
FEBRUARY 28, MAY 31, 1998 1998 ------------ ----------- (UNAUDITED) Supplemental schedule of non-cash activities: Accounts payable--trade and other liabilities.... $ -- $(430,000) Proceeds on disposal of property and equipment... 330,000 521,000 Purchase of rental equipment..................... (2,427,400) (745,829) Increase in other assets......................... (330,000) (91,000) Proceeds of long-term debt....................... 2,427,400 745,829
12.SUBSEQUENT EVENT As of May 31, 1998, all the outstanding shares of the Company were purchased by United Rentals Inc. F-134 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Channel Equipment Holding, Inc. We have audited the accompanying combined balance sheet of Channel Equipment Holding Inc. (see Note 1) (the "Companies") as of December 31, 1997 and the related combined statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Channel Equipment Holding Inc. at December 31, 1997, and the combined results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey April 21, 1998 F-135 CHANNEL EQUIPMENT HOLDING, INC. COMBINED BALANCE SHEET DECEMBER 31, 1997 ASSETS Cash ............................................................. $ 63,589 Accounts receivable, net of allowance for doubtful accounts of $244,787......................................................... 1,274,432 Inventory......................................................... 617,793 Rental equipment, net............................................. 8,233,933 Property and equipment, net....................................... 546,798 Prepaid expenses and other assets................................. 27,567 ----------- Total assets.................................................. $10,764,112 =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Liabilities: Accounts payable, accrued expenses and other liabilities........ $ 997,055 Due to stockholders............................................. 745,650 Debt............................................................ 9,241,162 Deferred gain................................................... 121,980 ----------- Total liabilities............................................. 11,105,847 Commitments and contingencies Stockholders' equity (deficit): Common stock, Channel Equipment, $1.00 par value, 1,000,000 shares authorized, 1,000 issued and outstanding; River City, $1.00 par value, 100,000 shares authorized, 1,000 issued and outstanding; and Contractors, $1.00 par value, 1,000,000 shares authorized, 1,250 issued and outstanding....................... 3,250 Additional paid-in capital...................................... 238,836 Retained earnings (deficit)..................................... (538,821) ----------- (296,735) Treasury stock.................................................. (45,000) ----------- Total stockholders' equity (deficit).......................... (341,735) ----------- Total liabilities and stockholders' equity (deficit).......... $10,764,112 ===========
See accompanying notes. F-136 CHANNEL EQUIPMENT HOLDING, INC. COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 Revenue: Equipment rentals............................................... $ 4,680,867 Rental equipment sales.......................................... 2,265,294 Sales of parts, supplies and new equipment...................... 3,836,954 ----------- Total revenues................................................ 10,783,115 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation................................................... 1,459,268 Depreciation, equipment rentals................................. 2,092,035 Cost of rental equipment sales.................................. 2,016,654 Cost of parts, supplies and new equipment sales................. 3,138,237 ----------- Total cost of revenues........................................ 8,706,194 ----------- Gross profits................................................. 2,076,921 Selling, general and administrative expenses...................... 2,085,283 Non-rental depreciation........................................... 40,067 ----------- Operating loss.................................................... (48,429) Interest expense.................................................. 714,705 ----------- Loss before provisions for income taxes........................... (763,134) Provision for income taxes........................................ 3,040 ----------- Net loss.......................................................... $ (766,174) ===========
See accompanying notes. F-137 CHANNEL EQUIPMENT HOLDING, INC. COMBINED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK ADDITIONAL RETAINED -------------- PAID IN EARNINGS TREASURY SHARES AMOUNTS CAPITAL (DEFICIT) STOCK ------ ------- ---------- --------- -------- Balance at January 1, 1997...... 3,250 $3,250 $238,836 $ 227,353 $(45,000) Net loss...................... (766,174) ----- ------ -------- --------- -------- Balance at December 31, 1997.... 3,250 $3,250 $238,836 $(538,821) $(45,000) ===== ====== ======== ========= ========
See accompanying notes. F-138 CHANNEL EQUIPMENT HOLDING, INC. COMBINED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss......................................................... $ (766,174) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation................................................... 2,132,102 Gain on rental equipment sales................................. (248,640) Changes in assets and liabilities: Increase in accounts receivable............................... (254,454) Increase in inventory......................................... (176,462) Decrease in prepaid expenses and other assets................. 39,219 Increase in accounts payable, accrued expenses and other liabilities.................................................. 420,460 Increase in deferred gain..................................... 121,980 ----------- Cash provided by operating activities............................ 1,268,031 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment..................................... (846,817) Proceeds from sale of rental equipment........................... 1,936,072 Purchases of property and equipment.............................. (40,712) ----------- Cash provided by investing activities............................ 1,048,543 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt....................................... (4,525,576) Proceeds from stockholders loans................................. 411,600 Borrowings under credit facilities............................... 1,803,455 ----------- Cash used in financing activities................................ (2,310,521) ----------- Increase in cash................................................. 6,053 Cash balance at beginning of year................................ 57,536 ----------- Cash balance at end of year...................................... $ 63,589 ===========
See accompanying notes. F-139 CHANNEL EQUIPMENT HOLDING, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements of Channel Equipment Holding, Inc. include the accounts of Channel Equipment Holding, Inc. ("Channel"), River City Machinery Co., Inc. ("River City") and Contractors Sales & Rentals, Inc. ("Contractors") (collectively the "Companies"). The Companies are affiliated through common ownership. All significant intercompany accounts and transactions have been eliminated in combination. These combined financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Companies by United Rentals, Inc. ("United") as more fully described in Note 9. Business Activity The Companies rent, sell and repair construction equipment for use by contractor, industrial and homeowners markets. The rentals are on a daily, weekly or monthly basis. The Companies are located in three different cities (Houston, Austin and Georgetown) and their principal market area is the state of Texas. The nature of the Companies business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheet is presented on an unclassified basis. Inventory Inventories consist primarily of general replacement parts, hydraulic tubing and equipment held for resale and are stated at the lower of cost, determined under the first-in, first-out method, or market. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated five-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of equipment and cost of sales of equipment, respectively, in the combined statement of operations. Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over an estimated five-year useful life. Leasehold improvements are amortized using the straight-line method over the estimated lives of the improvements or the remaining life of the lease, whichever is shorter. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Rental Revenue Rental revenue is recorded as earned under the operating method. F-140 CHANNEL EQUIPMENT HOLDING, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Advertising Costs The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to approximately $56,300 in the year ended December 31, 1997. Income Taxes Both Channel and River City have elected, by unanimous consent of its stockholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code, for federal purposes. Under those provisions both Channel and River City do not have to pay federal income taxes; instead, the stockholders are liable for individual income taxes on both Channel and River City's profits. Therefore, no provision for federal income taxes is included in the accompanying combined financial statements for Channel or River City. Contractors, a C Corporation for federal tax purposes uses the "liability method" of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Companies maintain cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Companies customer base and its credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consisted of the following at December 31, 1997: Rental equipment................................................ $12,095,388 Less accumulated depreciation.................................. (3,861,455) ----------- Rental equipment, net.......................................... $ 8,233,933 ===========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1997: Land............................................................... $218,428 Building........................................................... 213,736 Transportation equipment........................................... 134,443 Leasehold improvements............................................. 9,250 Furniture and fixtures............................................. 28,953 -------- 604,810 Less accumulated depreciation...................................... (58,012) -------- Total.............................................................. $546,798 ========
F-141 CHANNEL EQUIPMENT HOLDING, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 5. DEBT Debt consists of the following at December 31, 1997: AEL Leasing Co., Inc.--Various notes dated from February 1997 to June 1997 with annual interest rates ranging from 8% to 10.2% due in monthly installments ranging from $933 to $4,616........ $ 213,149 The Associates--Two notes dated October 1997 with an annual interest rate due in full in June 1998......................... 768,589 CIT Group--Various notes dated from April 1995 to August 1997 with annual interest rates ranging from 7.5% to 10.0% due in monthly installments ranging from $533 to $6,007............... 1,626,743 CAT Financial--Various notes dated from April 1995 to July 1997 with annual interest rates ranging from 5.1% to 8.1% due in monthly installments ranging from $912 to $6,180............... 619,776 Deutsche Financial--Various notes dated from April 1996 to April 1997 with annual interest rates ranging from 9.6% to 9.9% due in monthly installments ranging from $930 to $2,893............ 564,160 NICE International Corporation--Various notes dated November 1997 with annual interest rates ranging from 9.4% to 10.9% due in monthly installments ranging from $634 to $5,199............ 665,255 Chicago Pneumatic--Various notes dated from March 1997 to July 1997 with annual interest rates ranging from 7.5% to 9.5% due in monthly installments ranging from $427 to $1,827............ 39,095 debis Financial Services, Inc.--Non-interest bearing line-of- credit......................................................... 89,481 Newcourt Financial USA, Inc.--Various notes dated from June 1997 to September 1997 with an annual interest rate of 9.3% due in monthly installments ranging from $1,751 to $20,107............ 549,994 First Prosperity--Various notes dated from April 1995 to September 1997 with annual interest rates ranging from 7.8% to 10.0% due in monthly installments ranging from $415 to $1,178.. 144,631 Financial Federal--Various notes dated from January 1996 to November 1997 with an annual interest rate of 11% due in monthly installments ranging from $430 to $21,465.............. 2,984,398 Norwest Bank--Various notes dated November 1996 with an annual interest rate of 9% due in monthly installments ranging from $277 to $380................................................... 20,998 Case Credit--Various notes dated from August 1995 to November 1996 with annual interest rates ranging from 7.9% to 9.0% due in monthly installments ranging from $481 to $6,935............ 207,007 KDC Financial--Various notes dated from March 1995 to May 1997 with annual interest rates ranging from 7.5% to 10.0% due in monthly installments ranging from $722 to $4,576............... 571,885 JCB Financial--Various notes dated from June 1995 to October 1997 with annual interest rates ranging from 7.0% to 9.5% due in monthly installments ranging from $782 to $1,554............ 134,272 PACCAR--Note dated June 1997 with an annual interest rate of 8.0% due in monthly installments of $1,540..................... 41,729 ---------- $9,241,162 ==========
Substantially all rental equipment and fixed assets collateralize the above notes. All debt at December 31, 1997 was paid off in connection with the acquisition discussed in Note 9. F-142 CHANNEL EQUIPMENT HOLDING, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 6. RELATED PARTY TRANSACTIONS River City leases its Georgetown operating facility and Channel leases its operating facilities from its stockholders on a month to month basis. Both Channel and River City are responsible for all operating expenses of the facilities including property taxes, assessments, insurance, repairs and maintenance. Total rent expense for 1997 was approximately $160,100. In connection with the acquisition discussed in Note 9, the lease terms have been renegotiated. The Companies also had a non-interest bearing note payable from its stockholders totaling $745,650 at December 31, 1997. No repayment schedule has been established. 7. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 total interest and income taxes paid were $705,700 and $3,040, respectively. During 1997 the Companies purchased $4,240,540 of equipment which was financed. 8. EMPLOYEE BENEFIT PLAN The Companies have a defined contribution 401(k) pension plan which covers substantially all employees. The Companies match 100% up to the first six percent of the employees contribution. The Companies contributions to the plan were $8,850 for the year ended December 31, 1997. 9. SUBSEQUENT EVENT On January 23, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Channel and River City. On January 23, 1998, under the terms of the asset purchase agreement, United purchased certain assets of Contractors. F-143 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Paul E. Carlson, Inc. (d/b/a Carlson Equipment Company) Roseville, Minnesota We have audited the accompanying balance sheet of Paul E. Carlson, Inc. (d/b/a Carlson Equipment Company) as of February 28, 1998, and the related statements of operations, stockholders' equity, and cash flow for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Paul E. Carlson, Inc. (d/b/a Carlson Equipment Company) as of February 28, 1998, and the results of its operations and its cash flow for the year then ended in conformity with generally accepted accounting principles. McGladrey & Pullen, LLP St. Paul, Minnesota April 21, 1998 F-144 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) BALANCE SHEETS FEBRUARY 28, 1998 AND JUNE 30, 1998
FEBRUARY JUNE 30, 28, 1998 1998 ---------- ----------- (UNAUDITED) ASSETS (NOTES 3 AND 4) Current Assets Cash.................................................. $ 168,100 $ 492,186 Receivables: Trade accounts, less allowance for doubtful accounts of $125,000 and $176,000 at February 28 and June 30, 1998, respectively.................................. 848,365 1,326,603 Due from stockholder................................. 43,000 43,000 Inventories (Note 2).................................. 1,615,701 2,263,715 Prepaid expenses...................................... 34,330 37,148 Deferred income taxes (Note 6)........................ 146,000 146,000 ---------- ---------- Total current assets.............................. 2,855,496 4,308,652 ---------- ---------- Rental Equipment, at cost (Note 5)...................... 7,137,174 7,556,112 Less accumulated depreciation......................... 2,922,730 3,050,438 ---------- ---------- 4,214,444 4,505,674 ---------- ---------- Property and Equipment, at cost (Note 5) Computer equipment.................................... 153,373 153,373 Transportation equipment.............................. 378,472 380,472 Furniture and equipment............................... 217,838 227,475 Leasehold improvements................................ 115,484 115,484 ---------- ---------- 865,167 876,804 Less accumulated depreciation......................... 426,798 468,798 ---------- ---------- 438,369 408,006 ---------- ---------- $7,508,309 $9,222,332 ========== ==========
See Notes to Financial Statements. F-145 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) BALANCE SHEETS (CONTINUED) FEBRUARY 28, 1998 AND JUNE 30, 1998
FEBRUARY 28, JUNE 30, 1998 1998 ------------ ----------- (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank line of credit (Notes 3 and 10)................ $ -- $4,500,000 Current maturities of long-term debt................ 273,914 468,708 Accounts payable.................................... 257,289 612,160 Accrued expenses: Compensation, vacation, and related taxes......... 160,940 64,969 Profit sharing (Note 7)........................... 150,000 -- Real estate taxes................................. 45,660 41,586 Interest.......................................... 32,067 33,542 Other............................................. 30,894 -- Income taxes payable................................ 155,861 148,861 ---------- ---------- Total current liabilities....................... 1,106,625 5,869,826 ---------- ---------- Deferred Income Taxes (Note 6)........................ 380,000 380,000 ---------- ---------- Long-Term Debt, less current maturities (Notes 3, 4, 5 and 10) Bank line of credit................................. 3,700,000 -- Finance companies and capital lease obligations..... 338,925 715,103 Subordinated note to former stockholder............. 735,448 726,249 ---------- ---------- 4,774,373 1,441,352 ---------- ---------- Commitments (Notes 5, 7 and 8) Stockholders' Equity (Notes 8 and 10) Common stock, par value $1 per share; authorized 100,000 shares; issued and outstanding 2,550 shares............................................. 2,550 2,550 Retained earnings................................... 1,244,761 1,528,604 ---------- ---------- 1,247,311 1,531,154 ---------- ---------- $7,508,309 $9,222,332 ========== ==========
See Notes to Financial Statements. F-146 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) STATEMENTS OF OPERATIONS YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR MONTHS ENDED JUNE 30, 1997 AND 1998
FOUR MONTHS ENDED JUNE YEAR ENDED 30, FEBRUARY 28, ------------------------ 1998 1997 1998 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Sales and rental income................ $10,695,366 $4,173,049 $4,023,720 Cost of sales.......................... 6,085,129 2,477,742 2,400,219 ----------- ---------- ---------- Gross profit....................... 4,610,237 1,695,307 1,623,501 Operating expenses..................... 3,550,240 1,119,606 970,324 ----------- ---------- ---------- Operating income................... 1,059,997 575,701 653,177 ----------- ---------- ---------- Nonoperating: Interest expense..................... (528,266) (176,025) (176,334) Gain on sale of other equipment...... 19,270 -- -- ----------- ---------- ---------- (508,996) (176,025) (176,334) ----------- ---------- ---------- Income before income taxes......... 551,001 399,676 476,843 Federal and state income taxes (Note 6).................................... 244,000 162,000 193,000 ----------- ---------- ---------- Net income $ 307,001 $ 237,676 $ 283,843 =========== ========== ==========
See Notes to Financial Statements. F-147 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR MONTHS ENDED JUNE 30, 1998
COMMON STOCK ------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------ ---------- ---------- Balance, February 28, 1997................. 2,550 $2,550 $ 937,760 $ 940,310 Net income............................... -- -- 307,001 307,001 ----- ------ ---------- ---------- Balance, February 28, 1998................. 2,550 2,550 1,244,761 1,247,311 Net income (unaudited)................... -- -- 283,843 283,843 ----- ------ ---------- ---------- Balance, June 30, 1998 (unaudited)......... 2,550 $2,550 $1,528,604 $1,531,154 ===== ====== ========== ==========
See Notes to Financial Statements. F-148 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) STATEMENTS OF CASH FLOW YEAR ENDED FEBRUARY 28, 1998 AND THE FOUR MONTHS ENDED JUNE 30, 1997 AND 1998
YEAR ENDED FOUR MONTHS ENDED JUNE 30, FEBRUARY 28, ----------------------------- 1998 1997 1998 ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) Cash Flows From Operating Activities Net Income........................ $ 307,001 $ 237,676 $ 283,843 Adjustments to reconcile net in- come to net cash provided by (used in) operating activities: Depreciation.................... 1,482,371 455,303 515,329 Gross margin contribution from rental equipment sales......... (592,674) (225,377) (291,460) Gain on sale of other equip- ment........................... (19,270) -- -- Net increase in deferred income taxes.......................... 82,000 -- -- Changes in current assets and liabilities: Trade accounts receivable..... (26,690) (743,676) (478,238) Inventories................... (133,318) (342,995) (648,014) Prepaid expenses.............. (8,579) (14,634) (2,818) Accounts payable.............. 182,051 662,178 354,871 Accrued expenses.............. 194,834 (23,145) (279,464) Income taxes payable.......... 89,926 94,789 (7,000) ---------- ------------- ------------- Net cash provided by (used in) operating activities.................. 1,557,652 100,119 (552,951) ---------- ------------- ------------- Cash Flows From Investing Activities Proceeds from sales of rental equipment........................ 1,578,609 618,710 748,027 Purchases of rental equipment..... (2,473,274) (1,013,823) (1,221,126) Purchases of property and equip- ment............................. (144,253) (26,678) (11,637) Proceeds from sales of other equipment........................ 21,778 -- -- Increase in receivable from stock- holder........................... (43,000) (12,000) -- ---------- ------------- ------------- Net cash used in investing activities................. (1,060,140) (433,791) (484,736) ---------- ------------- ------------- Cash Flows From Financing Activities Proceeds from long-term borrow- ing.............................. -- -- 659,707 Payments of long-term debt........ (1,576,236) (398,975) (97,934) Net increase in bank line of credit debt...................... 1,100,000 900,000 800,000 ---------- ------------- ------------- Net cash provided by (used in) financing activities... (476,236) 501,025 1,361,773 ---------- ------------- ------------- Net increase in cash........ 21,276 167,353 324,086 Cash Beginning......................... 146,824 146,824 168,100 ---------- ------------- ------------- Ending............................ $ 168,100 $ 314,177 $ 492,186 ========== ============= =============
See Notes to Financial Statements (Additional Cash Flow Information -- Note 9). F-149 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business: Carlson Equipment Co. is engaged in the short-term rental and sales of construction equipment to contractor, industrial, and municipal clients in the St. Paul/Minneapolis metropolitan area, primarily on credit terms established on an individual customer basis. Revenue recognition: The Company recognizes revenue upon delivery of the rental equipment to customers. The Company recognizes revenue from the rental agreements as earned and related expenses as incurred. Cash: The Company maintains cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. Fair value of financial instruments: The financial statements include the following financial instruments and the methods and assumptions used in estimating their fair value: for cash and cash equivalents, the carrying amount is fair value; for trade accounts receivable and accounts payable, the carrying amounts approximate their fair values due to the short term nature of these instruments, and for the notes payable and long-term debt, fair value has been estimated based on discounted cash flows using interest rates being offered for similar borrowings. No separate comparison of fair values versus carrying values is presented for the aforementioned financial instruments since their fair values are not significantly different than their balance sheet carrying amounts. In addition, the aggregate fair values of the financial instruments would not represent the underlying value of the Company. Inventories: Inventories consisting of parts, supplies, and new machinery and equipment are stated at the lower of cost or market. The cost of serialized machinery and equipment is determined on a specific-identification basis. All other inventory is valued using an average-cost method which approximates the first-in, first-out method. Accounting for long-lived assets: Management has and will continue, on a periodic basis, to closely evaluate its equipment to determine potential impairment by comparing its carrying value with the estimated future net undiscounted cash flows expected to result from the use of the assets, including cash flows from disposition. Should the sum of the expected future net cash flows be less than the carrying value, the Company would recognize an impairment loss at that date. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value (estimated discounted future cash flows or appraisal of assets) of the long- lived assets. To date, management has determined that no impairment of long- lived assets exists. Property and equipment depreciation methods: Depreciation is provided using the straight-line method over the following estimated useful lives:
YEARS ----- Computer equipment............................... 5 Transportation equipment......................... 5 Furniture and equipment.......................... 5-10 Leasehold improvements........................... 5-31
F-150 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Rental equipment and related depreciation methods: Rental units are created by the transfer of new equipment, valued at acquisition cost, from inventories to rental equipment. Rental equipment depreciation begins at the point of transfer. Depreciation is provided using the straight-line method over five years, the estimated useful life of the equipment. Sales of rental equipment are accounted for by including the proceeds in sales and by transferring the net book value of the equipment sold to cost of sales. Reclassification of rental equipment depreciation expense: In prior years and in previous February 28, 1998, financial statements, the Company included rental equipment depreciation expense in operating expenses. Rental equipment depreciation expense of $1,359,467 has been reclassified to cost of goods sold for the year ended February 28, 1998. The proceeds and related net book value of rental equipment sold during the year ended February 28, 1998, and for the four months ended June 30, 1997 and 1998, were as follows:
FOUR MONTHS YEAR ENDED ENDED JUNE 30, FEBRUARY 28, ----------------------- 1998 1997 1998 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Proceeds of rental equipment sales............................. $1,578,609 $618,710 $ 748,027 Net book value..................... 985,935 393,333 456,567 ---------- -------- --------- Gross margin from rental equipment sales............................. $ 592,674 $225,377 $ 291,460 ========== ======== =========
Income taxes: Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. New accounting pronouncements: In June 1997, SFAS No. 130, Reporting Comprehensive income, and SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, were issued. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 redefines how operating segments are determined and requires disclosures of certain financial and descriptive information about the Company's operating segments. SFAS Nos. 130 and 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that adoption of SFAS Nos. 130 and 131 will not have any significant effect on its financial statements. F-151 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED Interim financial information (unaudited): The financial statements and notes related thereto as of June 30, 1998, and for the four months ended June 30, 1997 and 1998, are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations. The operating results for the interim periods are not indicative of the operating results to be expected for a full year or for other interim periods. NOTE 2. INVENTORIES The composition of inventories at February 28, 1998, and June 30, 1998 is as follows:
FEBRUARY 28, JUNE 30, 1998 1998 ------------ ----------- (UNAUDITED) Equipment........................................ $ 937,879 $1,508,695 Supplies......................................... 516,552 613,421 Parts............................................ 161,270 141,599 ---------- ---------- $1,615,701 $2,263,715 ========== ==========
NOTE 3. REVOLVING LINE OF CREDIT AGREEMENT The Company had a revolving credit agreement with a bank which provided a $4,500,000 line of credit. The availability of credit was determined by a borrowing base formula consisting of eligible receivables, inventories, and rental equipment. Advances under the line of credit accrued interest at 0.25 percent above the prime interest rate (8.5 percent as of February 28, 1998). The line was due on March 31, 1999, and was secured by substantially all of the Company's assets and the personal guarantees of the Company's stockholders. Since the Company did not intend to reduce the $3,700,000 outstanding balance under this line of credit prior to February 28, 1999, nor did it anticipate a reduction in the borrowing base during this same period, the revolving credit agreement was reflected as long-term debt as of February 28, 1998. At June 30, 1998, the outstanding balance has been reflected as a current liability since it was due within the subsequent 12 months. On July 9, 1998, the revolving credit agreement was paid in full and terminated (see Note 10). The agreement contained certain restrictive financial covenants relative to maintaining a minimum amount of net worth and maintaining a certain debt to net worth ratio. F-152 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 4. LONG-TERM DEBT Capital lease obligations and long-term debt with finance companies and a former stockholder at February 28, 1998 and June 30, 1998, consisted of the following:
FEBRUARY 28, JUNE 30, 1998 1998 ------------ ----------- (UNAUDITED) Capitalized lease obligations, due in monthly installments varying from $521 to $9,704, including interest at 9.2% to 12.3%, through May 2001, secured by related equipment, personally guaranteed by the Company's stockholders (Note 5)..................... $416,739 $ 376,637 Notes payable, due in monthly installments varying from $5,259 to $10,016, plus interest at 8.75% to 10.75%, through March 2003, secured by related equipment........................................... 170,265 780,468 -------- --------- 587,004 1,157,105 Less current maturities.............................. 248,079 442,002 -------- --------- $338,925 $ 715,103 ======== ========= Note payable to former stockholder, due in monthly installments of $8,400 to March 2000, when monthly payments become $13,662 to February 2005, when the remaining principal balance is due, plus interest at 1.0% over prime, secured by accounts receivable, inventories, equipment, and stock, personally guaranteed by the Company's stockholders, subordinated to bank line of credit (1)............. $761,283 $ 752,955 Less current maturities.............................. 25,835 26,706 -------- --------- $735,448 $ 726,249 ======== =========
- -------- (1) On July 9, 1998, the remaining debt balance was paid in full (see Note 10). The approximate aggregate annual future maturities of all long-term debt as of February 28, 1998, including the line of credit and capital leases, were as follows: Years ending February: 1999............................ $ 274,000 2000............................ 3,907,000 2001............................ 229,000 2002............................ 137,000 2003............................ 119,000 Thereafter...................... 382,000 ---------- $5,048,000 ==========
F-153 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 5. LEASE COMMITMENTS Capitalized leases: The Company leases certain rental and other equipment under capitalized leases as follows:
FEBRUARY 28, 1998 ------------ Rental and other equipment................................. $641,448 Less accumulated amortization.............................. 221,066 -------- $420,382 ======== The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of February 28, 1998: Years ending February: 1999..................................................... $171,094 2000..................................................... 139,677 2001..................................................... 140,473 2002..................................................... 29,113 -------- Total minimum payments..................................... 480,357 Less amount representing interest.......................... 63,618 -------- Present value of net minimum payments, included in long- term debt................................................. $416,739 ======== Operating leases: The Company leases its operating facilities under arrangements which are classified as operating leases. The New Hope facility is leased pursuant to an agreement which expires November 1999 and requires monthly lease payments of $6,096. The Roseville facility, which is leased on a month-to-month basis from the Company's former majority stockholder, requires monthly lease payments of $9,624 (see Note 10 relative to a new lease on the Roseville facility). The Bloomington facility is leased under an agreement which expires December 1999 and requires monthly lease payments of $4,463. Future aggregate minimum payments as of February 28, 1998 under operating leases are as follows: Years ending February: 1999..................................................... $133,000 2000..................................................... 102,000 -------- $235,000 ========
Total rent expense for fiscal year 1998 was approximately $233,000. During fiscal year 1998, approximately $115,000 of total rent expense was paid to the Company's former majority stockholder, whose shares were redeemed in 1995. F-154 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 6. INCOME TAX MATTERS Net deferred tax liabilities consist of the following components as of February 28, 1998: Deferred tax assets: Inventory reserve.......................................... $ 51,000 Receivable allowance....................................... 51,000 Accrued compensation....................................... 44,000 AMT credit carryforward.................................... 18,000 ---------- 164,000 Deferred tax liabilities: Property and equipment..................................... (398,000) ---------- Net deferred tax liabilities................................. $ (234,000) ========== Alternative minimum tax credits may be carried forward indefinitely to reduce future tax liabilities. The deferred tax amounts mentioned above have been classified on the accompanying balance sheet as of February 28, 1998, as follows: Current assets............................................... $ 146,000 Noncurrent liabilities....................................... (380,000) ---------- $ (234,000) ========== The provision for income taxes for the year ended February 28, 1998, is comprised of the following: Currently payable............................................ $ 162,000 Deferred..................................................... 82,000 ---------- Federal and state income taxes............................... $ 244,000 ========== The Company's income tax expense for the year ended February 28, 1998, differed from the statutory federal rate as follows: Statutory rate applied to income before income taxes......... $ 187,000 State income tax expense net of federal tax effect........... 34,000 Nondeductible expense........................................ 11,000 Other........................................................ 12,000 ---------- $ 244,000 ==========
F-155 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 7. PROFIT SHARING AND 401(K) PLAN The Company had a profit sharing and 401(k) plan for all employees who met the eligibility requirements set forth in the plan. The plan incorporated the provisions of Internal Revenue Code Section 401(k) under which the employees could contribute up to 20 percent of their salary to the plan. The Company matched up to 50 percent of the participant's voluntary contribution up to 5 percent of the participant's salary. In addition, the plan allowed for additional discretionary contributions. The Company communicated its intention and historically distributed 20 percent of pretax, preprofit sharing income as an annual discretionary profit sharing contribution (see Note 10 relative to the subsequent termination of the profit sharing and 401(k) plan). Company contributions for the year ended February 28, 1998, and for the four months ended June 30, 1997 and 1998, were as follows:
FOUR MONTHS YEAR ENDED ENDED JUNE 30, FEBRUARY 28, ----------------------- 1998 1997 1998 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Discretionary...................... $150,000 $109,000 $ -- Matching........................... 37,400 10,953 8,438 -------- -------- -------- $187,400 $119,953 $ 8,438 ======== ======== ======== NOTE 8. STOCK REDEMPTION AGREEMENT In the event of the death or disability of a stockholder prior to July 9, 1998, the Company was obligated to purchase the outstanding stock of the affected stockholder, should the other stockholder not exercise the right of first purchase. The purchase price of the stock was based on the value of the Company, as defined per the shareholder agreement. The purchase price was to be paid in 120 equal monthly installments (see Note 10 relative to the subsequent termination of the stock redemption agreement). NOTE 9. ADDITIONAL CASH FLOW INFORMATION FOUR MONTHS YEAR ENDED ENDED JUNE 30, FEBRUARY 28, ----------------------- 1998 1997 1998 ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) Supplemental disclosures of cash flow information: Cash payments for interest....... $519,265 $173,072 $174,859 Cash payments for income taxes... 72,074 72,000 200,000 ======== ======== ======== Supplemental schedule of noncash investing and financing activities: Capital lease obligations incurred for use of equipment... $ 81,124 $ -- $ -- ======== ======== ========
F-156 PAUL E. CARLSON, INC. (D/B/A CARLSON EQUIPMENT COMPANY) NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION APPLICABLE TO THE FOUR MONTH PERIODS ENDED JUNE 30, 1997 AND 1998, IS UNAUDITED) NOTE 10. EVENTS SUBSEQUENT TO JUNE 30, 1998 (UNAUDITED) On July 9, 1998, the Company's stockholders entered into an agreement, effective July 1, 1998, whereby United Rentals Inc. purchased all of the Company's outstanding common stock. In conjunction with the aforementioned agreement, the note payable to former stockholder and the outstan~ding balance on the revolving line of cre~dit were paid in full on July 9, 1998. In addition, the revolving credit agreement was terminated at that time. The stock redemption agreement (Note 8) a~nd the profit sharing and 401(k) p~lan (Note 7) were also terminated effective June 30,1998. On July 9, 1998, the Company entered into a ten-year lease for its Roseville facility with a former stockholder. The lease requires monthly lease payments of $9,624 and has a five-year option to renew. F-157 INDEPENDENT AUDITOR'S REPORT To the Board of Directors West Main Rentals and Sales, Incorporated We have audited the accompanying balance sheet of West Main Rentals and Sales, Incorporated (an S corporation) as of December 31, 1997, and the related statements of income, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Main Rentals and Sales, Incorporated as of December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Moss Adams LLP Eugene, Oregon April 22, 1998 F-158 WEST MAIN RENTALS AND SALES, INCORPORATED BALANCE SHEET ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) CURRENT ASSETS Cash................................................. $ 134,924 $ 155,238 Accounts receivable.................................. 1,014,677 936,423 Inventory for resale................................. 634,249 630,729 Rental fleet expected to be sold..................... 402,000 402,000 Prepaid expenses..................................... 57,920 15,271 Current portion of notes receivable.................. 2,432 6,753 ---------- ---------- Total current assets............................... 2,246,202 2,146,414 ---------- ---------- NOTES RECEIVABLE, less current portion................. 55,954 69,160 ---------- ---------- PROPERTY AND EQUIPMENT Rental fleet......................................... 6,121,168 6,246,646 Leasehold improvements............................... 513,278 528,353 Equipment............................................ 1,246,218 1,344,013 Equipment held under capital leases.................. 1,067,217 1,067,217 ---------- ---------- 8,947,881 9,186,229 Less accumulated depreciation and amortization....... 3,554,875 3,739,962 ---------- ---------- 5,393,006 5,446,267 ---------- ---------- $7,695,162 $7,661,841 ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable....................................... $ 137,446 $ 414,808 Accrued liabilities.................................... 198,517 198,162 Notes payable.......................................... 478,616 428,198 Current portion: Long-term debt....................................... 1,145,640 1,210,636 Obligations under capital leases..................... 206,000 214,000 ---------- ---------- Total current liabilities.......................... 2,166,219 2,465,804 ---------- ---------- LONG-TERM DEBT, less current portion..................... 3,184,201 3,539,421 ---------- ---------- OBLIGATIONS UNDER CAPITAL LEASES, less current portion... 648,146 619,353 ---------- ---------- COMMITMENTS STOCKHOLDERS' EQUITY Common stock, no par value; 1,000 shares authorized, 100 shares issued and outstanding..................... 130,841 130,841 Retained earnings...................................... 1,565,755 906,422 ---------- ---------- 1,696,596 1,037,263 ---------- ---------- $7,695,162 $7,661,841 ========== ==========
See accompanying notes. F-159 WEST MAIN RENTALS AND SALES, INCORPORATED STATEMENT OF INCOME
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------------- 1997 1998 1997 ------------ ---------- ---------- (UNAUDITED) REVENUES Rental................................. $7,167,252 $1,067,808 $1,208,955 Retail sales........................... 1,286,872 366,341 303,444 Other sales............................ 1,061,874 202,658 180,800 Gain on sale of rental equipment....... 238,793 47,209 82,399 ---------- ---------- ---------- 9,754,791 1,684,016 1,775,598 ---------- ---------- ---------- COST OF OPERATIONS Rental................................. 5,064,324 1,267,400 848,479 Retail cost of sales................... 916,670 279,002 212,656 Other cost of sales.................... 252,472 45,276 46,242 ---------- ---------- ---------- 6,233,466 1,591,678 1,107,377 ---------- ---------- ---------- GROSS PROFIT............................. 3,521,325 92,338 668,221 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................................ 2,515,654 564,480 589,522 ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS............ 1,005,671 (472,142) 78,699 ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest income........................ 6,094 1,576 1,952 Gain on sale of equipment.............. 9,067 -- 1,117 Interest expense....................... (540,064) (141,267) (114,070) ---------- ---------- ---------- (524,903) (139,691) (111,001) ---------- ---------- ---------- NET INCOME (LOSS)........................ $ 480,768 $ (611,833) $ (32,302) ========== ========== ==========
See accompanying notes. F-160 WEST MAIN RENTALS AND SALES, INCORPORATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON RETAINED STOCK EARNINGS TOTAL -------- ---------- ---------- BALANCE, December 31, 1996..................... $130,841 $1,404,987 $1,535,828 Net income..................................... -- 480,768 480,768 Dividends...................................... -- (320,000) (320,000) -------- ---------- ---------- BALANCE, December 31, 1997..................... 130,841 1,565,755 1,696,596 Net loss (unaudited)........................... -- (611,833) (611,833) Dividends (unaudited).......................... -- (47,500) (47,500) -------- ---------- ---------- BALANCE, March 31, 1998 (unaudited)............ $130,841 $ 906,422 $1,037,263 ======== ========== ==========
See accompanying notes. F-161 WEST MAIN RENTALS AND SALES, INCORPORATED STATEMENT OF CASH FLOWS
YEAR ENDED THREE MONTHS ENDED DECEMBER MARCH 31, 31, ------------------- 1997 1998 1997 ----------- --------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss).......................... $ 480,768 $(611,833) $(32,302) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization............ 1,129,015 307,895 244,383 Net gain from sale of property........... (247,860) (47,209) (83,516) Changes in: Accounts receivable.................... (329,061) 78,254 5,396 Inventory for resale................... 32,228 3,520 (144,037) Prepaid expenses....................... (17,756) 42,649 (12,866) Accounts payable....................... (286,115) 277,362 (160,215) Accrued liabilities.................... 27,723 (355) 7,708 ----------- --------- -------- Net cash from operating activities......... 788,942 50,283 (175,449) ----------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment......... (2,261,854) (492,384) (608,559) Proceeds from sale of equipment............ 625,362 178,437 620,775 Net principal repayments (advances) on notes receivable.......................... 480 (17,527) 325 ----------- --------- -------- Net cash from investing activities......... (1,636,012) (331,474) 12,541 ----------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (payments) on notes payable................................... 478,616 (50,418) 190,000 Proceeds from long-term borrowings and capital lease obligations................. 1,818,217 670,403 142,412 Principal payments on long-term debt and capital lease obligations................. (1,078,345) (270,980) (96,132) Dividends paid............................. (320,000) (47,500) -- ----------- --------- -------- Net cash from financing activities......... 898,488 301,505 236,280 ----------- --------- -------- NET INCREASE IN CASH......................... 51,418 20,314 73,372 CASH, beginning of period.................... 83,506 134,924 83,506 ----------- --------- -------- CASH, end of period.......................... $ 134,924 $ 155,238 $156,878 =========== ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for interest... $ 532,245 $ 135,866 $110,846 =========== ========= ========
See accompanying notes. F-162 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF OPERATIONS--The Company primarily rents heavy equipment to contractors. The Company provides wholesale and retail rental services and sales from four Oregon locations and two in California. The second California location was opened in May 1997. The Company extends credit to all customer types once a credit contract has been completed by the customer. This credit contract includes trade references, which are consulted, and personal guarantees, when deemed necessary. All charges are due in full 30 days from the transaction date. Past due items are assessed a carrying charge. Cash transactions require a deposit for a portion of the rental charge. A minimum of one day's rent is required. RESTATEMENT OF FINANCIAL INFORMATION--The Company has restated its 1997 financial statements primarily to capitalize certain equipment leases entered into during 1996 and 1997. In the opinion of management, all material adjustments necessary to correct the financial statements have been recorded. The impact of these adjustments did not have a material effect on beginning retained earnings. INTERIM FINANCIAL STATEMENTS--The accompanying financial statements as of March 31, 1998, and for the three months ended March 31, 1997 and 1998 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. REVENUE RECOGNITION--Revenues from the daily and monthly rental of equipment are accounted for as operating leases. Credit risk associated with accounts receivable is periodically reviewed by management and an allowance for doubtful accounts, if required, is established. The allowance was $20,000 at December 31, 1997 and March 31, 1998 (unaudited). INVENTORY FOR RESALE--The inventory for resale consists of equipment parts and supplies and is stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. RENTAL FLEET EXPECTED TO BE SOLD--An estimate of rental fleet equipment expected to be sold in the next year is presented as a current asset. PROPERTY AND EQUIPMENT--Property and equipment is stated at cost. Depreciation and amortization is computed using the straight-line method over the following estimated useful lives: Rental fleet............................................... 5 to 10 years Leasehold improvements..................................... 5 to 31 years Equipment.................................................. 3 to 10 years Equipment held under capital leases........................ 3 to 5 years
ADVERTISING AND PROMOTION--All costs associated with advertising and promotion are expensed as incurred. Advertising and promotion expense totaled $141,200 in 1997, and was $59,100 (unaudited) and $32,400 (unaudited) for the three month periods ended March 31, 1998 and 1997, respectively. INCOME TAXES--The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code, whereby income of the Company is taxable directly to the individual stockholders. Accordingly, no provision for income taxes is included in these financial statements. F-163 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 1--DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of financial instruments, consisting of cash, receivables, accounts payable, and debt instruments, is based on interest rates available to the Company and discounted cash flow analysis. The fair value of these financial instruments approximates carrying value. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results will differ from those estimates. RECENTLY ISSUED ACCOUNTING STANDARDS--In 1997, the Company implemented Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information about Capital Structure," that continues the existing requirements to disclose pertinent rights and privileges of all securities other than common stock, but expands the number of companies subject to portions of its requirements. The Company's current capital structure does not require any additional disclosures as a result of this pronouncement. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" which the Company is required to adopt for years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of financial statements. This statement will require that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Other issued but not yet required FASB statements are not currently applicable to the Company's operations. NOTE 2--NOTES RECEIVABLE The Company has two unsecured notes receivable from stockholders. These notes require interest only payments with the balance due in 2000. The interest rate is fixed at 8%, requiring monthly payments of $361.
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Stockholder notes receivable........................... $54,255 $54,255 Other notes receivable................................. 4,131 21,658 ------- ------- 58,386 75,913 Less current portion................................... 2,432 6,753 ------- ------- Long-term portion...................................... $55,954 $69,160 ======= =======
NOTE 3--NOTES PAYABLE The Company has a revolving credit line available totaling $600,000 at prime plus 1% (9.5% at December 31, 1997 and March 31, 1998). Outstanding borrowings under the line of credit are subject to the same collateral and restrictive covenant provisions as the term notes described in Note 4, and totaled $430,000 at December 31, 1997 and $390,000 (unaudited) at March 31, 1998. The Company also has a short term note payable to a finance company. The outstanding balance on this note was $48,616 at December 31, 1997 and $38,198 (unaudited) at March 31, 1998. F-164 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Note payable to bank, payable in monthly (excepting January and February) installments of $33,334 plus interest at prime plus 1.25% (9.75% at December 31, 1997 and March 31, 1998), due December 1999......... $ 666,640 $ 633,306 Note payable to bank, payable in monthly installments of $20,934 including interest at 9.36%, due March 2001................................................ 704,108 657,444 Note payable to bank, payable in monthly (excepting January and February) installments of $7,000 plus interest at prime plus 1.25% (9.75% at December 31, 1997 and March 31, 1998), due December 1999......... 126,000 105,000 Unsecured notes payable to stockholders, payable in monthly interest only installments at 12%, due October 2000. Subordinated to the bank debt......... 591,162 591,162 Note payable to bank, payable in monthly installments of $5,334 plus interest at 10.7%, due November 1999................................................ 122,642 106,640 Unsecured notes payable to stockholders, all with interest at 10% payable annually, due October 2000. Subordinated to the bank debt....................... 114,545 114,545 Note payable to bank, payable in monthly installments of $16,667 beginning November 1997 plus interest at prime plus 1.25% (9.75% at December 31, 1997 and March 31, 1998), due October 2002................... 966,667 916,667 Note payable to bank, payable in monthly payments of $10,348 plus interest at 8.87%, due April 2002...... 427,566 396,523 Note payable to bank, payable in monthly interest only payments through March 1998, then in monthly installments of $11,231 including interest at prime plus 2.00% (10.50% at March 31, 1998), due March 2006................................................ -- 600,000 Other notes payable, due in varying installments including interest at various rates, collateral provided by equipment and vehicles.................. 610,511 628,770 ---------- ---------- 4,329,841 4,750,057 Less current portion................................. 1,145,640 1,210,636 ---------- ---------- $3,184,201 $3,539,421 ========== ==========
Substantially all cash, accounts receivable, inventories, property and equipment, and general intangibles are pledged as collateral for the Company's short and long-term borrowing arrangements. The stockholders have also personally guaranteed outstanding bank borrowings. In addition, the Company's bank loan agreements contain provisions which, among other things, require maintenance of certain financial ratios, restrict dividend payments and property and equipment purchases, and provide for prepayment penalties. Annual payments of long-term debt for the years subsequent to December 31, 1997 are due as follows:
DECEMBER 31, ------------ 1998............................................................ $1,145,640 1999............................................................ 1,097,900 2000............................................................ 1,326,200 2001............................................................ 552,500 2002............................................................ 202,600 2003 and thereafter............................................. 5,001 ---------- $4,329,841 ==========
F-165 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--LONG-TERM DEBT (CONTINUED) Interest expense to stockholders on notes payable and long-term debt totaled approximately $81,920 during 1997 and $20,600 (unaudited) and $20,500 (unaudited) for the three month periods ended March 31, 1998 and 1997, respectively. NOTE 5--OBLIGATIONS UNDER CAPITAL LEASES The Company leases equipment under long-term leases and has the option to purchase the equipment at the termination of the lease. Included in property and equipment are the following assets held under capital leases:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Equipment held under capital leases.................... $1,067,217 $1,067,217 Less accumulated amortization.......................... 222,011 282,320 ---------- ---------- $ 845,206 $ 784,897 ========== ==========
Future minimum lease payments for assets under capital leases at December 31, 1997 are as follows:
DECEMBER 31, ------------ 1998........................................................... $ 283,500 1999........................................................... 256,900 2000........................................................... 205,000 2001........................................................... 197,600 2002........................................................... 103,016 ---------- Total minimum lease payments..................................... 1,046,016 Less amount representing interest................................ 191,870 ---------- Present value of net minimum lease payments...................... 854,146 Less current maturities.......................................... 206,000 ---------- $ 648,146 ==========
NOTE 6--COMMITMENTS RELATED PARTY LEASES--The Company leases facilities under five separate agreements from a partnership owned by the Company stockholders. These agreements expire between 1999 and 2011. The lease agreements provide for payment of a minimum amount plus taxes, insurance and other costs. The monthly rental payments can be adjusted annually. Total rents paid for the year ended December 31, 1997 were $220,350, and were $87,600 (unaudited) and $48,450 (unaudited) for the three month periods ended March 31, 1998 and 1997, respectively. GRANTS PASS, OREGON LEASE--The Company leased facilities in Grants Pass, Oregon under an agreement which expired in 1997. Rental expense on this lease was $34,930 in 1997, and was $8,700 (unaudited) for the three month period ended March 31, 1997. EUREKA, CALIFORNIA LEASE--During 1997, the Company began leasing facilities in Eureka, California under a month-to-month agreement. Monthly rent is $3,850. A long-term agreement at the current location is expected in 1998. F-166 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--COMMITMENTS (CONTINUED) Aggregate future minimum lease commitments for real property, substantially all of which are with related parties, are as follows:
DECEMBER 31, ------------ 1998............................................................ $ 350,400 1999............................................................ 283,100 2000............................................................ 174,000 2001............................................................ 54,000 2002............................................................ 54,000 Thereafter........................................................ 459,000 ---------- $1,374,500 ==========
EQUIPMENT LEASES--The Company leases equipment under several operating lease arrangements. Monthly payments on these leases total approximately $130,300, with maturities extending to 2002. Rental expense totaled $982,500 for the year ended December 31, 1997, and was $177,000 (unaudited) and $95,200 (unaudited) for the three months ended March 31, 1998 and 1997, respectively. A significant portion of the leased equipment is returnable to the vendor with thirty days notice without penalty from the lessor. Additionally, the shareholders have guaranteed these lease commitments. Aggregate future minimum lease commitments for equipment are as follows:
DECEMBER 31, ------------ 1998............................................................ $1,303,000 1999............................................................ 1,274,100 2000............................................................ 1,256,400 2001............................................................ 942,600 2002............................................................ 293,600 ---------- $5,069,700 ==========
STOCK REPURCHASE AGREEMENT--The Company and the stockholders have entered into an agreement whereby the Company will purchase the shares of a deceased stockholder at a value to be determined as set forth in the agreement. NOTE 7--RETIREMENT PLAN A defined contribution plan covers all employees who meet age and service requirements. The defined contribution plan is a 401(k) profit-sharing plan. The plan allows employee contributions. The Company, at its discretion, may also contribute to the plan. In 1997, the Company contributed $40,000; $24,400 was allocated to the profit-share portion of the plan and $15,600 was allocated to match employee contributions at 50%. There were no Company contributions for the three month periods ended March 31, 1998 and 1997. NOTE 8--SUBSEQUENT EVENTS DIVIDENDS--On January 2, 1998 the Board of Directors declared a dividend of $475 per share of outstanding common stock, payable to shareholders of record as of January 2, 1998. Also, on April 10, 1998 an additional dividend was declared of $750 per share, to shareholders of record on that date. F-167 WEST MAIN RENTALS AND SALES, INCORPORATED NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 8--SUBSEQUENT EVENTS (CONTINUED) NEW DEBT--On March 4, 1998 the Company obtained additional financing from its bank. This debt is in addition to existing bank liabilities. The new agreement provides for an aggregate commitment of $1,000,000 and expires in 2006. This note has been guaranteed by the stockholders. SALE OF COMPANY STOCK--On March 20, 1998 a Letter of Intent was received from United Rentals, Inc. to acquire all outstanding stock of the Company. Under the terms of the agreement, all indebtedness of the Company, including long-term debt and notes payable, but excluding leases, is to be paid in full at closing. The agreement also provided for real estate leases described in Note 6 to be extended for an additional ten years. This transaction was closed on April 22, 1998. Acquisition of the Company stock by United Rentals, Inc. resulted in the termination of the Company's election to be taxed under Subchapter S of the Internal Revenue Code. F-168 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Pro Rentals, Inc. We have audited the accompanying balance sheet of Pro Rentals, Inc. as of December 31, 1997 and the related statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pro Rentals, Inc. at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey April 22, 1998 F-169 PRO RENTALS, INC. BALANCE SHEET DECEMBER 31, 1997 ASSETS Cash............................................................... $ 2,700 Accounts receivable, net of allowance for doubtful accounts of $38,000........................................................... 582,034 Inventory.......................................................... 499,826 Rental equipment, net.............................................. 4,308,589 Property and equipment, net........................................ 210,889 Prepaid expenses and other assets.................................. 5,315 Due from stockholder............................................... 60,643 ---------- Total assets................................................... $5,669,996 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable................................................. 334,829 Accrued expenses and other liabilities........................... 182,281 Debt............................................................. 3,456,278 ---------- Total liabilities.............................................. 3,973,388 Commitments and contingencies Stockholders' equity: Common stock, $4.00 par value, 50,000 shares authorized, 1,000 shares issued and outstanding............................. 4,000 Retained earnings................................................ 1,692,608 ---------- Total stockholders' equity..................................... 1,696,608 ---------- Total liabilities and stockholders' equity..................... $5,669,996 ==========
See accompanying notes. F-170 PRO RENTALS, INC. STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1997 Revenues: Equipment rentals................................................. $3,980,013 Sales of rental equipment......................................... 581,820 Sales of parts, supplies and new equipment........................ 1,309,778 ---------- Total revenues.................................................. 5,871,611 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation..................................................... 889,536 Depreciation, equipment rentals................................... 578,897 Cost of rental equipment sales.................................... 403,475 Cost of parts, supplies and new equipment sales................... 1,147,579 ---------- Total cost of revenues.......................................... 3,019,487 ---------- Gross profit.................................................... 2,852,124 Selling, general and administrative expenses........................ 2,137,103 Non-rental depreciation............................................. 58,327 ---------- Operating income.................................................... 656,694 Interest expense.................................................... 440,998 ---------- Net income...................................................... $ 215,696 ==========
See accompanying notes. F-171 PRO RENTALS, INC. STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------- RETAINED SHARES AMOUNT EARNINGS ------ ------ ---------- Balance at January 1, 1997............................. 1,000 $4,000 $1,476,912 Net income........................................... 215,696 ----- ------ ---------- Balance at December 31, 1997........................... 1,000 $4,000 $1,692,608 ===== ====== ==========
See accompanying notes. F-172 PRO RENTALS, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 Cash flows from operating activities Net income....................................................... $ 215,696 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................... 637,224 Gain on rental equipment sales................................. (178,345) Changes in assets and liabilities: Increase in accounts receivable.............................. (189,727) Decrease in inventory........................................ 676,854 Decrease in prepaid expenses and other assets................ 157,506 Decrease in accounts payable................................. (4,745) Increase in accrued expenses and other liabilities........... 69,357 ----------- Cash provided by operating activities............................ 1,383,820 Cash flows from investing activities Proceeds from sale of rental equipment........................... 581,820 Purchase of property and equipment............................... (2,399) ----------- Cash provided by investing activities............................ 579,421 Cash flows from financing activities Principal payments on debt....................................... (2,553,206) Borrowings under credit facility................................. 589,965 ----------- Cash used in financing activities................................ (1,963,241) ----------- Increase in cash................................................. -- Cash at beginning of year........................................ 2,700 ----------- Cash at end of year.............................................. $ 2,700 ===========
See accompanying notes. F-173 PRO RENTALS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY The Company rents, sells and repairs construction equipment for use by contractor, industrial and homeowners markets. The rentals are on a daily, weekly or monthly basis. The Company has six locations (East Bremerton, West Bremerton, Port Angeles, Gig Harbor, Port Orchard and Lakewood) and the principal market area is Northern Washington. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheet is presented on an unclassified basis. These financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Company by United Rentals, Inc. ("United") as more fully described in Note 9. INVENTORY Inventories consists primarily of equipment, general replacement parts and fuel for the equipment and are stated at the lower of cost, determined under the first-in, first-out method, or market. RENTAL EQUIPMENT Rental equipment is recorded at cost. Rental equipment costing less than $1,000 is immediately expensed at the date of purchase. Depreciation for rental equipment is computed using the straight-line method over an estimated seven-year useful life with a 35% salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from the sales of rental equipment and cost of sales of rental equipment, respectively, in the statement of income. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. The company capitalizes all property and equipment purchases greater than $1,000. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives of 5 to 10 years with no salvage value. Leasehold improvements are amortized using the straight-line method over the estimated lives of the improvements or the remaining life of the lease, whichever is shorter. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. RENTAL REVENUE Rental revenue is recorded as earned under the operating method. ADVERTISING COSTS The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to $61,405 in the year ended December 31, 1997. INCOME TAXES Pro Rentals has elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal purposes. Under those provisions, the Company does not pay federal income taxes; instead, the shareholders are liable for individual income taxes on the Company's profits. F-174 PRO RENTALS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Companies maintain cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Companies' customer base and their credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consisted of the following at December 31, 1997: Rental equipment................................................. $6,326,420 Less accumulated depreciation.................................... 2,017,831 ---------- Rental equipment, net............................................ $4,308,589 ==========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1997: Furniture and fixtures............................................. $ 30,363 Office equipment................................................... 237,868 Vehicles........................................................... 336,457 Leasehold improvements............................................. 11,218 -------- 615,906 Less accumulated depreciation ..................................... 405,017 -------- Total.............................................................. $210,889 ========
5. DEBT Debt consists of the following at December 31, 1997: Deutsche Financial Services--Various notes with combined monthly payments of $37,489 including interest from 7.9% to 10.25%..... $1,116,338 John Deere--Various notes with combined monthly payments of $10,699 including interest from 6.9% to 10.24%................. 558,677 American Equipment Leasing (AEL)--Various notes with combined monthly payments of $34,763 including interest from 8% to 12.25%......................................................... 648,835 Financial Federal Credit, Inc.--Various notes with combined monthly payments of $7,291 including interest of 10.25%........ 183,757 Associates Commercial Corporation--Various notes with combined monthly payments of $6,436 including interest from 8.3% to 10.25%......................................................... 166,780 AEL--$150,000 revolving line of credit due October 14, 1998 with monthly interest payments at prime plus 2.17%.................. 150,000 Kitsap Bank--$150,000 revolving line of credit due July 7, 1998 with monthly interest payments at prime plus 2%. This line is personally guaranteed by the Company's shareholders............ 75,000 Other........................................................... 556,891 ---------- Total....................................................... $3,456,278 ==========
F-175 PRO RENTALS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Substantially all rental equipment and inventory collateralized the above notes. All debt at December 31, 1997 was paid off in connection with the acquisition discussed in Note 9. 6. OPERATING LEASES The Company leases six store locations. Three of the locations are on long term leases, while the other three are on a month-to-month basis. The Company is responsible for all operating expenses of the facilities including property taxes, assessments, insurance, repairs and maintenance. These leases have various terms and extend through December 2007 and include scheduled base rent increases over the term of the leases. The total amount of the base rent payments is being charged to expense on the straight-line method over the terms of the leases. Total rent expense for 1997 was approximately $294,893. At December 31, 1997, minimum lease commitments under all operating leases, with initial or remaining lease terms of more than one year are as follows: 1998.............................................................. $ 318,360 1999.............................................................. 299,037 2000.............................................................. 273,144 2001.............................................................. 223,364 Thereafter........................................................ 1,432,800 ---------- Total............................................................. $2,546,705 ==========
7. RELATED PARTIES Three of the Company's locations are leased from the Company's shareholders. Total rent paid to the shareholders under these leases amounted to $177,412 in 1997. At December 31, 1997 Pro Rentals has a non-interest bearing amount due from one of the Company's shareholders of $60,643. 8. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 total interest paid was $440,998. During 1997 the Companies purchased $607,902 of rental equipment and $524,333 of inventory which was financed. 9. SUBSEQUENT EVENT On January 22, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Company. F-176 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders ASC Equipment Company, Inc. We have audited the accompanying balance sheet of ASC Equipment Company, Inc. as of December 31, 1997 and the related statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ASC Equipment Company, Inc. at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey April 22, 1998 F-177 ASC EQUIPMENT COMPANY, INC. BALANCE SHEET DECEMBER 31, 1997 ASSETS Cash............................................................... $ 13,365 Accounts receivable, net of allowance for doubtful accounts of $51,217........................................................... 623,370 Inventory.......................................................... 619,187 Rental equipment, net.............................................. 2,721,279 Property and equipment, net........................................ 313,827 Prepaid expenses and other assets.................................. 33,883 ---------- Total assets................................................... $4,324,911 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable, accrued expenses and other liabilities......... $ 490,454 Debt............................................................. 2,436,503 Deferred compensation............................................ 52,615 Deferred income taxes............................................ 206,109 ---------- Total liabilities.............................................. 3,185,681 Commitments and contingencies Stockholders' equity: Common stock, $1.00 par value, 100,000 shares authorized, 3,210 shares issued and outstanding................................... 3,210 Preferred stock, $1.00 par value, 1,000 shares authorized, 55 shares issued and outstanding................................... 55 Additional paid-in capital....................................... 19,595 Retained earnings................................................ 1,188,370 ---------- 1,211,230 Treasury stock................................................... (72,000) ---------- Total stockholders' equity..................................... 1,139,230 ---------- Total liabilities and stockholders' equity..................... $4,324,911 ==========
See accompanying notes. F-178 ASC EQUIPMENT COMPANY, INC. STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1997 Revenues: Equipment rentals................................................ $3,209,936 Rental equipment sales........................................... 291,618 Sales of parts, supplies and new equipment....................... 1,963,901 ---------- Total revenues................................................. 5,465,455 Cost of revenues: Cost of equipment rentals, excluding equipment rental depreciation.................................................... 1,248,757 Depreciation, equipment rentals.................................. 949,526 Cost of rental equipment sales................................... 136,712 Cost of parts, supplies and new equipment sales.................. 1,480,339 ---------- Total cost of revenues......................................... 3,815,334 ---------- Gross profit................................................... 1,650,121 Selling, general and administrative expenses....................... 1,328,977 Non-rental depreciation............................................ 105,503 ---------- Operating income................................................... 215,641 Interest expense................................................... 214,983 Other (income)..................................................... (116,188) ---------- Income before provision for income taxes........................... 116,846 Provision for income taxes......................................... 87,861 ---------- Net income......................................................... $ 28,985 ==========
See accompanying notes. F-179 ASC EQUIPMENT COMPANY, INC. STATEMENT OF STOCKHOLDERS' EQUITY
PREFERRED COMMON STOCK STOCK ADDITIONAL ------------- ------------- PAID IN RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS STOCK ------ ------ ------ ------ ---------- ---------- -------- Balance at January 1, 1997................... 3,210 $3,210 55 $55 $19,595 $1,159,385 $(72,000) Net income............ 28,985 ----- ------ --- --- ------- ---------- -------- Balance at December 31, 1997................... 3,210 $3,210 55 $55 $19,595 $1,188,370 $(72,000) ===== ====== === === ======= ========== ========
See accompanying notes. F-180 ASC EQUIPMENT COMPANY, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income....................................................... $ 28,985 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................... 1,055,029 Gain on rental equipment sales................................. (26,631) Deferred taxes................................................. 75,333 Changes in assets and liabilities: Increase in accounts receivable.............................. (123,786) Increase in inventory........................................ (57,506) Decrease in prepaid expenses and other assets................ 47,521 Increase in accounts payable accrued expenses and other liabilities................................................. 141,880 Increase in deferred compensation............................ 3,895 ----------- Cash provided by operating activities............................ 1,144,720 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment..................................... (1,597,801) Proceeds from sale of rental equipment........................... 262,130 Purchases of property and equipment.............................. (190,245) ----------- Cash used in investing activities................................ (1,525,916) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt....................................... (2,933,065) Borrowings under credit facilities............................... 3,325,064 ----------- Cash provided by financing activities............................ 391,999 ----------- Increase in cash................................................. 10,803 Cash balance at beginning of year................................ 2,562 ----------- Cash balance at end of year...................................... $ 13,365 ===========
See accompanying notes. F-181 ASC EQUIPMENT COMPANY, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY ASC Equipment Company, Inc. (the "Company") rents, sells and repairs construction equipment for use by contractor, industrial and homeowners markets. The rentals are on a daily, weekly or monthly basis. The Company has three locations (Fayetteville, Goldsboro and Jacksonville) and their principal market area is eastern North Carolina. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheet is presented on an unclassified basis. These financial statements are prepared on a historical cost basis and do not include any adjustments that may result from the acquisition of the Company by United Rentals, Inc. ("United") as more fully described in Note 10. INVENTORY Inventories consists primarily of general replacement parts and equipment held for resale and are stated at the lower of cost, determined under the first-in, first-out method, or market. RENTAL EQUIPMENT Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated five-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of equipment and cost of sales of equipment, respectively, in the statement of income. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over an estimated five-year useful life. Leasehold improvements are amortized using the straight-line method over the estimated lives of the improvements or the remaining life of the lease, whichever is shorter. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. RENTAL REVENUE Rental revenue is recorded as earned under the operating method. ADVERTISING COSTS The Companies advertise primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expense amounted to approximately $34,900 in the year ended December 31, 1997. F-182 ASC EQUIPMENT COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) INCOME TAXES The Company uses the "liability method" of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which differences are expected to reverse. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The company maintains cash balances with a quality financial institution and, consequently, management believes funds maintained there are secure. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and its credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consisted of the following at December 31, 1997: Rental equipment............................................... $ 5,640,041 Less accumulated depreciation.................................. (2,918,762) ----------- Rental equipment, net.......................................... $ 2,721,279 ===========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31, 1997: Transportation equipment.......................................... $ 571,054 Furniture and fixtures............................................ 36,317 Leasehold improvements............................................ 32,622 --------- 639,993 Less accumulated depreciation..................................... (326,166) --------- Total............................................................. $ 313,827 =========
5. DEBT Debt consists of the following at December 31, 1997: First Citizens Bank; three notes; payable in monthly installments of $37,770 including interest at prime 8.5% at December 31, 1997, collateralized by equipment and real estate........................................................ $ 936,404 First Citizens Bank; line of credit of $1,550,000; payable in monthly installments of interest only at prime, collateralized by equipment and inventory.................................... 1,446,292 Financial Federal; payable in monthly installments of $2,230 including interest at 6.75%; collateralized by equipment...... 53,807 ---------- $2,436,503 ==========
All debt at December 31, 1997 was paid off in connection with the acquisition discussed in Note 10. F-183 ASC EQUIPMENT COMPANY, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. INCOME TAXES The provision for income taxes consists of the following for the year ended December 31, 1997: Current: Federal............................................................ $10,270 State.............................................................. 2,258 ------- 12,528 Deferred: Federal............................................................ 61,773 State.............................................................. 13,560 ------- 75,333 ------- $87,861 =======
Significant components of the Company's deferred tax liability at December 31, 1997 are as follows: Difference in basis of accounting................................. $(20,487) Cumulative tax depreciation in excess of book..................... 226,596 -------- Deferred tax liability, net..................................... $206,109 ========
7. RELATED PARTY TRANSACTIONS The Company leases its three operating facilities from the president and a stockholder of the Company on a month to month basis. The Company is responsible for all operating expenses of the facilities including property taxes, assessments, insurance, repairs and maintenance. Total rent expense for 1997 was approximately $99,100. In connection with the acquisition discussed in Note 10, the lease terms have been renegotiated. The Company also had a non-interest bearing note receivable from its stockholders totaling $14,971 at December 31, 1997 and is included in prepaid expenses and other assets on the accompanying balance sheet. No repayment schedule has been established. 8. SUPPLEMENTAL CASH FLOW INFORMATION For the year ended December 31, 1997 total interest and income taxes paid were $200,457 and $29,000, respectively. During 1997, the Company purchased $72,500 of equipment which was financed. 9. EMPLOYEE BENEFIT PLAN The Company has a defined contribution 401(k) pension plan which covers substantially all employees. The Company matches 100% up to the first five percent of the employees contribution. Company contributions to the plan were $33,980 for the year ended December 31, 1997. 10. SUBSEQUENT EVENT On January 27, 1998, under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Company. F-184 INDEPENDENT AUDITOR'S REPORT MERCER Equipment Company: We have audited the accompanying balance sheets of MERCER Equipment Company as of December 31, 1996 and October 24, 1997 and the related statements of income and retained earnings and of cash flows for each of the two years in the period ended December 31, 1996, and for the period from January 1, 1997 to October 24, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MERCER Equipment Company as of December 31, 1996, and October 24, 1997 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 and for the period from January 1, 1997 to October 24, 1997 in conformity with generally accepted accounting principles. /s/ Webster, Duke & Co. PA Charlotte, North Carolina January 21, 1998 F-185 MERCER EQUIPMENT COMPANY BALANCE SHEETS
DECEMBER 31, OCTOBER 24, ------------ ----------- 1996 1997 ------------ ----------- ASSETS CURRENT ASSETS: Cash................................................ $ 276,639 $ 85,384 Accounts receivable (less allowance for doubtful accounts: 1996-$182,425, 1997-$254,073)............ 1,819,581 2,398,926 Inventory (Notes 2, 5 and 8)........................ 2,417,425 2,299,512 Miscellaneous receivables........................... 16,604 29,508 Prepaid expenses.................................... -- 17,965 ----------- ----------- Total current assets.............................. 4,530,249 4,831,295 ----------- ----------- RENTAL EQUIPMENT (Notes 2, 5, 8, 9, 10 and 15): Rental equipment.................................... 14,030,584 15,392,093 Less accumulated depreciation....................... 3,717,218 4,322,744 ----------- ----------- Rental equipment, net............................. 10,313,366 11,069,349 ----------- ----------- OTHER PROPERTY (Notes 2, 8 and 11): Other property...................................... 1,003,079 1,091,365 Less accumulated depreciation....................... 395,658 498,962 ----------- ----------- Other property, net............................... 607,421 592,403 ----------- ----------- OTHER ASSETS (Note 13): Deposits and other assets........................... 68,639 42,889 Notes receivable-officers........................... 69,980 67,453 ----------- ----------- Total other assets................................ 138,619 110,342 ----------- ----------- TOTAL............................................. $15,589,655 $16,603,389 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit (Note 4)............................. -- -- Note payable-Bank (Note 4).......................... $ 494,245 $ 5,017,953 Short-term equipment notes (Note 5)................. 189,528 3,619,830 Notes payable-individuals (Notes 6 and 13).......... 609,000 142,000 Current portion of long-term debt................... 2,253,562 56,411 Current portion of capital leases................... 167,445 86,597 Accounts payable.................................... 2,161,340 3,174,282 Accrued expenses.................................... 140,361 254,444 ----------- ----------- Total current liabilities......................... 6,015,481 12,351,517 ----------- ----------- LONG-TERM DEBT (Non-current Portion): Revolving credit note (Note 7)...................... 2,430,000 -- Notes payable to bank (Note 8)...................... 1,513,000 -- Notes payable on rental equipment (Note 9).......... 2,195,238 -- Capital leases on rental equipment (Note 10)........ 119,183 176,047 Notes payable on other property..................... 138,543 82,208 ----------- ----------- Total long-term debt.............................. 6,395,964 258,255 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock (Notes 2 and 12)....................... 500,001 500,001 Retained earnings (Note 8).......................... 2,678,209 3,493,616 ----------- ----------- Total stockholders' equity........................ 3,178,210 3,993,617 ----------- ----------- TOTAL............................................. $15,589,655 $16,603,389 =========== ===========
See notes to financial statements. F-186 MERCER EQUIPMENT COMPANY STATEMENTS OF INCOME AND RETAINED EARNINGS
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1997 TO ------------------------ OCTOBER 24, 1995 1996 1997 ----------- ----------- ----------- REVENUE: Sales of new equipment................. $ 2,479,358 $ 3,415,523 $3,709,356 Sales of supplies and parts............ 1,558,273 2,067,403 1,831,345 ----------- ----------- ---------- Total goods sold..................... 4,037,631 5,482,926 5,540,701 Sales of rental equipment.............. 872,621 1,102,621 1,876,001 Rental revenues........................ 4,950,614 7,380,137 6,891,972 Service department revenues............ 357,039 488,216 764,738 ----------- ----------- ---------- Total revenues....................... 10,217,905 14,453,900 15,073,412 ----------- ----------- ---------- DIRECT COSTS OF REVENUE: Cost of goods sold..................... 3,171,168 4,469,790 4,677,328 Cost of rental equipment sold, net..... 530,102 702,254 1,218,507 Rental department expenses (including depreciation of $1,035,352, $1,492,131 and $1,428,312)....................... 2,226,420 3,589,936 3,728,374 Service department expenses............ 460,382 648,882 706,958 ----------- ----------- ---------- Total direct costs of revenue........ 6,388,072 9,410,862 10,331,167 ----------- ----------- ---------- GROSS MARGIN............................. 3,829,833 5,043,038 4,742,245 ----------- ----------- ---------- OPERATING EXPENSES: Sales expenses......................... 752,722 1,386,812 1,345,705 Administrative and general expenses.... 1,930,124 2,247,556 2,014,205 ----------- ----------- ---------- Total operating expenses............. 2,682,846 3,634,368 3,359,910 ----------- ----------- ---------- MARGIN FROM OPERATIONS................... 1,146,987 1,408,670 1,382,335 ----------- ----------- ---------- OTHER INCOME (EXPENSE): Miscellaneous income................... 78,258 110,340 147,362 Interest expense....................... (486,976) (813,339) (686,512) ----------- ----------- ---------- Total other income (expense)......... (408,718) (702,999) (539,150) ----------- ----------- ---------- NET INCOME............................... 738,269 705,671 843,185 BEGINNING RETAINED EARNINGS.............. 1,450,936 2,045,871 2,678,209 ----------- ----------- ---------- Total................................ 2,189,205 2,751,542 3,521,394 LESS DIVIDENDS PAID...................... 143,334 73,333 27,778 ----------- ----------- ---------- ENDING RETAINED EARNINGS................. $ 2,045,871 $ 2,678,209 $3,493,616 =========== =========== ==========
See notes to financial statements. F-187 MERCER EQUIPMENT COMPANY STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31, 1997 TO ------------------------ OCTOBER 24, 1995 1996 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. $ 738,269 $ 705,671 $ 843,185 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 1,117,783 1,610,918 1,542,966 Cost of rental equipment sold, net... 530,102 702,254 1,218,507 Cost of other property sold, net..... 14,800 Changes in assets and liabilities: Accounts receivable, net........... (418,132) (398,900) (579,345) Inventory.......................... (900,532) (325,339) 117,913 Miscellaneous receivables.......... (5,437) (4,065) (12,904) Prepaid expenses................... (17,965) Other assets....................... (16,000) (24,239) 14,400 Accounts payable................... 651,668 558,903 944,210 Accrued expenses................... 29,098 24,329 114,083 ----------- ----------- ---------- Net cash provided by operating activities...................... 1,726,819 2,864,332 4,185,050 ----------- ----------- ---------- CASH FLOWS (TO) INVESTING ACTIVITIES: Purchase of rental equipment........... (2,466,039) (2,001,083) (1,601,703) Purchase of other property............. (131,695) (171,319) (81,117) Increase in other asset................ (1,650) ----------- ----------- ---------- Net cash (to) investing activities...................... (2,599,384) (2,172,402) (1,682,820) ----------- ----------- ---------- CASH FLOWS FROM (TO) FINANCING ACTIVITIES: Repayments of notes receivable-- officers.............................. 2,264 3,019 2,527 Repayments by stockholders............. 220,602 Loans to stockholders.................. (247,729) Repayments under line of credit........ (125,000) (8,792) Borrowings under line of credit........ -- Repayments of short-term equipment notes................................. (130,301) (618,854) (597,500) Repayments of notes payable-- individuals........................... (52,500) (491,000) Repayments of long term debt........... (1,051,070) (1,950,688) (1,794,942) Repayments of capital leases........... (22,009) (150,279) Net borrowings under note payable-- bank.................................. 465,200 29,045 -- Borrowings under revolving credit note.................................. 1,000,000 1,700,000 200,000 Proceeds from bank loans............... 1,120,588 Proceeds from notes payable individuals........................... 305,000 23,000 24,000 Dividends paid......................... (143,334 ) (73,333) (27,778) ----------- ----------- ---------- Net cash from (to) financing activities...................... 1,173,609 (869,988) (2,693,485) ----------- ----------- ---------- NET INCREASE (DECREASE) IN CASH.......... 301,044 (178,058) (191,255) BEGINNING CASH BALANCE................... 153,653 454,697 276,639 ----------- ----------- ---------- ENDING CASH BALANCE...................... $ 454,697 $ 276,639 $ 85,384 =========== =========== ==========
See notes to financial statements F-188 MERCER EQUIPMENT COMPANY NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND OCTOBER 24, 1997 1. ORGANIZATION AND BUSINESS Organization--MERCER Equipment Company (MERCER) is a North Carolina corporation. For income tax purposes, it has elected treatment under Subchapter S of the Internal Revenue Code of 1986. Business--MERCER sells, rents, and repairs construction equipment, primarily to contractors, industry, utilities, and municipalities. MERCER operates two branches in the Charlotte, North Carolina area and one branch in Greensboro, North Carolina. 2. ACCOUNTING PRINCIPLES Basis of Accounting--MERCER prepares its financial statements on the accrual basis of accounting. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Inventory--Inventory consists of new equipment and merchandise for resale and of parts for resale or repair of equipment. MERCER records inventory using the last-in, first-out (LIFO) cost assumptions. MERCER maintains separate LIFO pools for new equipment, merchandise, and parts; and uses government indices to determine the cost of LIFO layers. At December 31, 1996 and October 24, 1997, the difference between LIFO and first-in, first-out cost was $310,346 and $347,936 respectively. Rental Equipment--MERCER records rental equipment at cost and depreciates that cost using the straight-line method over 60 months (50 months for rental equipment purchased after December 31, 1995). MERCER estimates the salvage value on rental equipment to be 28% (50% for rental equipment purchased after December 31, 1995). (See Note 15). Other Property--MERCER records other property at cost and depreciates that cost using the straight-line method over lives of 5 or 7 years. Notes Receivable--Officers--At December 31, 1996, and October 24, 1997 the notes receivable from officers are due in monthly payments of $600, including principal and interest, for 15 years. At December 31, 1995, the notes receivable from officers were due in quarterly installments of $1,264, including principal and interest, for 14 years. Common Stock--MERCER has two classes of common stock: Class A common stock which has voting rights and Class B common stock which has no voting rights. The preferences, limitations, and relative rights of classes are the same except the nonvoting stock has no voting rights other than in those cases in which nonvoting stock is expressly granted voting rights under North Carolina law. F-189 MERCER EQUIPMENT COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996 and October 24, 1997, the number of shares authorized and outstanding of each class of stock was as follows:
AUTHORIZED OUTSTANDING ---------- ----------- Class A, voting....................................... 25,000 16,667 Class B, nonvoting.................................... 175,000 150,000
Rental Revenue--MERCER generally rents equipment under short-term agreements of one month or less and accounts for these agreements as operating leases. Lease Expense--MERCER leases its facilities and certain delivery vehicles under leases classified as operating leases. MERCER leases certain rental equipment and new equipment inventory under leases classified as capital leases. Income Taxes--MERCER has elected taxation under Subchapter S of the Internal Revenue Code of 1986 and its stockholders report the taxable income or loss of the company on their individual income tax returns. For income tax purposes, MERCER generally uses accelerated depreciation methods (without salvage value) and deducts bad debts as they are written off. Statement of Cash Flows--MERCER considers all instruments with a maturity of three months or less to be cash equivalents. MERCER paid interest expense and purchase various assets through incurrence of notes payable as follows:
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 1997 TO 31 OCTOBER 24, 1995 1996 1997 ---------- ---------- ----------- Interest paid................................ $ 464,090 $ 807,169 $ 683,596 Debt incurred to purchase: Inventory.................................. 357,306 88,509 Rental equipment........................... 2,300,291 2,530,234 1,801,029 Fixed assets............................... 142,174 163,756 7,169
3. PURCHASE OF BUSINESS On September 29, 1995, MERCER acquired the branch retail operations of Builders Equipment & Tool Co., Inc. (BETCO) in a transaction accounted for as a purchase. The accompanying financial statements include the results of the Greensboro operation from that date. MERCER purchased substantially all of the resale and rental inventory and the fixed assets at the branch. The purchase price was $600,000. There were no intangible assets purchased nor are there any contingent payments or commitments. 4. NOTE PAYABLE--BANK At December 31, 1996, MERCER had a note payable to a bank that is due May 31, 1997. The note provides for monthly payment of interest at the bank's prime rate plus 1/2%. The original amount of the note was $500,000. In connection with the purchase of MERCER's common stock (see Note 16), substantially all of the outstanding debt at October 24, 1997 was paid off. 5. SHORT-TERM EQUIPMENT NOTES MERCER has purchased rental equipment and inventory with short-term (less than 12 months) notes payable with a nominal interest charge. At December 31, 1996, rental equipment and inventory with a cost of $434,972 and $135,522, respectively, is pledged as collateral. F-190 MERCER EQUIPMENT COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In connection with the purchase of MERCERs common stock (see Note 16), substantially all of the outstanding debt at October 24, 1997 was paid off. 6. NOTES PAYABLE--INDIVIDUALS Notes payable--individuals provide for quarterly interest payments at the Wall Street prime rate plus one percent and allows MERCER to delay payment of principal for up to one year and a day after request. At December 31, 1996 and October 24, 1997, $178,000 and $ -- , respectively, of this amount was due stockholders. 7. REVOLVING CREDIT NOTES MERCER has a $3,000,000 revolving credit note with a bank. At December 31, 1996 MERCER had termed the revolver's outstanding balance and will repay the principal over 36 months beginning in June 1997. The repayment provides for monthly payment of $45,000 principal plus interest at the bank's prime rate plus 1/4%. At December 31, 1995 and during 1996, only interest payments were due on the note (see Note 9 for collateral). In connection with the purchase of MERCERs common stock (see Note 16), substantially all of the outstanding debt at October 24, 1997 was paid off. 8. NOTES PAYABLE TO BANK MERCER's note payable to bank consisted of the following:
DECEMBER 31, 1996 ------------ Bank note--8.25%, principal of $49,750 plus interest paid monthly through November 1998; balance of $635,750 due December 1998........................................................... $1,780,000 Bank note--interest at prime plus 1/2%, principal of $10,000 plus interest paid monthly through August 1998; $250,000 due September 30, 1998............................................. 450,000 ---------- Total........................................................... 2,230,000 Less current portion............................................ 717,000 ---------- Noncurrent portion.............................................. $1,513,000 ==========
All accounts receivable and inventory and rental equipment, unless otherwise encumbered, are given as security for the notes payable to bank. The loan agreement with the bank provides for maintenance of certain absolute and ratio amounts relating to working capital, net worth, cash flow coverage, and debt/equity and limits amounts that can be paid in dividends. At December 31, 1996, MERCER had obtained a waiver on the cash flow coverage ratio. In connection with the purchase of MERCERs common stock (see Note 16), substantially all of the outstanding debt at October 24, 1997 was paid off. 9. NOTES PAYABLE ON RENTAL EQUIPMENT MERCER finances purchases of rental equipment and inventory through various arrangements with vendors, their related finance entities, and other lenders. These notes provide for monthly payments of either a fixed principal plus interest or a level payment of principal and interest. These note have terms of 36 to 60 months and generally provide for accelerated repayment if the underlying equipment is sold. At December 31, 1995 and 1996, the weighted interest rates were 10.1%, and 8.6%, respectively. F-191 MERCER EQUIPMENT COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, $480,801 of floor plan notes, which have not yet begun to require payments of principal or interest, are included in notes payable on rental equipment. The financial statements assume their conversion upon expiration of the floor plan period. At December 31, 1996, rental equipment and inventory of $4,637,033 and $88,509, respectively, were collateral for all of the above notes. In connection with the purchase of MERCER's common stock (see Note 16), substantially all of the outstanding debt at October 24, 1997 was paid off. 10. CAPITAL LEASES MERCER leases certain rental equipment under leases accounted for as capital leases. The following is an analysis of the leased property:
DECEMBER 31, OCTOBER 24, ------------ ----------- 1996 1997 ------------ ----------- Rental equipment.................................... $408,081 $386,153 Less accumulated amortization....................... 78,561 138,706 -------- -------- Net............................................... $329,520 $247,447 ======== ========
The following is a schedule by years of future lease payments under capital leases together with the present value of the net minimum lease payments as of October 24, 1997: Year ended December 31, 1997....................................... $106,795 1998............................................................. 98,730 1999............................................................. 74,158 2000............................................................. 23,177 -------- Net minimum lease payments......................................... 302,860 Less amount representing interest.................................. 40,216 -------- Present value of net minimum lease payments........................ 262,644 Less current portion............................................... 86,597 -------- Long-term portion.................................................. $176,047 ========
11. NOTES PAYABLE ON OTHER PROPERTY The notes payable on other property provide for monthly payment of principal and interest at rates from 9.0% to 10.8%. At December 31, 1996 and October 24, 1997, related assets with a cost of $287,430 and $232,599 are collateral for the notes. The annual amounts of principal due for the next five years is as follows: 1997--$56,411; 1998--$50,318; 1999--$25,082; and 2000--$6,808. 12. COMMITMENTS AND CONTINGENCIES As of December 31, 1996 and October 24, 1997, MERCER's cash balance had $100,000 of FDIC insurance and is at one bank. F-192 MERCER EQUIPMENT COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) As of October 24, 1997, MERCER leased all of its facilities from a limited liability company (LLC) whose members own 72% of MERCER's outstanding stock. The leases provided for initial terms of five to seven years; two of the leases provide for annual cost of living increases and have renewal options of five years. MERCER is also responsible for the property taxes, insurance, and repairs (see Note 13). In connection with the sale of MERCER's common stock (see Note 16), the leases were rewritten to provide for an initial term of ten years with two five-year options. The leases provide for minimum rentals of $28,000 per month, after five years, minimum rents will be adjusted for changes in the Consumer Price Index. MERCER has also guaranteed debt of approximately $2,000,000 that the LLC has borrowed against the buildings. MERCER had a stock repurchase agreement with two stockholders, each owning 30,000 shares of the outstanding Class B common stock. Among other provisions, the stock repurchase agreement allows MERCER first refusal on a sale of such shares at no less than the book value per share of the stock. At December 31, 1996 the minimum purchase price under this plan was $1,121,950. MERCER had a salary continuation agreement with the same two stockholders. MERCER has agreed to pay these stockholders' beneficiaries an amount equal to twice the prior year's wages. This amount is payable over 24 months, and at December 31, 1996, the potential obligation under the salary continuation plan was $672,672. In connection with the Purchase of MERCER's common stock both of these agreements were canceled. (See Note 16) 13. RELATED PARTIES At December 31, 1996 and October 24, 1997, other assets includes rental deposits of $42,889 and $42,889, respectively, with the LLC described in Note 12. For the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997, MERCER paid building rentals to the LLC of $149,500, $278,000 and $273,000, respectively. For the years ended December 31, 1995 and 1996 and for period from January 1, 1997 to October 24, 1997, MERCER paid interest of $17,808, $15,672 and $14,576, respectively to stockholders on the notes payable--individuals. 14. PROFIT-SHARING PLAN MERCER has adopted a profit-sharing plan that covers substantially all employees and provides for discretionary employer and voluntary employee contributions. For the years ended December 31, 1995, and 1996, and for the period from January 1, 1997 to October 24, 1997, no profit-sharing contribution was made. For the years ended December 31, 1995, and 1996, and for the period from January 1, 1997 to October 24, 1997, MERCER made matching payments of $21,969, $14,777, and $24,287, respectively under Section 401(k) of the Internal Revenue Code of 1986. 15. CHANGE IN ACCOUNTING ESTIMATE In 1996 MERCER changed the depreciable life and estimated salvage value of its rental equipment purchased after December 31, 1995 from 60 months to 50 months and from 28% to 50%. The effect of these changes in estimated life and salvage value was to decrease depreciation on rental equipment by $58,859. 16. SUBSEQUENT EVENT On October 24, 1997, United Rentals, Inc. purchased all of MERCER's issued and outstanding common stock. F-193 REPORT OF INDEPENDENT AUDITORS The Board of Directors A&A Tool Rentals & Sales, Inc.: We have audited the accompanying consolidated balance sheets of A&A Tool Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19, 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended October 31, 1995 and 1996, and the period from November 1, 1996 to October 19, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of A&A Tool Rentals & Sales, Inc. and subsidiary as of October 31, 1996 and October 19, 1997 and the results of their operations and their cash flows for the years ended October 31, 1995 and 1996, and the period from November 1, 1996 to October 19, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Sacramento, California November 20, 1997 F-194 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
OCTOBER 31, OCTOBER 19, JULY 31, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS Cash....................................... $ 308,331 $ 108,327 $ 187,082 Trade accounts receivable, less allowance for doubtful accounts of $80,000 at October 31, 1996 and at October 19, 1997, and $94,608 at July 31, 1997 (notes 2 and 3)........................... 1,416,142 1,415,775 1,324,684 Merchandise inventory...................... 847,035 862,200 906,969 Rental equipment, primarily machinery, at cost, net of accumulated depreciation and amortization of $5,909,751 at October 31, 1996, $6,822,441 at October 19, 1997, and $6,727,264 at July 31, 1997 (notes 2 and 3)........................... 3,190,093 2,780,854 3,133,863 Operating property and equipment, net of accumulated depreciation and amortization of $912,230 at October 31, 1996, $955,007 at October 19, 1997, and $975,498 at July 31, 1997 (notes 2 and 3).................. 384,759 281,593 306,415 Due from related party (note 5)............ 228,737 332,613 316,364 Prepaid expenses and other assets.......... 234,976 303,553 152,251 ---------- ---------- ---------- Total assets........................... $6,610,073 $6,084,915 $6,327,628 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt (note 2)................... $ 90,400 $ 449,670 $ 484,700 Accounts payable........................... 766,465 1,040,494 703,583 Accrued liabilities........................ 244,938 203,709 221,763 Income tax payable......................... 6,019 12,262 2,992 Long-term debt and capital lease obligations (note 3)...................... 4,351,394 3,463,807 3,868,069 ---------- ---------- ---------- Total liabilities...................... 5,459,216 5,169,942 5,281,107 ---------- ---------- ---------- Commitments (notes 6 and 9)................ Stockholders' equity: Common stock, Class A--voting par value $.10. Authorized 2,000,000 shares; issued and outstanding 720,000 shares... 72,000 72,000 72,000 Common stock, Class B--nonvoting. Authorized 5,000,000 shares; issued and outstanding 277,172 shares at October 31, 1996, 272,491 shares at October 19, 1997, and 275,242 shares at July 31, 1997.................................... 395,201 378,714 393,058 Retained earnings........................ 683,656 464,259 581,463 ---------- ---------- ---------- Total stockholders' equity............. 1,150,857 914,973 1,046,521 ---------- ---------- ---------- Total liabilities and stockholders' equity................................ $6,610,073 $6,084,915 $6,327,628 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-195 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM NOVEMBER 1, NINE MONTHS YEAR ENDED OCTOBER 31, 1996 TO ENDED JULY 31, ----------------------- OCTOBER 19, ---------------------- 1995 1996 1997 1996 1997 ----------- ---------- ----------- ---------- ---------- (UNAUDITED) Revenues: Equipment rentals..... $ 4,800,767 $5,918,148 $6,022,196 $4,165,881 $4,501,537 New equipment sales... 4,283,294 4,463,117 4,355,965 3,310,409 3,228,472 Sales of parts, supplies and rental equipment..... 848,193 1,027,943 778,141 824,910 657,572 Other................. 237,205 296,926 290,140 198,144 215,542 ----------- ---------- ---------- ---------- ---------- Total revenues.......... 10,169,459 11,706,134 11,446,442 8,499,344 8,603,123 ----------- ---------- ---------- ---------- ---------- Costs of Revenues: Cost of equipment rentals, excluding equipment rental depreciation and amortization......... 2,049,172 2,542,965 2,583,884 1,976,183 2,097,280 Depreciation and amor- tization, equipment rentals.............. 1,040,233 1,382,048 1,465,586 902,347 1,193,986 Cost of new equipment sales................ 4,054,467 4,304,301 4,148,874 3,234,457 3,016,957 Cost of sales of parts, supplies, and equipment............ 598,545 622,956 595,424 330,714 296,725 Other................. 38,358 32,582 31,339 24,337 33,115 ----------- ---------- ---------- ---------- ---------- Total costs of revenues............... 7,780,775 8,884,852 8,825,107 6,468,038 6,638,063 ----------- ---------- ---------- ---------- ---------- Gross Profit............ 2,388,684 2,821,282 2,621,335 2,031,306 1,965,060 Selling, general and administration....... 2,063,730 2,215,936 2,178,383 1,614,263 1,696,104 Non-rental depreciation and amortization......... 107,390 120,757 124,648 88,896 95,171 ----------- ---------- ---------- ---------- ---------- Operating income (loss)................. 217,564 484,589 318,304 328,147 173,785 Other income (expense)............ 50,090 116,539 80,080 61,119 105,777 ----------- ---------- ---------- ---------- ---------- Income before interest and taxes.............. 267,654 601,128 398,384 389,266 279,562 ----------- ---------- ---------- ---------- ---------- Interest income....... 56,053 54,993 39,967 51,898 34,590 Interest expense...... (324,957) (401,204) (642,478) (264,613) (410,345) ----------- ---------- ---------- ---------- ---------- Net interest expense............ (268,904) (346,211) (602,511) (212,715) (375,755) ----------- ---------- ---------- ---------- ---------- Income (loss) before income taxes........... (1,250) 254,917 (204,127) 176,551 (96,193) Income tax expense (note 4)............. (1,600) (7,619) (15,270) (1,600) (6,000) ----------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations.. (2,850) 247,298 (219,397) 174,951 (102,193) Loss from operation of discontinued subsidiary (note 1).. (55,929) -- -- -- -- Loss from disposal of discontinued subsidiary (note 1).. -- (44,269) -- (16,318) -- ----------- ---------- ---------- ---------- ---------- Net income (loss)....... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193) =========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-196 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON COMMON STOCK STOCK CLASS A CLASS B --------------- ----------------- RETAINED SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL ------- ------- ------- -------- -------- ---------- Balances at October 31, 1994................... 720,000 $72,000 363,433 $487,609 $539,406 $1,099,015 Purchase Class B common stock from ESOP........ -- -- (27,847) (29,796) -- (29,796) Net loss................ -- -- -- -- (58,779) (58,779) ------- ------- ------- -------- -------- ---------- Balances at October 31, 1995................... 720,000 72,000 335,586 457,813 480,627 1,010,440 Purchase Class B common stock from ESOP........ -- -- (58,414) (62,612) -- (62,612) Net income.............. -- -- -- -- 203,029 203,029 ------- ------- ------- -------- -------- ---------- Balances at October 31, 1996................... 720,000 72,000 277,172 395,201 683,656 1,150,857 Purchase Class B common stock from ESOP........ -- -- (4,681) (16,487) -- (16,487) Net loss................ -- -- -- -- (219,397) (219,397) ------- ------- ------- -------- -------- ---------- Balances at October 19, 1997................... 720,000 $72,000 272,491 $378,714 $464,259 $ 914,973 ======= ======= ======= ======== ======== ==========
See accompanying notes to consolidated financial statements. F-197 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM YEAR ENDED OCTOBER 31, NOVEMBER 1, 1996 NINE MONTHS ENDED JULY 31, ----------------------- TO OCTOBER 19, ---------------------------- 1995 1996 1997 1996 1997 ---------- ----------- ---------------- ----------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)...... $ (58,779) $ 203,029 $ (219,397) $ 158,633 $ (102,193) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......... 1,147,623 1,502,805 1,590,234 991,243 1,289,157 Provision for bad debts................. 71,600 96,216 73,894 52,515 59,985 Provision for write- down of inventory..... 31,709 -- 35,403 -- 35,403 Gain on sale of equip- ment.................. (213,049) (364,504) (220,017) (196,325) (167,944) Changes in operating assets: (Increase) decrease in trade accounts receivable........... (282,115) (151,882) (73,527) (190,069) 31,473 (Increase) decrease in related party receivables.......... (54,741) 748 (103,876) (30,385) (87,627) (Increase) decrease in merchandise inventory............ 38,955 (96,479) (50,568) (348,187) (95,337) (Increase) decrease in prepaid expenses and other assets..... (29,102) 10,934 (174,821) (42,445) (50,309) Increase (decrease) in accounts payable, trade................ 18,196 61,005 274,029 114,982 (62,882) Increase (decrease) in accrued liabili- ties................. 52,801 9,680 (41,229) (39,228) (23,175) Decrease in deferred revenue.............. (4,440) -- -- -- -- Increase (decrease) in income tax pay- able................. -- 6,019 6,243 -- (3,027) ---------- ----------- ---------- ----------- ---------- Net cash provided by operating activities.......... 718,658 1,277,571 1,096,368 470,734 823,524 ---------- ----------- ---------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of rental equipment and operating property and equipment......... 277,390 469,489 348,374 245,232 213,013 Purchases of rental equipment and operating property and equipment......... (1,620,011) (2,689,358) (1,206,186) (2,042,083) (1,199,652) Proceeds from sale of marketable securi- ties.................. 4,954 2,514 -- 2,514 -- ---------- ----------- ---------- ----------- ---------- Net cash used in investing activities.......... (1,337,667) (2,217,355) (857,812) (1,794,337) (986,639) ---------- ----------- ---------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on long-term debt.................. 788,967 3,062,482 855,435 3,224,342 828,345 Payments on long-term debt.................. (574,595) (1,121,435) (1,743,022) (572,655) (1,311,670) Net borrowings (pay- ments) on short-term debt.................. 513,771 (901,881) 359,270 (1,553,999) 394,300 Premiums paid for offi- cers' life insurance.. (60,042) (64,743) (93,756) (50,799) (66,966) Drawings on cash surrender value of officers' life insurance............. -- -- 200,000 -- 200,000 Purchase of Class B common stock.......... (29,796) (62,612) (16,487) (59,590) (2,143) ---------- ----------- ---------- ----------- ---------- Net cash provided by (used in) financing activities.......... 638,305 911,811 (438,560) 987,299 41,866 ---------- ----------- ---------- ----------- ---------- Net increase (de- crease) in cash..... 19,296 (27,973) (200,004) (336,304) (121,249) Cash at beginning of period................. 317,008 336,304 308,331 336,304 308,331 ---------- ----------- ---------- ----------- ---------- Cash at end of period... $ 363,304 $ 308,331 $ 108,327 $ -- $ 187,082 ========== =========== ========== =========== ========== SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............... $ 324,957 $ 401,204 $ 516,307 $ 264,613 $ 410,345 ========== =========== ========== =========== ========== Income taxes........... $ 1,600 $ 1,600 $ 4,606 $ 1,600 $ 10,627 ========== =========== ========== =========== ========== NONCASH INVESTING AND FINANCING ACTIVITIES: Sale of property and equipment for promissory note....... $ 10,000 $ -- $ -- $ -- $ -- ========== =========== ========== =========== ========== Conversion of short- term debt to long-term debt.................. $ -- $ 686,963 $ -- $ -- $ -- ========== =========== ========== =========== ==========
See accompanying notes to consolidated financial statements. F-198 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1995 AND 1996 AND PERIOD FROM NOVEMBER 1, 1996 TO OCTOBER 19, 1997 (THE INFORMATION AS OF JULY 31, 1997 AND FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996 IS UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization and Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary Operations Management Systems, Inc. (OMS). The Company rents and sells construction and industrial supplies and power equipment in Northern California. OMS marketed and sold computer hardware and software to construction related businesses. All significant intercompany accounts and transactions were eliminated in consolidation. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying consolidated balance sheets are presented on an unclassified basis. As of October 31, 1995, the Company decided to discontinue the operations of its subsidiary, OMS. Certain assets of OMS were sold as of October 31, 1995. The Company disposed of the remaining assets and liabilities of OMS, which included cash, accounts receivable, inventory, property and equipment, accounts payable and accrued liabilities, during fiscal year 1996. The Company recognized a loss on disposal of the remaining assets. The loss from the disposal of OMS assets was $44,269 for the year ended October 31, 1996 and $16,318 for the nine months ended July 31, 1996. The loss from operations of OMS was $55,929 for the year ending October 31, 1995. (b) Interim Financial Statements The accompanying consolidated balance sheet at July 31, 1997 and the consolidated statements of operations and cash flows for the nine month periods ended July 31, 1996 and 1997 are unaudited and have been prepared on the same basis as the audited consolidated financial statements included herein. In the opinion of management, such unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. (c) Merchandise Inventory Merchandise inventory is stated at the lower of cost or market. Cost is determined using the weighted-average method. (d) Revenue Recognition Revenue related to the sale of construction and industrial supplies and power equipment is recognized at the point of sale. Revenue related to the rental of construction and industrial power equipment is recognized at the time of return for rentals of twenty-eight days or less, and ratably over the contract term for rentals in excess of twenty-eight days. (e) Property and Equipment Property and equipment are stated at cost and consist of rental equipment and operating property and equipment. Property and equipment under capital leases are stated at the present value of minimum lease payments. Depreciation on property and equipment is calculated using an accelerated method. F-199 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation for property and equipment is taken over the asset's useful life of 5 years, except for leasehold improvements which are amortized over 10 to 20 years. (f) Other Assets Other assets consist primarily of the cash surrender value of officers' life insurance net of loans against the cash surrender value of the policies and unbilled rental revenue. The loans outstanding were $410,000 at October 31, 1996, and $610,000 at October 19, 1997 and July 31, 1997. The Company is named beneficiary under the life insurance policy. Unbilled rental revenue represents the revenue recognized on contracts over twenty-eight days, but not billed. At October 19, 1997 unbilled rental revenue was $180,178. (g) Income Taxes The Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the asset and liability method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, on November 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations, or liquidity. (j) Reclassifications Certain amounts in the 1995 and 1996 consolidated financial statements have been reclassified to conform to the 1997 consolidated financial statement presentation. (2) SHORT-TERM DEBT As of October 31, 1996, the Company had borrowed $90,400, on a credit facility that allows the Company to borrow up to $500,000 at the bank's prime rate (8.25% at October 31, 1996) plus 2%. Borrowings under this facility are collateralized by trade accounts receivable. F-200 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In 1997, the Company had borrowed on a credit facility that allows the Company to borrow up to $500,000 at the bank's prime rate (8.5% at October 19, 1997 and July 31, 1997) plus 2%. At October 19, 1997 and July 31, 1997, the amounts outstanding were $449,670 and $484,700, respectively. (3) LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist of the following:
OCTOBER 31, OCTOBER 19, JULY 31, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) CURRENT PAYOR AND TERMS Union Safe Deposit Bank--Various notes with combined monthly payments of $54,592 including interest at prime plus 2%, due from 1996 through 1999. Collateralized by equipment and accounts receivable................... $1,382,482 $ 851,741 $ 989,334 American Equipment Leasing--Various leases with combined monthly payments of $24,149 including interest ranging from 11.5% to 12%, due from 1997 through 1998. Collateralized by equipment............................. 510,567 377,619 381,122 Atlas Copco, Inc.--Various notes with a combined monthly payment of $22,212 including interest ranging from 8.5% to 12.36%, due from 1996 through 1998. Collateralized by equipment........... 352,446 257,875 323,727 Clark Equipment Credit Co.--Various notes with a combined monthly payment of $3,546 including interest ranging from 8.7% to 12.39%, due from 1996 through 1999. Collateralized by equipment............................. 105,889 39,083 45,433 Ingersoll-Rand--One note with a monthly payment of $3,254 including interest at 9.75%, due in 1999. Collateralized by equipment.......................... 91,121 52,069 61,832 Prospect Leasing--Two leases with a combined monthly payment of $1,798 including interest at 10%, due in 1998. Collateralized by equipment..... 36,364 18,712 24,106 Miller Electric Finance--Two notes with a combined monthly payment of $3,964 including interest ranging from 10.25% to 11.3%, due in 1999. Collateralized by equipment.......................... 72,746 89,813 101,704 The Associates--Various notes and leases with a combined monthly payment of $35,365 including interest ranging from 9% to 13.5%, due from 1996 through 2000. Collateralized by equipment............................. 924,064 1,002,327 1,175,627 JI Case Credit Corporation--Three notes with combined monthly payments of $14,428 including interest ranging from 6.9% to 8.2%, due from 1997 through 2000. Collateralized by equipment............................. 515,184 349,235 346,540 John Deere--One note with a monthly payment of $885 including interest at 8.75%, due in 1998. Collateralized by equipment............................. 14,159 3,540 6,195
F-201 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
OCTOBER 31, OCTOBER 19, JULY 31, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) CURRENT PAYOR AND TERMS--(CONTINUED) Caterpillar Financial Services--Various notes with a combined monthly payment of $12,279 including interest ranging from 9.4% to 11.3%, due from 1998 through 2001. Collateralized by equipment.............................. 546,420 458,438 493,833 Colonial Pacific Leasing--One note with a monthly payment of $1,323 including interest at 10%, due in 1997. Collateralized by equipment............ 5,293 -- -- Newcourt Financial--Two notes with a combined monthly payment of $4,207 including interest ranging from 10% to 11%, due in 1998 and 2001. Collateralized by equipment............ 196,194 148,508 158,329 Other................................... 80,773 62,181 105,030 ---------- ---------- ---------- Total long-term debt.................... 4,833,702 3,711,141 4,212,812 Less amounts representing interest...... 482,308 247,334 344,743 ---------- ---------- ---------- Long-term debt, net of interest......... $4,351,394 $3,463,807 $3,868,069 ========== ========== ==========
Subsequent to October 19, 1997, all amounts outstanding under the long-term debt agreements and capital lease agreements were paid except for $18,546 which is scheduled for payment in fiscal year 1998. (4) INCOME TAXES Income tax expense consists of the following:
PERIOD FROM YEAR ENDED NOVEMBER 1, NINE MONTHS OCTOBER 31, 1996 TO ENDED JULY 31, ------------- OCTOBER 19, --------------- 1995 1996 1997 1996 1997 ------ ------ ----------- ------- ------- (UNAUDITED) Current............................ $1,600 $7,619 $15,270 $ 1,600 $ 6,000 Deferred........................... -- -- -- -- -- ------ ------ ------- ------- ------- $1,600 $7,619 $15,270 $ 1,600 $ 6,000 ====== ====== ======= ======= =======
F-202 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred tax assets and deferred tax liabilities are comprised of the following:
OCTOBER 31, OCTOBER 19, JULY 31, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) Current deferred tax assets: Allowance for bad debts.............. $ 34,600 $ 34,600 $ 41,000 Inventory reserve.................... -- 6,600 -- Noncurrent deferred tax assets: Depreciation and amortization expense............................. 12,000 14,000 11,300 Net operating loss................... 188,300 236,800 198,800 Alternative minimum taxes............ 25,500 39,000 29,900 --------- --------- --------- Total deferred tax assets............ 260,400 331,000 281,000 Less: Valuation allowance............ (260,400) (331,000) (281,000) --------- --------- --------- Total deferred tax assets............ -- -- -- Total deferred tax liabilities....... -- -- -- --------- --------- --------- Net deferred tax asset/liability... $ -- $ -- $ -- ========= ========= =========
The effective rate for income tax expense differs from the statutory tax rate of 34% when applied to income (loss) from continuing operations before income taxes as a result of the following:
OCTOBER 31, ----------- OCTOBER 19, JULY 31, 1995 1996 1997 1997 ---- ---- ----------- ----------- (UNAUDITED) Expected U.S. Federal income tax....... (34%) 34% (34%) (34%) State franchise tax, net............... 128% 1% -- 2% Net operating loss carryforward........ -- (34%) -- -- Effect of valuation allowance.......... 34% -- 34% 34% Alternative minimum tax................ -- 2% 7% 4% --- --- --- --- Total.............................. 128% 3% 7% 6% === === === ===
The net change in the total valuation allowance for the year ended October 31, 1995 and 1996 and the period from November 1, 1996 to October 19, 1997 was an increase of $8,000, a decrease of $100,600 and an increase of $70,600, respectively. (5) RELATED PARTY TRANSACTIONS Building The Company leased its Stockton, California premises from officers and stockholders of the Company. The Company executed a new five year lease on June 1, 1993 with monthly rent of $21,500. On October 20, 1997, this lease was amended for an additional five years with monthly rent of $17,000. In addition, the Company as lessee is to pay all taxes and insurance relating to the property. At October 19, 1997, the remaining commitment under this lease, as amended, is $1,020,000 plus property taxes and insurance. F-203 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Due From Related Party Due from related party comprise the following:
OCTOBER 31, OCTOBER 19, JULY 31, 1996 1997 1997 ----------- ----------- ----------- (UNAUDITED) President and shareholder................ $228,737 $317,613 $316,364 Vice president and shareholder........... -- 15,000 -- -------- -------- -------- $228,737 $332,613 $316,364 ======== ======== ========
The amounts due from related parties were paid subsequent to October 19, 1997. (6) OPERATING LEASES The Company leases vehicles from various unrelated companies through 1999. The vehicle leases, as well as the lease for the Company's business premises, are classified as operating leases. At October 19, 1997, future minimum lease payments under the operating leases including amounts amended as discussed in note (5) are:
YEAR ENDING OCTOBER 31 ---------------------- 1998............................................................ $ 442,636 1999............................................................ 305,036 2000............................................................ 204,000 2001............................................................ 204,000 2002............................................................ 204,000 ---------- $1,359,672 ==========
Operating lease expense aggregated $520,210, $533,619 and $501,473 in 1995, 1996 and for the period from November 1, 1996 to October 19, 1997, respectively, and $167,032 and $359,378 for the nine months ended July 31, 1996 and 1997, respectively. (7) EMPLOYEE STOCK OWNERSHIP PLAN Effective October 31, 1972, the Company established an Employee Stock Ownership Plan (ESOP) for the benefit of its eligible employees. The ESOP is designed to invest primarily in the stock of the Company. Contributions to the ESOP are determined annually by the Board of Directors, however, in no case may the contribution exceed the lesser of (a) fifteen percent (15%) of the compensation of eligible employees, or (b) $30,000 for each participant. No contributions were made in the years ended October 31, 1995 and 1996 or the period from November 1, 1996 to October 19, 1997. The ESOP measures compensation for Plan purposes as the Company's contribution to the Plan. No compensation cost was recognized by the Plan for the years ended October 31, 1995 and 1996, or the period from November 1, 1996 to October 19, 1997. The ESOP held 277,172, 272,491 and 275,242 allocated shares at October 31, 1996, October 19, 1997, and July 31, 1997, respectively. No committed-to-be- released or suspense shares were held by the ESOP at October 31, 1996, October 19, 1997, or at July 31, 1997. Following termination of employment, participants receive a distribution of their vested ESOP account balance in the form of cash or Company shares in accordance with the provisions of the ESOP. If shares are distributed to the participant, the participant has the right to sell the shares back to the Company, for a limited period of time, at the fair market value of the shares. F-204 A & A TOOL RENTALS & SALES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (8) PROFIT SHARING PLAN In August 1995, the Company established a Profit Sharing/401(k) Savings Plan (Plan) under Section 401 and 501 of the Internal Revenue Code. Substantially all employees are eligible for the Plan. Yearly employer contributions to the Plan are discretionary. Employees may also elect to contribute to the Plan. For the years ended October 31, 1995 and 1996, and the period from November 1, 1996 to October 19, 1997, the Company contributed, $8,245, $27,422, and $27,064, respectively to the Plan and $19,780 and $19,779 for the nine months ended July 31, 1996 and 1997. (9) COMMITMENTS Litigation, contingent liabilities, and claims, all arising in the ordinary course of business, are not expected to involve any amounts that could be material to the Company's financial position or results of operations. (10) SUBSEQUENT EVENT On October 17, 1997, the Company entered into a stock purchase agreement with United Rentals, Inc. (United). The transaction closed on October 20, 1997 and under the terms of the stock purchase agreement, United purchased all of the issued and outstanding common stock of the Company. F-205 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders J & J Rental Services, Inc. We have audited the balance sheets of the predecessor companies to J & J Rental Services, Inc. (see Note 1) as of December 31, 1996 and for J&J Rental Services, Inc. as of October 22, 1997 and the related statements of income, stockholders' equity and partners' capital and cash flows for each of the two years in the period ended December 31, 1996, the six months ended June 30, 1997 and for the period from July 1, 1997 to October 22, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the predecessor companies to J & J Rental Services, Inc. at December 31, 1996, and for J&J Rental Services, Inc. as of October 22, 1997 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, the six months ended June 30, 1997 and for the period from July 1, 1997 to October 22, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey January 23, 1998 F-206 J & J RENTAL SERVICES, INC. BALANCE SHEETS (NOTE 1)
PREDECESSORS COMPANY ------------ ----------- DECEMBER 31, OCTOBER 22, 1996 1997 ------------ ----------- ASSETS Cash................................................. $ 666,153 $ 1,431,287 Accounts receivable, net of allowance for doubtful accounts of $428,270, and $226,273 at 1996 and 1997, respectively........................................ 1,502,119 1,470,608 Trade notes receivable, net of allowance for doubtful accounts of $93,337 at 1996......................... 37,081 Rental equipment, net................................ 6,669,365 7,961,850 Property and equipment, net.......................... 467,460 319,219 Investments in marketable equity securities.......... 81,175 Due from Predecessor Stockholder..................... 120,000 Due from Related Party............................... 354,388 Prepaid expenses and other assets.................... 126,221 4,006 Intangible assets, net............................... 3,270,614 ---------- ----------- Total assets................................... $9,669,574 $14,811,972 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL Liabilities: Accounts payable................................... $ 628,252 $ 936,725 Accrued expenses................................... 336,884 360,990 Income tax payable................................. 24,814 Deferred tax liability............................. 430,000 Debt............................................... 5,766,651 14,078,932 Due to Predecessor Stockholder..................... 336,498 ---------- ----------- Total liabilities.............................. 7,523,099 15,376,647 Commitments and contingencies Stockholders' equity and partners' capital: Stockholder's equity--J & J Equipment, Inc. Common stock, $1.00 par value, 50,000 shares authorized, issued and outstanding.............. 50,000 Unrealized gain on marketable equity securities.. 1,165 Retained earnings................................ 981,955 ---------- 1,033,120 Partners' capital--Tri-Star Rentals, Ltd........... 1,113,355 ---------- Stockholders' equity--J & J Rental Services, Inc. Common stock, no par value, 1,000,000 shares authorized, 77,500 shares issued and outstanding..................................... 1,000 Accumulated deficit.............................. (565,675) ----------- Total stockholders' equity (deficit) and partners' capital............................................. 2,146,475 (564,675) ---------- ----------- Total liabilities and stockholders' equity and partners' capital............................... $9,669,574 $14,811,972 ========== ===========
See accompanying notes. F-207 J & J RENTAL SERVICES, INC. STATEMENTS OF INCOME (NOTE 1)
PREDECESSORS COMPANY ------------------------------------------ --------------- THE PERIOD FROM YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JULY 1, TO ------------------------ JUNE 30, OCTOBER 22, 1995 1996 1997 1997 ----------- ----------- ---------------- --------------- Revenues: Equipment rentals................................................. $7,573,784 $7,769,716 $3,823,790 $2,544,233 Sales of equipment and parts...................................... 1,810,400 1,243,297 573,450 129,963 ----------- ----------- ---------- ---------- Total revenues.................................................. 9,384,184 9,013,013 4,397,240 2,674,196 Cost of revenues: Cost of revenues, excluding depreciation.......................... 3,906,336 3,544,040 1,629,299 1,363,085 Depreciation, equipment rentals................................... 2,048,619 2,389,929 1,171,685 359,672 Cost of revenues of equipment and parts........................... 898,190 452,522 326,847 46,653 ----------- ----------- ---------- ---------- Total cost of revenues.......................................... 6,853,145 6,386,491 3,127,831 1,769,410 ----------- ----------- ---------- ---------- Gross profit........................................................ 2,531,039 2,626,522 1,269,409 904,786 Selling, general and administrative expenses........................ 1,840,973 1,521,562 713,488 786,907 Non-rental depreciation............................................. 125,004 123,971 78,643 7,629 ----------- ----------- ---------- ---------- Operating income................................................ 565,062 980,989 477,278 110,250 Interest expense.................................................... 411,731 478,341 180,769 378,231 Other (income), net................................................. (45,103) (27,523) (11,418) (26,306) ----------- ----------- ---------- ---------- Income (loss) before provision for income taxes................. 198,434 530,171 307,927 (241,675) Provision for income taxes.......................................... 35,678 49,685 98,000 -- ----------- ----------- ---------- ---------- Net income (loss)............................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675) =========== =========== ========== ==========
See accompanying notes. F-208 J & J RENTAL SERVICES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (NOTE 1)
UNREALIZED (LOSS) GAIN ON COMMON STOCK MARKETABLE RETAINED PARTNERS' SHARES AMOUNT SECURITIES EARNINGS CAPITAL ------ ------- -------------- ---------- ---------- Predecessors: Balance at January 1, 1995.................. 50,000 $50,000 $(6,500) $ 796,096 $ 927,272 Net income............. 75,762 86,994 Distributions paid to partners.............. (169,741) Unrealized gain on marketable securities............ 9,250 ------ ------- ------- ---------- ---------- Balance at December 31, 1995.................. 50,000 50,000 2,750 871,858 844,525 Net income............. 110,097 370,389 Distributions paid to partners.............. (101,559) Unrealized loss on marketable securities............ (1,585) ------ ------- ------- ---------- ---------- Balance at December 31, 1996.................. 50,000 50,000 1,165 981,955 1,113,355 Net income (loss) from January 1, 1997 to June 30, 1997......... 311,262 (101,335) Distributions paid to partners.............. (50,500) ------ ------- ------- ---------- ---------- Balance at June 30, 1997.................. 50,000 $50,000 $ 1,165 $1,293,217 $ 961,520 ====== ======= ======= ========== ========== Company: Issuance of common stock................. 77,500 $ 1,000 Net loss from July 1, 1997 to October 22, 1997.................. $ (241,675) Basis adjustment....... (324,000) ------ ------- ------- ---------- ---------- Balance at October 22, 1997.................. 77,500 $ 1,000 $ (565,675) ====== ======= ======= ========== ==========
See accompanying notes. F-209 J & J RENTAL SERVICES, INC. STATEMENTS OF CASH FLOWS (NOTE 1)
PREDECESSORS COMPANY ------------------------------------- ----------- THE PERIOD SIX MONTHS FROM JULY 1 YEAR ENDED DECEMBER 31, ENDED TO ------------------------ JUNE 30, OCTOBER 22, 1995 1996 1997 1997 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)....................................................... $ 162,756 $ 480,486 $ 209,927 $ (241,675) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................................... 2,173,623 2,513,900 1,250,328 396,823 Bad debt expense (recovery)............................................. 128,092 (57,621) 7,214 226,273 Gain on sale of rental equipment........................................ (396,704) (369,379) (210,390) (43,878) Gain on sale of property and equipment.................................. (2,809) (6,591) -- -- Deferred taxes.......................................................... 23,000 12,000 -- -- Changes in assets and liabilities: Increase in accounts receivable........................................ (64,895) (10,430) (512,942) (1,696,881) (Increase) decrease in trade notes receivable.......................... (170,337) 39,859 37,081 -- Increase in prepaid expenses and other assets.......................... (31,561) (84,918) (26,028) (4,006) Increase (decrease) in accounts payable................................ 46,476 (41,052) 372,230 936,725 Increase in accrued expenses........................................... 53,632 1,919 123,765 360,990 Increase in income tax payable......................................... 7,613 17,201 73,186 -- Increase in Related Party receivable................................... (354,388) ----------- ----------- ----------- ----------- Cash provided by (used in) operating activities....................... 1,928,886 2,495,374 1,324,371 (420,017) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment................................... (270,369) (195,823) (614,414) (548,346) Proceeds from sale of rental equipment.................................. 930,860 755,122 1,227,501 232,148 Proceeds from sale of property and equipment............................ 24,634 74,585 -- -- Purchase of other company, net of cash acquired......................... (7,238,924) Unrealized gain/(loss) on marketable securities......................... 9,250 (1,585) -- -- Purchase of marketable securities....................................... (9,250) (28,425) -- -- Payments on loans to Predecessor Stockholder............................ (21,573) (73,724) (79,254) -- Proceeds received on Predecessor Stockholder loans...................... 94,857 -- 6,884 -- Loan to Predecessor Stockholder......................................... (120,000) -- -- -- ----------- ----------- ----------- ----------- Cash provided by (used in) investing activities....................... 638,409 530,150 540,717 (7,555,122) CASH FLOWS FROM FINANCING ACTIVITIES Borrowing under credit facilities....................................... 871,496 351,958 -- 10,000,000 Principal payments on debt.............................................. (3,117,926) (3,171,213) (1,920,472) (593,574) Distributions paid...................................................... (169,741) (101,559) (50,500) -- ----------- ----------- ----------- ----------- Cash provided by (used in) financing activities....................... (2,416,171) (2,920,814) (1,970,972) 9,406,426 ----------- ----------- ----------- ----------- Increase (decrease) in cash ............................................. 151,124 104,710 (105,884) 1,431,287 Cash at beginning of year................................................ 410,319 561,443 666,153 -- ----------- ----------- ----------- ----------- Cash at end of year................................................... $ 561,443 $ 666,153 $ 560,269 $ 1,431,287 =========== =========== =========== ===========
See accompanying notes. F-210 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 AND OCTOBER 22, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation J & J Rental Services, Inc. (the "Company") was formed in May 1997, and pursuant to the terms of an Asset Purchase Agreement (the "Agreement"), on June 30, 1997 acquired all of the rental equipment and property and equipment from J & J Equipment, Inc. ("J & J"), and Tri-Star Rentals, Ltd. ("Tri-Star") (collectively, the "Predecessors") and assumed all operations of the Predecessors (the "Acquisition"). The purchase price of $10,700,000 consisted of cash of $7,200,000 and a promissory note payable for $3,500,000. The sole stockholder and partner of J & J and Tri-Star, respectively, (the "Predecessor Stockholder") has, on a fully-diluted basis, a 9% ownership interest in the outstanding common stock of the Company, and has continued in a management role as chief operating officer. The accompanying financial statements as of December 31, 1996 and for the years ended December 31, 1995 and 1996, and for the six month period ended June 30, 1997 present the accounts and results of operations of the Predecessors on a combined, historical cost basis. Although the financial statements of the Predecessors have been combined, the balance sheets and statements of income and cash flows do not represent those of a single legal entity. All significant intercompany accounts and transactions have been eliminated in combination. The financial statements as of October 22, 1997 and for the period from July 1 to October 22, 1997 present the accounts and results of operations of the Company since the Acquisition. The Acquisition has been accounted for as a purchase effective July 1, 1997 and, accordingly, at such date the Company recorded the assets acquired at their estimated fair values, adjusted for the impact of the Predecessor Stockholder's continuing residual interest as described below. The assets acquired have been reduced by $324,000 representing the Predecessor Stockholder's continuing residual interest in the Company with a corresponding charge against the Company's retained earnings. The adjusted purchase price and the preliminary allocation of the adjusted purchase price to the historical assets of the Company as of July 1, 1997 are as follows: Purchase price................................................. $10,739,000 Adjustment necessary to value Predecessor Stockholder's continuing residual interest at Predecessor's basis........... 324,000 ----------- Adjusted purchase price........................................ $10,415,000 =========== Allocation of adjusted purchase price: Net assets acquired, at fair values.......................... $ 7,115,000 Covenant not to compete...................................... 50,000 Goodwill..................................................... 3,250,000 ----------- Total adjusted purchase price allocation................... $10,415,000 ===========
Business Activity The Company rents and sells light weight and heavy off-road construction equipment for use by construction and maintenance companies, and has ancillary sales of parts and supplies. The rentals are on a daily, weekly or monthly basis. The Company has two locations in Houston, Texas and its F-211 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) principal market area is the state of Texas. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheets are presented on an unclassified basis. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over estimated useful lives of three to five years through June 30, 1997 and two to ten years subsequent to June 30, 1997 with no salvage value. Rental equipment costing less than $500 is immediately expensed at the date of purchase. Equipment rental revenue is recorded as earned under the operating method. Equipment rental revenue in the statements of operations includes revenues earned on equipment rentals, and related fuel sales and rental equipment delivery fees. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from rental equipment sales in the statements of operations. Ordinary maintenance and repair costs are charged to operations as incurred. Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives of 5 to 10 years. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Ordinary maintenance and repair costs are charged to operations as incurred. Advertising Costs The Company advertises primarily through trade journals, phone directories and the distribution of promotional items. All advertising costs are expensed as incurred. Advertising expenses amounted to approximately $40,095 and $52,483 in the years ended December 31, 1995 and 1996, respectively, $1,297 in the six months ended June 30, 1997, and $9,433 from July 1 to October 22, 1997. Income Taxes J & J applied an asset and liability approach to accounting for income taxes. Deferred income tax assets and liabilities arise from differences between the tax basis of an asset or liability and its reported amount in the financial statements. Deferred tax balances are determined by using tax rates expected to be in effect when the taxes will actually be paid or refunds received. Under federal and state income tax law, Tri-Star, a partnership, is not a taxable entity and, therefore, incurs no income tax liability. Any profits and losses of Tri-Star flow through to the individual partners. Investments The Company's investments consist of marketable equity securities and are classified as available for sale. Any unrealized gains or losses are excluded from income and are presented as a component of stockholders' equity. Intangible assets Intangible assets are recorded at cost and consist of goodwill of $3,250,134 and covenant not to compete of $50,000. Goodwill is being amortized by the straight-line method over its estimated useful life of forty years. The covenant not to compete reflects an agreement made regarding confidentiality and restricting competitive activity and is being amortized by the straight- line method over the period of the agreement, which is 5 years. Amortization expense was $29,520 for the period from July 1 to October 22, 1997. F-212 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances with a quality financial institution and, accordingly, management believes this mitigates the amount of credit risk. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and its credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consists of the following:
DECEMBER 31, OCTOBER 22, 1996 1997 ------------ ----------- Rental equipment.................................... $12,520,482 $8,313,840 Less accumulated depreciation....................... 5,851,117 351,990 ----------- ---------- Rental equipment, net............................... $ 6,669,365 $7,961,850 =========== ==========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, OCTOBER 22, 1996 1997 ------------ ----------- Transportation equipment............................ $763,402 $166,003 Furniture, fixtures and office equipment............ 92,082 59,760 Shop equipment...................................... 39,356 Leasehold improvements.............................. 38,386 Construction in progress............................ 101,085 -------- -------- 933,226 326,848 Less accumulated depreciation....................... 465,766 7,629 -------- -------- Total............................................... $467,460 $319,219 ======== ========
F-213 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. DEBT Debt consists of the following:
DECEMBER 31, OCTOBER 22, 1996 1997 ------------ ----------- CIT Group--Various notes dated from September 21, 1995 through August 5, 1997, with annual interest rates ranging from 8% to 9.4% due in monthly payments ranging from $867 to $43,987. ............. $1,246,231 $637,956 The Associates--Note dated April 1, 1996, with annual interest of 8.8% due in monthly payments of $3,609. ............................................ 110,450 Case Power & Equipment--Various notes dated from January 1, 1992 through December 30, 1996, with annual interest rates ranging from 5.5% to 7.9% due in monthly payments ranging from $408 to $7,747. ... 795,344 Sterling Bank--Various notes dated from January 26, 1994 through December 20, 1996, with annual interest rates ranging from 8% to 11% due in monthly payments ranging from $582 to $2,084. ....................... 306,708 KDC Financial--Various notes dated from June 14, 1993 through December 31, 1996, with annual interest rates ranging from 4.5% to 9.5% due in monthly payments ranging from $840 to $4,691. .............. 1,443,971 John Deere Financial--Notes dated December 31, 1995 and September 10, 1996, with annual interest rates of 7.9% and 6.9% due in monthly payments of $807 and $1,083. ............................................ 69,247 Frost National Bank--Various notes dated from January 25, 1995 through August 15, 1995, with annual interest rates ranging from 8.75% to 9.5% due in monthly principal payments ranging from $582 to $8,492. ............................................ 101,771 Citicorp--Note dated June 15, 1993, with an annual interest rate of 5.9% due in monthly payments of $921. .............................................. 5,433 First Prosperity Bank--Various notes dated from September 8, 1994 through December 13, 1996, with annual interest ranging from 7.25% through 9.9% due in monthly payments ranging from $354 to $1,039. ... 55,139 CAT Financial--Notes dated June 2, 1995 and December 31, 1994, with annual interest rates of 9.69% and 9.5% due in monthly payments of $4,227 and $3,036. ............................................ 152,293 CAT Financial--Notes dated October 11, 1996 and November 25, 1996, non-interest bearing, with monthly payments of $1,205 and $3,522. ............. 161,102 Chase/Clark Credit--Various notes dated from March 17, 1994 through September 28, 1994, with annual interest rates ranging from 9.75% to 12.765% due in monthly installments ranging from $194 to $1,430. .. 30,232 First Prosperity--Various notes dated from August 16, 1993 through December 13, 1996, with annual interest rates ranging from 6.4% to 11% due in monthly installments ranging from $423 to $4,205............ 171,518 Associates Commercial Credit Corp.--Various notes dated from May 16, 1994 through July 8, 1996, with annual interest rates ranging from 7.75% to 11.25% due in monthly installments ranging from $912 to $6,656.............................................. 246,570
F-214 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, OCTOBER 22, 1996 1997 ------------ ----------- Ingersoll-Rand Company--Various notes dated from June 30, 1992 through September 8, 1996 with annual interest rates ranging from 7% to 9.5% due in monthly installments ranging from $301 to $7,794.... 316,003 Wacker Corporation--Various notes dated from January 7, 1994 through May 25, 1996, with annual interest rates ranging from 6.25% to 10.25% due in monthly installments ranging from $854 to $2,889............ 99,666 AEL Leasing Co., Inc.--Various notes dated from April 21, 1994 through May 20, 1996, with annual interest rates ranging from 8.72% to 12.93% due in monthly installments ranging from $371 to $4,883............ 261,043 AEL Leasing Co., Inc.--Various non-interest bearing notes dated from April 21, 1994 through February 26, 1996, due in 12 principal installments ranging from $8,022 to $18,249................................... 36,498 Shandee--Note dated August 31, 1995, with an annual interest rate of 11.25% due in monthly installments of $2,803........................................... 21,510 Sterling Bank--Note dated January 2, 1996, with an annual interest rate of 9.5% due in 24 principal installments of $4,118.............................. 53,538 Miller Financing--Various notes dated from February 15, 1996 through June 1, 1996, with annual interest rates ranging from 9.25 % to 10.25% due in monthly installments ranging from $375 to $2,922............ 82,384 Toyota Motor Credit Corp.--Notes dated July 12 and August 28, 1997, with annual interest rates of 5.4% and 6.9%, respectively, due in monthly installments of $543 and $ 561, respectively..................... 47,460 AEL Leasing Co., Inc.--Note dated October 10, 1997 with annual interest of 9.33% due in monthly payments of $3,345.................................. 157,807 Case Credit--Various notes dated June 30, 1997 with an annual interest rate of 7.9% due in monthly installments ranging from $1,685 to $2,254.......... 290,260 Case Credit--Term note dated June 30, 1997, with interest due monthly at prime plus .75% (9.25% at September 30, 1997). Principal is due June 30, 2002. This note is secured by all of the Company's rental assets and property, plant and equipment, and is personally guaranteed by the majority owners of the Company............................................. 7,445,449 J & J and Tri-Star--Promissory note dated June 30, 1997 with an annual interest rate of 7.5%. Principal payments of $175,000 are due quarterly beginning October 1, 2000..................................... 3,500,000 Equus II Incorporated--Senior subordinated note dated June 30, 1997, with interest to be paid monthly on the unpaid principal balance at a variable rate not to exceed 10% (10% at September 30, 1997). Principal is to be paid in four annual installments of $500,000 beginning June 30, 2001.................... 2,000,000 ---------- ----------- $5,766,651 $14,078,932 ========== ===========
Substantially all rental equipment collateralize the above notes. F-215 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) All debt at October 22, 1997, except for $200,000 of the J & J and Tri-Star note, were paid off by October 31, 1997 as a result of the acquisition discussed in Note 10. 6. INCOME TAXES The provision for income taxes relates to the operating results of J & J before July 1, 1997 and consists of the following:
YEAR ENDED SIX MONTHS DECEMBER 31, ENDED JUNE --------------- 30, 1995 1996 1997 ------- ------- ---------- Current: Federal............................................ $ 7,216 $32,054 $86,500 State.............................................. 5,462 5,631 11,500 ------- ------- ------- 12,678 37,685 98,000 Deferred: Federal............................................ 20,300 10,600 -- State.............................................. 2,700 1,400 -- ------- ------- ------- 23,000 12,000 -- ------- ------- ------- Total............................................ $35,678 $49,685 $98,000 ======= ======= =======
Tri-Star is a pass-through entity and, therefore incurs no tax liability. Significant components of J & J's deferred tax liability at December 31, 1996 is as follows:
DECEMBER 31, 1996 ------------ Difference in basis of accounting......................... $221,000 Cumulative tax depreciation in excess of book............. 209,000 -------- Deferred tax liability $430,000 ========
Effective July 1, 1997, the Company and its shareholders have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal tax purposes. Under those provisions the Company does not pay federal income taxes; instead, the shareholders are liable for individual income taxes on the Company's profit. Therefore, no provision for federal income taxes is included in the Company's financial statements for the period from July 1 to October 22, 1997. 7. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995 and 1996; the six months ended June 30, 1997; and the period from July 1 to October 22, 1997, total interest paid was $411,731 and $478,341; $180,769; and $259,705, respectively. For the years ended December 31, 1995 and 1996; the six months ended June 30, 1997; and the period from July 1 to October 22, 1997, total income taxes paid was $ -- and $ --; $24,814; and $ --, respectively. During the years ended December 31, 1995 and 1996, and the six months ended June 30, 1997, and for the period from July 1 to October 22, 1997 the Company purchased $3,738,807, and $3,160,914; $1,172,917; and $1,172,506, respectively, of equipment which was financed. F-216 J & J RENTAL SERVICES, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. EMPLOYEE BENEFIT PLAN The Predecessor sponsored a defined contribution 401(k) retirement plan, which was implemented during 1995 and covers substantially all full time employees. The Predecessor matched a portion of the participants' contributions. Predecessor contributions to the plan were $9,272, $6,395, $--, and $ -- for the years ended December 31, 1995, and 1996, for the six month period ended June 30, 1997 and for the period from July 1 to October 22, 1997, respectively. 9. RELATED PARTY TRANSACTIONS On November 27, 1995, Tri-Star loaned $120,000 to the Predecessor Stockholder. This non-interest bearing note is unsecured, and is due on demand. The outstanding balance on this note receivable at December 31, 1996 was $120,000. On November 30, 1995, Tri-Star issued a $100,000 note payable to the Predecessor Stockholder, which bears interest at 11.4% per annum, requires monthly principal and interest payments of $6,097, and is unsecured. The outstanding balance on this note at December 31, 1996 was $79,254. J & J has a note payable outstanding to the Predecessor Stockholder, which required interest to be paid quarterly at 6.5% per annum, and is due on January 1, 1998. The outstanding balance on this note payable at December 31, 1996 was $257,244. During the period from July 1 to October 22, 1997 the Company made payments of $354,388 on behalf of another Company owned by the Company's Stockholder. The Company leases its operating facilities from the Predecessor Stockholder, and paid monthly rent of $8,600 through June 30, 1997. These leases are month-to-month and can be canceled by either party. 10. SUBSEQUENT EVENT On October 23, 1997, the Company entered into a stock purchase agreement with United Rentals, Inc. ("United"). Under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Company. F-217 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Coran Enterprises, Inc. and Monterey Bay Equipment Rental, Inc. We have audited the accompanying combined statements of earnings, stockholders' equity, and cash flows of Coran Enterprises, Inc., dba A-1 Rents, and Monterey Bay Equipment Rental, Inc. for the years ended December 31, 1995 and 1996. We have also audited the combined statements of earnings, stockholders' equity, and cash flows for the period from January 1, 1997 through October 24, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations and combined cash flows of Coran Enterprises, Inc. dba A-1 Rents, and Monterey Bay Equipment Rental, Inc. for the years ended December 31, 1995 and 1996, and also for the period from January 1, 1997 through October 24, 1997, in conformity with generally accepted accounting principles. /s/ Grant Thornton LLP San Jose, California January 21, 1998 F-218 CORAN ENTERPRISES, INC. DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC. COMBINED STATEMENTS OF EARNINGS
PERIOD FROM JANUARY 1, 1997 YEAR ENDED DECEMBER 31, THROUGH ----------------------- OCTOBER 24, 1995 1996 1997 ----------- ----------- ----------- Revenues: Equipment rentals........................ $ 6,962,130 $ 7,679,713 $6,743,497 Sales of parts, supplies and rental equipment............................... 565,586 738,330 974,713 ----------- ----------- ---------- Total revenues......................... 7,527,716 8,418,043 7,718,210 Costs: Cost of equipment rentals................ 3,835,982 4,254,243 3,764,346 Rental equipment depreciation............ 611,577 1,304,847 1,328,193 Cost of sales of supplies................ 200,746 257,500 204,248 Other.................................... 49,523 115,758 53,590 ----------- ----------- ---------- Total costs............................ 4,697,828 5,932,348 5,350,377 ----------- ----------- ---------- Gross margin........................... 2,829,888 2,485,695 2,367,833 Selling, general and administrative........ 1,786,650 2,062,246 1,768,439 Non-rental depreciation.................... 28,435 17,202 15,370 ----------- ----------- ---------- Operating Income....................... 1,014,803 406,247 584,024 Interest expense........................... 21,120 96,464 170,183 ----------- ----------- ---------- Earnings before income taxes........... 993,683 309,783 413,841 Provision for income taxes................. 12,275 8,221 276,383 ----------- ----------- ---------- Net earnings............................. $ 981,408 $ 301,562 $ 137,458 =========== =========== ==========
The accompanying notes are an integral part of these statements. F-219 CORAN ENTERPRISES, INC. DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC. COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
SHARES ISSUED ------------- CEI MBERI ------ ------ ADDITIONAL $1 PAR NO PAR COMMON PAID-IN RETAINED VALUE VALUE STOCK CAPITAL EARNINGS TOTAL ------ ------ -------- ---------- ---------- ---------- Balance at January 1, 1995..................... 75,000 10,000 $275,000 $37,920 $1,691,541 $2,004,461 Net earnings............ -- -- -- -- 981,408 981,408 ------ ------ -------- ------- ---------- ---------- Balance at December 31, 1995..................... 75,000 10,000 275,000 37,920 2,672,949 2,985,869 Net earnings............ -- -- -- -- 301,562 301,562 Dividends paid to stockholders........... -- -- -- -- (750,000) (750,000) ------ ------ -------- ------- ---------- ---------- Balance at December 31, 1996..................... 75,000 10,000 275,000 37,920 2,224,511 2,537,431 Net earnings January 1, 1997 through October 24, 1997................... -- -- -- -- 137,458 137,458 Dividends paid to stockholders........... -- -- -- -- (781,852) (781,852) Stock redemption........ -- (2,500) (50,000) -- (200,000) (250,000) ------ ------ -------- ------- ---------- ---------- Balance at October 24, 1997..................... 75,000 7,500 $225,000 $37,920 $1,380,117 $1,643,037 ====== ====== ======== ======= ========== ==========
The accompanying notes are an integral part of this statement. F-220 CORAN ENTERPRISES, INC. DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC. COMBINED STATEMENTS OF CASH FLOWS
PERIOD JANUARY 1, YEAR ENDED 1997 DECEMBER 31, THROUGH ---------------------- OCTOBER 24, 1995 1996 1997 --------- ----------- ----------- Cash flows from operating activities: Net earnings............................ $ 981,408 $ 301,562 $ 137,458 Adjustments to reconcile net earnings to net cash provided by operating activi- ties: Depreciation and amortization......... 640,012 1,322,049 1,343,563 Gain on sale of equipment............. (85,747) (163,753) (446,621) Change in assets and liabilities: Accounts receivable................. (210,091) 60,246 (61,976) Other assets........................ 5,220 (3,108) 59,276 Accounts payable and accrued liabil- ities.............................. 36,638 32,355 625,287 --------- ----------- ----------- Net cash provided by operating ac- tivities......................... 1,367,440 1,549,351 1,656,987 Cash flows from investing activities: Purchases of rental equipment........... (633,519) (4,017,946) (315,346) Proceeds from sale of equipment......... 110,273 205,639 492,977 --------- ----------- ----------- Net cash provided by (used in) investing activities............. (523,246) (3,812,307) 177,631 Cash flows from financing activities: Change in bank overdraft................ (15,760) -- -- Borrowings on equipment loans........... 244,235 1,096,820 -- Payments on equipment loans............. (46,853) (158,893) (42,649) Payment of dividends.................... -- (750,000) (781,853) Stock redemption........................ -- -- (250,000) Borrowings on notes payable--stockhold- ers.................................... -- 1,249,988 -- Payments on notes payable--stockhold- ers.................................... (95,888) -- (538,156) --------- ----------- ----------- Net cash provided by (used in) financing activities............. 85,734 1,437,915 (1,612,658) --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 929,928 (825,041) 221,960 Cash and cash equivalents--beginning of period................................... 35,259 965,187 140,146 --------- ----------- ----------- Cash and cash equivalents--end of period.. $ 965,187 $ 140,146 $ 362,106 ========= =========== =========== Supplementary disclosures of cash flow in- formation: Cash paid during the period for: Interest.............................. $ 21,120 $ 95,958 $ 151,792 ========= =========== =========== Income taxes.......................... $ 1,600 $ 23,047 $ 800 ========= =========== ===========
The accompanying notes are an integral part of these statements. F-221 CORAN ENTERPRISES, INC. DBA A-1 RENTS ANDMONTEREY BAY EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997 NOTE A--SUMMARY OF ACCOUNTING POLICIES 1. Nature of Business and Basis of Presentation The combined financial statements include the accounts of Coran Enterprises, Inc. and Monterey Bay Equipment Rental, Inc. (collectively the "Company"). Coran Enterprises, Inc. ("CEI") and Monterey Bay Equipment Rental, Inc. ("MBERI") are combined due to common ownership and operations which are complimentary. All significant intercompany balances and transactions have been eliminated in combination. The Company leases equipment for home and contractors' use under short-term rental agreements principally in the Northern California area. 2. Property and Equipment The Company provides for depreciation in amounts sufficient to relate the costs of depreciable assets to operations over their estimated service lives using the double-declining balance method. Leasehold improvements are amortized on a straight-line basis over the lives of the improvements or the term of the lease, whichever is shorter. Maintenance and repairs costs are expensed as incurred. Supplies and replacement parts are expensed when purchased. 3. Cash and Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 4. Use of estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE B--RELATED PARTY TRANSACTIONS The Company leases facilities from its stockholders on a month-to-month basis. Total rent expense on the facilities was $662,880 and $667,638 for the years ended December 31, 1995 and 1996. Total rent expense for the period from January 1, 1997 through October 24, 1997 was $545,702. The Company incurred interest expense of $17,755 and $27,627, respectively, for the years ended December 31, 1995 and 1996, related to notes payable to stockholders. For the period from January 1, 1997 through October 24, 1997 the interest expense related to the stockholder notes was $80,693. NOTE C--INCOME TAXES The stockholders of the Company have elected "S" Corporation status for income tax purposes. Therefore, income or loss for federal and California state income tax purposes is reported on the shareholders' individual income tax returns. Although the "S" Corporation tax treatment is recognized by the State of California, the net corporate income is subject to a 1.5% corporate surtax. (See Note E) F-222 CORAN ENTERPRISES, INC. DBA A-1 RENTS AND MONTEREY BAY EQUIPMENT RENTAL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 24, 1997 NOTE D--EQUIPMENT LOANS Equipment loans consist of notes payable, collateralized by equipment, due in monthly installments ranging from $1,095 to $5,375 with interest rates from 5.75% to 8.75%. These loans were paid in full as of October 31, 1997. Interest expense on the equipment loans aggregated $3,365 and $68,837, respectively, for the years ended December 31, 1995 and 1996. Interest expense on the equipment loans was $89,455 for the period January 1, 1997 through October 24, 1997. NOTE E--CHANGE IN OWNERSHIP Effective October 24, 1997, the stockholders of CEI and MBERI sold 100% of the outstanding shares of each company to United Rentals, Inc. The Company provided $270,000 for state income taxes resulting from the stock sale. F-223 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Bronco Hi-Lift, Inc. We have audited the balance sheets of Bronco Hi-Lift, Inc. as of December 31, 1996 and October 24, 1997 and the related statements of income, stockholders' equity and cash flows for the years ended December 31, 1995 and 1996, and the period from January 1, 1997 to October 24, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bronco Hi-Lift, Inc. at December 31, 1996 and October 24, 1997, and the results of its operations and its cash flows for the years ended December 31, 1995 and 1996, and the period from January 1, 1997 to October 24, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP MetroPark, New Jersey January 19, 1998 F-224 BRONCO HI-LIFT, INC. BALANCE SHEETS
DECEMBER 31, OCTOBER 1996 24, 1997 ------------ ---------- ASSETS Cash................................................... $ 305,506 $ 180,745 Accounts receivable, net............................... 826,849 998,467 Unbilled receivables................................... 40,722 283,865 Inventory.............................................. 67,825 273,119 Rental equipment, net.................................. 1,972,910 2,725,464 Property and equipment, net............................ 234,914 423,918 Due from related party................................. -- -- Prepaid expenses and other assets...................... 13,530 44,273 ---------- ---------- Total assets....................................... $3,462,256 $4,929,851 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Accounts payable, accrued expenses and other liabilities......................................... $ 90,584 $ 277,651 Debt................................................. 3,051,711 3,473,516 ---------- ---------- Total liabilities.................................. 3,142,295 3,751,167 Commitments and contingencies Stockholders' equity: Common stock, $.01 par value and $1.00 stated value, 100,000 shares authorized, 10,000 issued and outstanding at December 31, 1996, and October 24, 1997................................................ 10,000 10,000 Additional paid-in capital........................... 598,000 598,000 Notes receivable from stockholders................... (300,000) -- Retained earnings.................................... 11,961 570,684 ---------- ---------- Total stockholders' equity......................... 319,961 1,178,684 ---------- ---------- Total liabilities and stockholders' equity......... $3,462,256 $4,929,851 ========== ==========
See accompanying notes. F-225 BRONCO HI-LIFT, INC. STATEMENTS OF INCOME
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31 1997 TO ------------------------ OCTOBER 1995 1996 24, 1997 ----------- ----------- ---------- Revenues: Equipment rentals...................... $ 3,427,596 $ 4,313,855 $4,330,000 New equipment sales.................... 266,308 611,033 533,370 Sales of parts, supplies and rental equipment............................. 155,331 410,957 375,451 Other.................................. 147,214 194,469 182,355 ----------- ----------- ---------- Total revenues....................... 3,996,449 5,530,314 5,421,176 Cost of revenues: Cost of equipment rentals, excluding depreciation.......................... 335,028 699,455 374,845 Depreciation, equipment rentals........ 637,766 736,525 660,598 Cost of new equipment sales............ 206,268 479,920 412,592 Cost of sales of parts, supplies and equipment............................. 107,989 293,987 148,464 Other.................................. 32,418 119,315 112,107 ----------- ----------- ---------- Total cost of revenues............... 1,319,469 2,329,202 1,708,606 ----------- ----------- ---------- Gross profit............................. 2,676,980 3,201,112 3,712,570 Selling, general and administrative expenses................................ 2,540,699 2,359,326 2,353,924 Non-rental depreciation.................. 84,463 99,669 85,707 ----------- ----------- ---------- Operating income..................... 51,818 742,117 1,272,939 Interest expense......................... 171,305 334,035 229,154 Other (income), net...................... (26,575) (46,175) (29,938) ----------- ----------- ---------- Net income (loss).................... $ (92,912) $ 454,257 $1,073,723 =========== =========== ==========
See accompanying notes. F-226 BRONCO HI-LIFT, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK NOTES RECEIVABLE RETAINED ----------------- PAID-IN FROM EARNINGS SHARES AMOUNT CAPITAL STOCKHOLDERS (DEFICIT) ------- -------- --------- ---------------- ----------- Balance at January 1, 1995................... 20,000 $ 20,000 $ 345,020 $ -- $ 693,596 Purchase and retirement of common stock................ (12,000) (12,000) (345,020) (1,042,980) Issuance of common stock................ 2,000 2,000 598,000 (500,000) Net loss.............. (92,912) ------- -------- --------- --------- ----------- Balance at December 31, 1995................... 10,000 10,000 598,000 (500,000) (442,296) Payment on notes receivable from stockholders......... 200,000 Net income............ 454,257 ------- -------- --------- --------- ----------- Balance at December 31, 1996................... 10,000 10,000 598,000 (300,000) 11,961 Payments on notes receivable from stockholders......... 300,000 Net income............ 1,073,723 Dividends paid........ (515,000) ------- -------- --------- --------- ----------- Balance at October 24, 1997................... 10,000 $ 10,000 $ 598,000 $ -- $ 570,684 ======= ======== ========= ========= ===========
See accompanying notes. F-227 BRONCO HI-LIFT, INC. STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 1, YEAR ENDED DECEMBER 31 1997 TO ------------------------ OCTOBER 24, 1995 1996 1997 ----------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................... $ (92,912) $ 454,257 $ 1,073,723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................ 722,229 836,194 746,305 Gain on equipment sales............. (317,871) (302,777) (355,159) Interest expense not requiring cash............................... 17,500 Changes in assets and liabilities: Increase in accounts receivable... (132,976) (235,655) (171,618) Decrease (increase) in unbilled receivables...................... 5,646 27,632 (243,143) (Increase) decrease in inventory.. (102,542) 89,645 (205,294) Decrease (increase) in prepaid expenses and other assets........ 30,774 20,171 (30,743) (Decrease) increase in accounts payable, accrued expenses and other liabilities................ (60,113) (14,377) 187,067 ---------- ------------ ----------- Total adjustments............... 145,147 438,333 (72,585) ---------- ------------ ----------- Cash provided by operating activities..................... 52,235 892,590 1,001,138 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of rental equipment.......... (92,727) (1,368,253) (1,631,309) Proceeds from sale of rental equipment............................ 350,739 745,687 573,316 Purchases of property and equipment, net.................................. (101,985) (90,932) (304,711) ---------- ------------ ----------- Cash provided by (used in) investing activities........... 156,027 (713,498) (1,362,704) CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid................... (485,000) Issuance of stock..................... 100,000 Re-payments on notes due from stockholders......................... 200,000 300,000 Principal payments on debt............ (742,891) (802,358) (278,195) Principal payments on capital lease obligations.......................... (32,711) Advances to related party............. (412,113) Borrowings under credit facility...... 900,000 500,000 700,000 ---------- ------------ ----------- Cash provided by (used) in financing activities........... (187,715) (102,358) 236,805 ---------- ------------ ----------- Increase (decrease) in cash........... 20,547 76,734 (124,761) Cash balance at beginning period......................... 208,225 228,772 305,506 ---------- ------------ ----------- Cash balance at end of period... $ 228,772 $ 305,506 $ 180,745 ========== ============ ===========
See accompanying notes. F-228 BRONCO HI-LIFT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 AND OCTOBER 24, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Bronco Hi-Lift, Inc. (the "Company") rents, sells and repairs aerial lift equipment for use by construction companies and maintenance and media crews. The rentals are on a daily, weekly or monthly basis. The Company is located in Denver, Colorado and its principal market area is the state of Colorado. The nature of the Company's business is such that short-term obligations are typically met by cash flow generated from long-term assets. Consequently, consistent with industry practice, the balance sheets are presented on an unclassified basis. Inventory Inventories consists primarily of general replacement parts and fuel for the equipment and are stated at the lower of cost, determined under the first-in, first-out method, or market. Rental Equipment Rental equipment is recorded at cost. Depreciation for rental equipment is computed using the straight-line method over an estimated five-year useful life with no salvage value. Ordinary maintenance and repair costs are charged to operations as incurred. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from sales of equipment and cost of sales of equipment, respectively, in the statements of operations. Property and Equipment Property and equipment is stated at cost. Depreciation of property and equipment is computed on the straight-line method over estimated useful lives of 5 to 10 years. Ordinary maintenance and repair costs are charged to operations as incurred. The cost of assets sold, retired, or otherwise disposed of, and the related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is included in operations. Rental Revenue Rental revenue is recorded as earned under the operating method. Advertising Costs The Company advertises primarily through trade journals, trade associations and phone directories. All advertising costs are expensed as incurred. Advertising expenses amounted to approximately $74,400 and $43,000 in the years ended December 31, 1995 and 1996, respectively, and $49,500 in the period from January 1, 1997 to October 24, 1997. Income Taxes The Company has elected, by unanimous consent of its shareholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code for both federal and state purposes. Under those provisions the Company does not pay federal or state income taxes; instead, the shareholders are liable for individual income taxes on the Company's profits. Therefore, no provision for federal or state income taxes is included in the accompanying financial statements. F-229 BRONCO HI-LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. CONCENTRATIONS OF CREDIT RISK The Company maintains cash balances with a quality financial institution and, accordingly, management believes this mitigates the amount of credit risk. Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising the Company's customer base and its credit policy. 3. RENTAL EQUIPMENT Rental equipment and related accumulated depreciation consisted of the following:
OCTOBER DECEMBER 31, 24, 1996 1997 ------------ ---------- Rental equipment.................................... $5,176,658 $5,943,569 Less accumulated depreciation....................... 3,203,748 3,218,105 ---------- ---------- Rental equipment, net............................... $1,972,910 $2,725,464 ========== ==========
4. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, OCTOBER 24, 1996 1997 ------------ ----------- Furniture and fixtures.............................. $ 59,572 $172,839 Transportation equipment............................ 520,356 664,543 Shop equipment...................................... 37,591 37,591 -------- -------- 617,519 874,973 Less accumulated depreciation....................... 382,605 451,055 -------- -------- Total............................................. $234,914 $423,918 ======== ========
F-230 BRONCO HI-LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. DEBT Debt consists of the following:
OCTOBER DECEMBER 31 24, 1996 1997 ----------- ---------- Citicorp Dealer Finance Agreement.................... $1,585,000 $2,135,000 GMAC note dated October 27, 1994 paid in full in August 1997......................................... 17,564 -- Kenworth/Trial-EZE dated July 11, 1994 paid in full in September 1997................................... 49,147 -- Notes payable to a former shareholder for $900,000 and $500,000 at an annual interest rate of 9%. The $900,000 note requires monthly interest payments through January 31, 1998 at which time the note is due in full. The $500,000 note requires monthly interest payments through January 31, 1997. Beginning February 1, 1997, the note is payable in 60 monthly installments of principal and interest of $10,379 through December 31, 2001. The above $500,000 note is subordinated to the Citicorp Dealer Finance Agreement................................... 1,400,000 1,338,516 ---------- ---------- $3,051,711 $3,473,516 ========== ==========
Substantially all of the Company's assets collateralize the debt outstanding under the Financing Agreement. All debt at October 24, 1997 was paid off in connection with the acquisition discussed in Note 10. 6. OPERATING LEASES During 1994, the Company leased 7,000 square feet of office and shop space on a twelve month lease, renewable annually. For the period from January 1, 1995 to April 30, 1995, the Company leased approximately 7,000 square feet of office and shop space under a new month to month lease. Effective May 1, 1995, the Company moved to a new location and entered into a lease agreement with a related party, Coyote Investments, LLC ("Coyote") (see Note 9). The facility consists of 17,000 square feet of office and shop area located on 1.8 acres. The 15 year lease expires April 30, 2010. The Company is responsible for all operating expenses of the facility including property taxes, assessments, insurance, repairs and maintenance. Rent expense under these leases totaled $52,000 and $78,000 for the years ended December 31, 1995 and 1996 and $65,000 for the period from January 1, 1997 to October 24, 1997. Under the lease agreement with Coyote, rent is payable in monthly installments of $6,500 for the first two years of the lease. Thereafter the rent shall be increased annually to reflect the then current fair market rent for the premises, provided that each annual increase shall not exceed 10% of the previous year's rental rate. Future minimum rent commitments are $78,000 each for years ended December 31, 1998 to December 31, 2009 and $26,000 for January 1, 2010 to April 30, 2010, provided there is no increase in fair market rent for the premises. 7. COMMITMENTS The Company has employment agreements, which expire in 1998, with three officers which grant certain severance pay rights to these officers provided that certain conditions of employment are met. F-231 BRONCO HI-LIFT, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Under terms of the employment agreements, the officers received approximately $253,000, $703,000, and $521,000 for the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997, respectively. Additional compensation to be paid to the officers, until the agreements expire, amounts to approximately $100,000 for the two months ended December 31, 1997 and $270,000 during 1998. The Company guarantees Coyote's debt on the building leased by the Company (see Note 9). 8. SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995 and 1996 and for the period from January 1, 1997 to October 24, 1997, total interest paid was $171,305, $335,686 and $224,016, respectively. During 1995, the Company purchased $726,355, of equipment which was financed. There were no purchases in 1996 or for the period from January 1, 1997 to October 24, 1997. On December 20, 1995, the Company purchased and retired 12,000 shares of its stock for two notes totaling $1,400,000. On December 21, 1995, the Company issued 2,000 shares of its stock to two officers of the Company in exchange for $100,000 cash and $500,000 of notes receivable from these officers. During 1996, the officers repaid $200,000 in accordance with the note agreements. In October of 1997, the notes were repaid in full. During 1997, the Company paid dividends of $515,000, of which $30,000 represented a non-cash transfer of a fixed asset. 9. RELATED PARTY TRANSACTIONS Coyote is owned by the shareholders of the Company. The Company leases its office and shop facility from Coyote (see Note 6). All stockholders and the Company have guaranteed Coyote's debt on the facility. The amount of debt principal on the facility was $555,080 at December 31, 1996 and $540,200 at October 24, 1997. Advances to Coyote were $412,113 at December 31, 1995. Coyote paid $3,434 of interest to the Company during 1996. As part of the Citicorp Amendment No. 1 Refinancing Agreement, the Company owed Coyote $152,187, which it paid with interest of $7,990 during August 1996. These obligations were fulfilled with a non-cash transaction in connection with the above mentioned amended agreement. On December 21, 1995 the Company issued 2,000 shares to two officers of the Company in exchange for $100,000 cash and two notes for $250,000 each. The notes bear interest at 9% per annum and are payable bi-annually. Principal on each note is payable $100,000 in 1996, $100,000 in 1997 and $50,000 in 1998. Interest paid to the Company during 1996 by these stockholders was $42,400. In October of 1997, the notes were repaid in full. 10. SUBSEQUENT EVENT On October 24, 1997, the Company entered into a stock purchase agreement with United Rentals, Inc. ("United"). Under the terms of the stock purchase agreement, United purchased all of the issued and outstanding capital stock of the Company. F-232 -----END PRIVACY-ENHANCED MESSAGE-----