ITEM 1. BUSINESS
GENERAL
National Equipment Services, Inc. (the "Company") is a leading participant in the growing and highly fragmented $24 billion equipment rental industry. Through its 41 businesses acquired since January 1997, the Company specializes in renting specialty and general equipment to industrial and construction end users. The Company rents over 750 different types of machinery and equipment, and distributes new equipment for nationally recognized original equipment manufacturers. The Company also sells used equipment as well as complementary parts, supplies and merchandise, and provides repair and maintenance services to its customers. The Company is geographically diversified, with 194 locations across 35 states, and is a leading competitor in each of the geographic markets it serves.
Management believes the Company offers one of the most modern and well-maintained fleets of specialty and general equipment in each of its markets. The average age of the Company's equipment fleet is approximately three years. Specialty equipment includes electric and pneumatic hoists, hydraulic and truck-mounted cranes, liquid storage tanks, pumps and highway safety equipment. General industrial and construction equipment includes aerial work platforms, air compressors, cranes, earth-moving equipment and rough terrain forklifts. The Company rents and sells this equipment to industrial and construction end users.
The Company is led by a senior management team with significant industry experience and an impressive track record of acquiring and integrating companies in the equipment rental industry. Prior to founding the Company, the Company's senior management team was responsible for building Brambles Equipment Services ("Brambles"), the U.S. equipment rental business of an Australian public company, into an industry leader. At Brambles, this team executed a growth strategy that combined a disciplined acquisition program with significant organic growth. Management believes that the team's extensive industry experience allows it to more easily identify quality acquisition targets, and successfully integrate and optimize these businesses through effective financial and operating controls and the proper use of capital. The Company's local operations are managed by professionals who average more than 15 years of experience in the industry and have extensive knowledge of and relationships in their local markets. These managers are typically former owners of the businesses acquired by the Company. The Company also benefits from the financial expertise of Golder, Thoma, Cressey, Rauner, Inc. and Brown Brothers Harriman & Co., established investment firms. Golder, Thoma, Cressey, Rauner Fund V, L.P., an affiliate of Golder, Thoma, Cressey, Rauner, Inc., and Brown Brothers Harriman & Co.'s 1818 Fund are the Company's principal equity investors.
ACQUIRED BUSINESSES
The Company was founded in June 1996 to acquire and integrate businesses that focus on the rental of specialty and general equipment to industrial and construction end users. Since January 1997, the Company has acquired 41 businesses. The Company believes that the extensive industry experience of its senior management team allows management to more easily identify quality acquisition targets and successfully integrate and optimize these businesses. The following table summarizes the Company's completed acquisitions to date:
PRODUCTS AND SERVICES
The Company is primarily involved in the business of renting equipment to industrial and construction end users. In addition, to more fully serve its customers and leverage its fixed costs, the Company 1) sells complementary parts, merchandise and rental equipment, 2) acts as a distributor of new equipment on behalf of original equipment manufacturers and 3) services the equipment it sells and rents.
EQUIPMENT RENTALS. The Company rents a broad selection of general equipment, ranging from large equipment, such as aerial work platforms, air compressors, generators, earth-moving equipment and rough terrain forklifts, to small equipment, such as hand tools, to industrial and commercial construction customers. The Company's specialty equipment available for rent includes electric and pneumatic hoists, hydraulic and truck-mounted cranes, liquid storage tanks, pumps, and trench and highway safety equipment. The Company is the only major company in the industry to focus on specialty equipment. The Company is the leading renter of industrial hoists in the United States, and the leading renter of portable storage tanks to the chemical and petrochemical industries in the Gulf Coast region. The Company's rental contracts range from a one-day rental contract for a small subcontractor, to a multi-year contract for certain industrial customers, with an overall average rental period of 19 days. Four categories of equipment represented approximately 69% of the Company's total rental equipment fleet (based on original equipment cost) at December 31, 2000: 1) aerial work platforms (41%), 2) cranes (12%), 3) forklifts (9%) and 4) mobile storage tanks (7%). The mix of rental equipment at each of the Company's locations is a function of the demands of the local customer base and the focus of that business. At December 31, 2000, the original equipment cost of the Company's rental fleet was approximately $919 million, and the weighted average age of its rental equipment fleet was approximately three years.
SALES OF NEW EQUIPMENT. The Company sells new equipment to end users from certain original equipment manufacturers, including JLG Industries, Genie Industries, OmniQuip, Manitowoc, Terex, Gehl, Broderson, Ingersoll-Rand, Miller Electric, SkyJack, Speed Shore, 3M, Dragon Products, Tadano, Avant Garde, Komatsu, Multiquip, Wacker and Mitsui. The Company believes the volume of equipment it buys creates significant purchasing power with suppliers, which leads to favorable prices and terms on the purchase of equipment for its rental fleet and for sale as new equipment. The Company's ability to sell new equipment offers flexibility to its customers and enhances the Company's customer relations.
SALES OF RENTAL EQUIPMENT. The Company routinely sells rental equipment to adjust the size and composition of its rental fleet to changing market conditions, and as part of its ongoing commitment to maintain a top quality fleet. The Company receives favorable sales prices for its rental equipment due to its strong preventive maintenance program and its practice of selling rental equipment before it becomes irreparable or obsolete. Senior management works with local managers to optimize the timing of sales of rental equipment by taking into account maintenance costs, rental demand patterns and resale prices. The
Company sells rental equipment to its existing rental customers, as well as to domestic and international used-equipment buyers.
SALES OF PARTS AND MERCHANDISE; SERVICE AND REPAIR. The Company also sells a wide range of parts and merchandise, including saw blades, drill bits, shovels, goggles, hard hats and other safety gear, as a complement to its core equipment rental business. These sales enable the Company to attract and retain customers by offering the convenience of "one-stop shopping." The Company also provides repair and maintenance services in connection with the equipment it sells as a complement to its core business.
CUSTOMERS
Management estimates the Company currently has more than 35,000 customers, ranging from "Fortune 500" companies to small contractors. For fiscal 2000, no single customer accounted for more than 1.3% of the Company's total revenues, while the top five customers represented less than 4.7% of total revenues. Customers look to the Company as an ongoing, comprehensive source of rental equipment because of the economic advantages and convenience of renting, as well as the high costs associated with equipment ownership. The Company's primary customer base can be classified into the following categories: 1) industrial, including manufacturers, petrochemical facilities, chemical companies, paper mills and public utilities and 2) commercial and residential construction, repair and renovation, including contractors. In addition to maintaining its historically strong relationship with local customers, the Company is increasing its emphasis on larger national and multi-regional accounts.
INDUSTRIAL. The Company's industrial customers, many of whom operate 24 hours per day, use the Company to outsource their equipment requirements, which reduces the capital investment and minimizes the ongoing maintenance, repair and storage costs associated with equipment ownership. Management believes the Company is well positioned to take advantage of the increasing trend among industrial customers to outsource their equipment needs. In addition, the Company's specialty products, such as hoists and tanks, are tailored to meet the needs of industrial end users. Management believes that given its multi-regional presence, the Company is well positioned to increase its industrial revenue base. The Company intends to expand its industrial customer base by providing additional equipment and services to its existing industrial customers, and establishing new relationships through its existing businesses as well as through strategic acquisitions.
CONSTRUCTION. The Company's construction customers include "Fortune 500" companies, national and regional contractors and subcontractors involved in construction projects such as 1) chemical plants and other manufacturing facilities, 2) roads, bridges and highways, 3) schools, hospitals and airports and 4) residential developments and apartment buildings.
MANAGEMENT INFORMATION SYSTEMS
The Company has made significant investments in its information systems. These information systems substantially integrate customer and equipment tracking programs that allow the sales force to use the Internet to track customer requirements, while coordinating with inside sales and logistics personnel to ensure customer demands are met on a timely basis. These systems also provide real-time rental management data, which allows management to monitor asset utilization, rental rates, repairs and maintenance, and inventory levels by region, location, equipment classification, and individual rental item. These systems are fully integrated into a financial package that tracks profitability by branch and region, enabling the Company to maintain a decentralized management structure.
OPERATIONS
The Company's equipment rental yards typically include 1) a customer service center and showroom displaying selected rental equipment, new equipment offered for sale and related merchandise; 2) an equipment service area, and 3) equipment storage facilities. Each rental center is staffed by an average of
16 employees, including a manager, an assistant manager, sales people, back office clerks, truck drivers, mechanics, and yard personnel. The rental center employees' knowledge of the equipment enables them to recommend the best equipment for a customer's particular application. Each rental center manager is responsible for all aspects of the center's operation, including establishing rental rates, selecting equipment, and determining employee compensation at such location. The Company also maintains two re-manufacturing facilities utilized in equipment refurbishing.
SALES
The Company offers rental equipment and related services primarily through its sales force, consisting of approximately 82 sales managers who oversee approximately 310 sales people. The sales force at each location is knowledgeable about all of the services and products provided there. Sales managers and representatives regularly call on contractors' job sites and industrial facilities in their sales territories, often assisting customers in planning for their equipment requirements. The Company also provides its sales force with extensive training, including frequent in-house training by supplier representatives, covering the operating features and maintenance requirements of its equipment. Members of the Company's sales force generally earn commissions on all equipment rentals and sales that they generate.
SEASONALITY
The Company's revenues and operating results are expected to fluctuate due to the seasonal nature of the industry in which the Company operates, with rental activity tending to be lower in the winter.
PURCHASING AND SUPPLIERS
Management believes that the Company's size enables it to purchase equipment directly from manufacturers at favorable prices. The Company has developed strong relationships with many leading original equipment manufacturers, including JLG Industries, Genie Industries, OminiQuip, Manitowoc, Terex, Gehl, Broderson, Ingersoll-Rand, Miller Electric, SkyJack, Speed Shore, 3M, Dragon Products, Tadano, Avant Garde, Komatsu, Multiquip, Wacker and Mitsui. No single supplier accounted for more than 10.6% of the Company's total purchases. The Company believes it could readily replace any of its suppliers if necessary.
COMPETITION
The equipment rental industry is highly fragmented and competitive. Many of the markets in which the Company operates are served by numerous competitors, ranging from national and multi-regional companies, such as Hertz Equipment Rental Corporation (an affiliate of Ford Motor Company), NationsRent, Inc., Neff Corp., Prime Services, Inc. and United Rentals, Inc., to small, independent businesses with a limited number of locations. Management believes that participants in the equipment rental industry compete on the basis of availability and quality of equipment, service, delivery time and price. Geographic territories for competition usually are limited to 50 to 75 miles, due to servicing requirements and equipment transportation costs. Certain specialized equipment renters, such as Industrial Hoist Services, compete on a larger regional or national basis. In general, management believes that national and multi-regional operators, such as the Company, enjoy substantial competitive advantages over small, independent rental businesses, which cannot afford to maintain the comprehensive rental equipment fleet and high level of maintenance and service that the Company offers.
EMPLOYEES
At March 22, 2001, the Company had a total of approximately 3,000 employees, approximately 400 of which are represented by unions. Management believes that its relationship with all of its employees is good. The Company is committed to, and has realized significant benefits from, its formal employee
training programs. Management believes that this investment in training and safety awareness programs for employees is a competitive advantage that positions the Company to be responsive to customer needs.
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The Company's facilities are subject to federal, state and local environmental requirements relating to discharges to air, water and land; the handling and disposal of solid and hazardous waste; and the cleanup of properties affected by hazardous substances. Certain environmental laws impose substantial penalties for noncompliance, and others, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act, as amended ("CERCLA"), impose strict, retroactive, joint and several liability for releases of hazardous substances.
Based on environmental assessments conducted in connection with the Company's acquisitions, the Company believes that its facilities are in substantial compliance with environmental requirements, and that the Company has no material liabilities arising under environmental requirements. Some risk of environmental liability is inherent in the nature of the Company's business, however, and in the future the Company may incur material costs to meet current or more stringent compliance, cleanup or other obligations under environmental laws.
The Company dispenses petroleum products from storage tanks located at some of its locations. There can be no assurance that these tank systems have been or will at all times remain free from leaks, or that the use of these tanks has not or will not result in spills or other releases. Management does not believe that the presence or operation of these tanks will have a material adverse effect on the Company's operating results or financial position.
The Company uses hazardous substances, such as solvents, to clean and maintain its rental equipment fleet, and generates wastes, such as used motor oil, radiator fluid and solvents, which are stored on site and disposed of at off-site locations. Under various environmental laws, including CERCLA, the Company could be liable for contamination at sites where hazardous substances used in its operations have been disposed of or otherwise released.
Management does not expect that compliance with environmental laws will have a material adverse effect on the Company's operating results, financial condition or competitive position to date. The Company does not expect to incur material expenditures for environmental upgrades or controls in this or the succeeding fiscal year.
ITEM 2.
ITEM 2. PROPERTIES
At March 22, 2001, the Company operated 193 equipment rental locations in the following 35 states: Alabama (9), Arizona (8), Arkansas (1), California (6), Connecticut (1), Florida (15), Georgia (8), Illinois (3), Indiana (6), Iowa (8), Kansas (1), Kentucky (6), Louisiana (4), Maine (5), Maryland (1), Massachusetts (8), Michigan (11), Mississippi (1), Missouri (5), Nevada (3), New Hampshire (3), New York (8), North Carolina (1), Ohio (2), Oklahoma (3), Oregon (4), Pennsylvania (2), Rhode Island (2), Tennessee (7), Texas (33), Vermont (1), Virginia (3), Washington (4), West Virginia (2) and Wisconsin (8). The Company's properties typically include an outside storage yard and a small building containing offices, a maintenance center and, in certain locations, a retail showroom. The Company owns 15 of its equipment rental locations and leases the other 178, as well as its approximately 7,000 square foot headquarters space in Evanston, Illinois. The net book value of owned facilities was approximately $10 million at December 31, 2000, and the average annual lease expense on leased facilities was approximately $56,000 in 2000. Management believes that none of the Company's leased facilities, individually, is material to its operations, and that all of these leases can be readily replaced at similar terms. The Company's interests in each of these properties secure borrowings under its credit facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time-to-time, the Company has been and is involved in various legal proceedings, all of which management believes are routine in nature and incidental to the conduct of its business. The Company's ultimate legal and financial liability resulting from any proceedings cannot be estimated with certainty. However, after examining these matters, the Company believes that an adverse ruling in any of these proceedings would not have a material adverse effect on the Company's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 22, 2001, there were 35 holders of record of the Company's common stock. The Company has never paid any dividends on its common stock. Dividend payments are restricted under the terms of the Company's credit facility and indentures.
The Company repurchased 2,114,600 shares of common stock during 2000 under the Company's common stock repurchase program. The Company repurchased no additional shares of common stock after December 31, 2000 through March 22, 2001.
Since the Company's initial public stock offering on July 13, 1998, the Company's common stock has been traded on the New York Stock Exchange under the symbol "NSV." The table below lists the high and low sales price information for the common stock, as reported by the New York Stock Exchange, during each quarter of the Company's last two fiscal years.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
THE DATA PRESENTED BELOW ON THE COMPANY SHOULD BE READ IN CONJUNCTION WITH ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
During the periods presented below, the Company completed 41 business acquisitions that were accounted for using the purchase method of accounting. The accounts of the businesses acquired in these transactions are included from their respective acquisition dates. In view of the fact that the Company's operating results for the periods presented below were affected by acquisitions, the Company believes that its results of operations for the years presented are not directly comparable. See Note 4 of the Notes to the Consolidated Financial Statements of the Company later in this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S RESULTS OF OPERATIONS AND ITS FINANCIAL CONDITION AND LIQUIDITY SHOULD BE READ IN CONJUNCTION WITH ITEM 1. BUSINESS, ITEM 6. SELECTED FINANCIAL DATA AND ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. UNLESS OTHERWISE SPECIFIED, ALL AMOUNTS ARE IN THOUSANDS.
GENERAL
The Company was founded in June 1996 to acquire and integrate businesses that focus on the rental of specialty and general equipment to industrial and construction end users. Since January 1997, the Company has acquired 41 businesses (the "Acquired Businesses") in separate transactions. All acquisitions were accounted for using the purchase method of accounting. The results of operations of the Acquired Businesses are included in the Company's financial statements only from their respective dates of acquisition.
The Company derives its revenues from four sources: 1) rental of equipment, 2) new equipment sales, 3) rental equipment sales and 4) sales of complementary parts and services. The Company's primary source of revenue is the rental of equipment to industrial and construction end users. The growth of rental revenues depends on several factors, including demand for rental equipment, the amount and quality of equipment available for rent, rental rates, and general economic conditions. Revenues generated from the sale of new equipment are affected by price and general economic conditions. Revenues generated from the sale of used rental equipment are affected by price, general economic conditions, and the Company's fleet maintenance programs. Revenues from the sale of complementary parts and services are primarily affected by equipment rental and sales volumes.
Cost of revenues consists primarily of rental equipment depreciation, the cost of new equipment, the net book value of rental equipment sold, and other direct operating costs. Given the varied, and in some cases specialized, nature of its rental equipment, the Company uses a range of periods over which it depreciates its equipment on a straight-line basis. On average, the Company depreciates its equipment over an estimated useful life of eight to nine years with 0% to 20% salvage value for certain rental equipment acquired.
The following table shows information from the Company's consolidated statements of operations as a percentage of total revenues.
RESULTS OF OPERATIONS
The Company's historical consolidated financial statements included herein cover the years ended December 31, 2000, 1999 and 1998. Comparisons of the Company's results are significantly impacted by the fact that the Company completed four, 19 and 12 acquisitions at different times during 2000, 1999 and 1998, respectively. The results of operations of the businesses acquired in these acquisitions are included in the Company's financial statements only from their respective dates of acquisition.
YEAR ENDED DECEMBER 31, 2000, COMPARED WITH THE YEAR ENDED DECEMBER 31, 1999
REVENUES. Total revenues increased to $623,836 in 2000 from $473,194 in 1999. Rental revenues increased to $470,211 from $341,535 during these respective periods. The increases were primarily the result of the acquisition of additional businesses in 2000, as well as the inclusion in 2000 of a full year of revenue for the businesses acquired in 1999, coupled with strong industry demand resulting in same-store rental revenue growth of 15%.
GROSS PROFIT. Gross profit increased to $261,178 in 2000 from $212,394 in 1999. Gross margin decreased to 41.9% from 44.9% during these respective periods. The decrease in gross margin was primarily the result of higher costs associated with the opening of 15 start-up locations during 2000 and the decline in rental rates in some markets.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $129,686 in 2000 from $98,530 in 1999. This increase is primarily the result of the inclusion in 2000 of a full year of expenses related to businesses acquired in 1999. As a percentage of total revenues, selling, general and administrative expenses remained constant at 20.8% for both 2000 and 1999.
NON-RENTAL DEPRECIATION AND AMORTIZATION. Non-rental depreciation and amortization increased to $28,044 in 2000 from $18,861 in 1999. This increase was due primarily to the inclusion of a full year of depreciation and amortization expense related to the businesses acquired in 1999.
OPERATING INCOME. As a result of the performance described above, operating income increased to $103,448 in 2000 from $95,003 in 1999. Operating income represented 16.6% of total revenues in 2000.
INTEREST EXPENSE, NET. Interest expense, net increased to $84,182 in 2000 from $60,156 in 1999. This increase was due to higher average debt levels resulting from increased financing required for the Company's 2000 and 1999 acquisitions, as well as an overall increase in interest rates on the Company's revolving line of credit.
INCOME TAX EXPENSE. Income tax expense decreased to $8,650 in 2000 from $14,443 in 1999. The Company's effective tax rate increased to 44.0% in 2000 from 40.6% in 1999 due to the non-deductibility for income tax purposes of amortization of goodwill related to certain acquisitions, offset by the effect of lower state tax rates compared to the prior year.
YEAR ENDED DECEMBER 31, 1999, COMPARED WITH THE YEAR ENDED DECEMBER 31, 1998
REVENUES. Total revenues increased to $473,194 in 1999 from $225,248 in 1998. This represented a 110.0% increase, 31.0% of which reflected the impact of acquiring 19 companies in 1999. The remaining 69% was attributed to increased volume at rental locations owned for more than one year and the recognition of a full year of revenue for the 1998 acquisitions.
GROSS PROFIT. Gross profit increased to $212,394 in 1999 from $102,793 in 1998. Gross margin decreased to 44.9% from 45.6% during these respective periods. The decrease in gross margin primarily resulted from lower volumes of rentals in the Gulf Coast region, which typically generates higher margin rental revenues as a percentage of total revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $98,530 in 1999 from $45,001 in 1998. As a percentage of total revenues, selling, general and administrative expenses increased to 20.8% from 20.0%, during these respective periods, primarily reflecting costs incurred to support the growth of the Company's business.
NON-RENTAL DEPRECIATION AND AMORTIZATION. Non-rental depreciation and amortization increased to $18,861 in 1999 from $7,855 in 1998. This increase was due primarily to the acquisition of 19 businesses in 1999 and the inclusion of a full year of non-rental depreciation and amortization expenses related to the businesses acquired in 1998.
OPERATING INCOME. As a result of the performance described above, operating income increased to $95,003 in 1999 from $49,937 in 1998. Operating income represented 20.1% of total revenues in 1999.
INTEREST EXPENSE, NET. Interest expense, net, increased to $60,156 in 1999 from $26,745 in 1998. This increase was due to higher average debt levels during 1999, resulting from increased financing required for the 19 acquisitions.
INCOME TAX EXPENSE. Income tax expense increased to $14,443 in 1999 from $9,904 in 1998. The Company's effective tax rate declined to 40.6% in 1999 from 42.0% in 1998, as the Company continued to acquire businesses with effective tax rates closer to the U.S. statutory tax rate than its tax rate and due to the mix of earnings by state jurisdiction.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are for purchasing new rental equipment and for acquisitions. The Company's other capital expenditures include buying vehicles used for delivery and maintenance, and for property, plant, and equipment. The Company purchases rental equipment throughout the year to replace equipment that has been sold, as well as to maintain adequate levels of equipment to meet existing and new customer needs. Rental fleet purchases for the Company were $160 million, $197 million and $145 million in 2000, 1999, and 1998, respectively. The Company's expenditures for rental fleet are expected to be approximately $26 million in 2001. The Company's
principal existing sources of cash are 1) cash generated from operations and 2) borrowings available under its credit facility ($84 million as of March 22, 2001).
For the years ended December 31, 2000, 1999 and 1998, the Company's net cash provided by operations was $112 million, $70 million and $28 million, respectively. The respective increases in 2000 and 1999 were due primarily to higher earnings before depreciation and amortization. For the same three years, the Company's net cash used in investing activities was $148 million, $469 million and $543 million, respectively. Net cash used in investing activities consists primarily of expenditures for new acquisitions and purchases of rental equipment and property, plant and equipment. The decrease in 2000 was due primarily to reduced acquisition activity. The decrease in 1999 was due primarily to reduced acquisition spending, offset somewhat by higher equipment purchases. Net cash provided by financing activities was $6 million in 2000, $432 million in 1999, $480 million in 1998. Net cash provided by financing activities consists primarily of borrowings, net of repayments, under the Company's credit facility. The decrease in 2000 was due primarily to reduced acquisition spending, offset by an increase in purchases of treasury shares under the Company's stock repurchase program. The decrease in 1999 was due primarily to reduced acquisition spending.
The Company's credit facility provides for a $100 million term loan and a revolving credit facility up to a maximum of $650 million (subject to availability based on certain financial tests including a borrowing base) to meet acquisition needs, as well as seasonal working capital and general corporate requirements. As of December 31, 2000, $597 million was outstanding under the credit facility. Based upon the available borrowing base at December 31, 2000, the Company had $113 million available on the revolving credit facility and up to $153 million if the incremental borrowings were used to purchase rental equipment. The Company expects to reduce the committed amount under its revolving credit facility to approximately $550 million during the second quarter of 2001. The credit facility contains certain covenants that require the Company to, among other things, satisfy certain financial tests relating to 1) the ratio of senior debt to EBITDA, 2) minimum interest coverage ratio and 3) the ratio of funded debt to EBITDA. The agreements governing the credit facility also contain various other covenants that restrict the Company's ability to, among other things, 1) incur additional indebtedness, 2) permit liens to attach to its assets, 3) pay dividends or make other restricted payments on its common stock and certain other securities and 4) make acquisitions unless certain financial conditions are satisfied. The Company is currently in compliance with all covenants governing the credit facility. While the Company expects to be in compliance with the covenants and satisfy the financial ratios and tests related to the credit facility in the future, there can be no assurance that the Company will meet such financial ratios and tests.
During 1997, the Company issued $100,000 of Senior Subordinated Notes due 2004 (the "Series A Notes") at a discount netting proceeds of $98,767. During 1998, the Company completed its exchange of $100,000 of Senior Subordinated Notes due 2004, Series B (the "Series B Notes"), which have been registered for public trading, for the Series A Notes.
Also during 1998, the Company issued $125,000 of Senior Subordinated Notes due 2004, Series C (the "Series C Notes") at a discount netting proceeds of $122,288. During 1999, the Company issued $50,000 of additional Series C Notes, at a discount netting proceeds of $49,000. Later during 1999, the Company completed its exchange of $175,000 of Senior Subordinated Notes due 2004, Series D (the "Series D Notes"), which have been registered for public trading, for the Series C Notes.
The Company accretes the original issue discount of the Series B Notes and the Series D Notes over the term of the notes using the effective interest rate method. The indentures for the Series B and Series D Notes contain a number of covenants that, among other things, set certain limitations on the granting of liens, asset sales, additional indebtedness, transactions with affiliates, restricted payments, investments, issuances of stock and payment of dividends. The Company is currently in compliance with all such covenants under the indentures.
The Company believes that its credit facility, together with funds generated by operations, will provide the Company with sufficient liquidity and capital resources in the near-term to finance its operations and
pursue its business strategy. Over the long term, the Company will need to refinance its credit facility, its Series B Notes and its Series D Notes since the credit facility becomes due and payable in July, 2003 and its Series B Notes and Series D Notes in November, 2004.
GENERAL ECONOMIC CONDITIONS, INFLATION, AND SEASONALITY
The Company's operating results may be adversely affected by 1) changes in general economic conditions, including changes in construction and industrial activity or increases in interest rates, or 2) adverse weather conditions that may temporarily decrease construction and industrial activity in a particular geographic area. Although the Company cannot accurately anticipate the effect of inflation on its operations, management believes this has not had a material impact on the Company's results of operations and is not likely to in the foreseeable future.
The Company's revenues and operating results are expected to fluctuate due to the seasonal nature of the industry in which the Company operates, with rental activity tending to be lower in the winter.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires an entity to recognize all derivatives as either assets or liabilities in its statement of financial position, and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. An entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative, and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity's approach to managing risk. SFAS No. 133 is effective for the Company's fiscal quarter beginning January 1, 2001. At December 31, 2000, the Company does not have any derivative instruments and does not expect this statement to have any significant impact on the consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's credit facility provides the Company with a $100 million term loan and permits the Company to borrow up to an additional $650 million of revolving loans provided that certain conditions and financial tests are met, subject to a borrowing base. Borrowings under the credit facility bear interest, at the Company's option, at a specified base rate or eurodollar rate plus the applicable borrowing margin. At March 22, 2001, the Company had total borrowings under the revolving credit facility and the term loan of $600 million, all of which is subject to interest rate risk. Each 100 basis point increase in interest rates on the variable rate debt would decrease pretax earnings by approximately $6 million.
The Company does not hold or issue derivative financial instruments.
FORWARD LOOKING STATEMENTS
NOTE: THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS AS ENCOURAGED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL STATEMENTS CONTAINED IN THIS DOCUMENT, OTHER THAN HISTORICAL INFORMATION, ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS REPRESENT MANAGEMENT'S CURRENT JUDGMENT ON WHAT THE FUTURE HOLDS. A VARIETY OF FACTORS COULD CAUSE BUSINESS CONDITIONS AND THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPECTED BY THE COMPANY OR EXPRESSED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, WITHOUT LIMITATION, THE COMPANY'S ABILITY TO SUCCESSFULLY INTEGRATE ACQUIRED BUSINESSES; CHANGES IN MARKET PRICE OR MARKET DEMAND; LOSS OF BUSINESS FROM CUSTOMERS; UNANTICIPATED EXPENSES; CHANGES IN FINANCIAL MARKETS; AND OTHER FACTORS DISCUSSED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements are listed in Part IV, Item 14, of this report and begin on page 16.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information regarding the Company's directors and executive officers is set forth in the Company's 2001 Proxy Statement, under the captions "ELECTION OF DIRECTORS" and "MANAGEMENT." This information is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information on the cash compensation of the executive officers, compensation available under employee benefit plans, employee benefit plans and compensation of directors is included in the Company's 2001 Proxy Statement under the caption "MANAGEMENT" and "EXECUTIVE COMPENSATION." This information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about security ownership of certain beneficial owners and management appears in the Company's 2001 Proxy Statement under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." This information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions can be found in the Company's 2001 Proxy Statement under the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." This information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The Consolidated Financial Statements set forth on pages 16 through 34.
Report of Independent Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets at December 31, 2000, and 1999
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. The Consolidated Financial Statement Schedule, set forth on page 35.
Schedule II. Valuation and Qualifying Accounts and Reserves for the years ended December 31, 2000, 1999 and 1998
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or the corresponding notes.
3. The exhibits listed in the Index to Exhibits set forth on pages 37 through 42.
(b) Reports on Form 8-K filed during the fourth quarter of the year ended December 31, 2000.
None.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of National Equipment Services, Inc.
In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 15 present fairly, in all material respects, the financial position of National Equipment Services, Inc. and its subsidiaries (the "Company") at December 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 15 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois February 22, 2001
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION
National Equipment Services, Inc. (the "Company") is principally a holding company organized on June 4, 1996 (date of inception) under the laws of Delaware. The Company conducts its operations through its wholly owned subsidiaries acquired or formed since the date of inception. The Company owns and operates equipment rental, sales and service facilities primarily located throughout the United States. The Company rents various types of equipment to a diverse customer base, including construction, petro-chemical and other industrial users. The Company also sells new equipment and used equipment out of its rental fleet, related parts, and provides other services. The nature of the Company's business is such that short-term obligations are met typically by cash flow generated from long-term assets. Consequently, consistent with industry practice, the accompanying balance sheets are presented on an unclassified basis.
The consolidated financial statements include accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are highly liquid investments with original maturities of three or fewer months.
ACCOUNTS RECEIVABLE
Accounts receivable represent amounts due from customers on rental and service contracts and equipment sales.
INVENTORY
Inventory primarily consists of new and used equipment held for sale, contractor supplies and spare parts held for sale and internal maintenance. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method or the weighted average cost method.
RENTAL EQUIPMENT
Rental equipment is recorded at cost. Depreciation for rental equipment acquired is computed using the straight-line method over five to 15-year useful lives, with 0% to 20% salvage value for certain rental equipment acquired. Accumulated depreciation on rental equipment was approximately $173,086 and $91,598 at December 31, 2000 and 1999, respectively. When rental equipment is disposed of, the related cost and accumulated depreciation are removed from the respective accounts. Proceeds from the disposal and the related net book value of the equipment are recognized in the period of disposal and reported as revenue from rental equipment sales and cost of rental equipment sales in the statements of operations.
Ordinary repairs and maintenance costs are charged to operations as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives for property and equipment range from 30 years for buildings, three to five years for vehicles, five to seven years for machinery and equipment, three to seven years for computers, furniture and fixtures, and the estimated term of the lease
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
for leasehold improvements. When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gains or losses are included in the statements of operations.
Ordinary repairs and maintenance costs are charged to operations as incurred.
INTANGIBLE ASSETS
Goodwill consists of the excess cost over acquired net assets that has been capitalized and is being amortized on a straight-line basis over 15 to 40 years. When an event or change in circumstances indicates that the carrying amount of goodwill may not be recoverable, the Company reviews the carrying value of goodwill for impairment based on the forecasted undiscounted operating cash flows of the related business unit. Non-compete agreements are recorded at cost and amortized over five years.
LOAN ORIGINATION COSTS
Loan origination costs primarily consist of $5,982 related to the First Union Credit Facility and $9,193 related to the Senior Subordinated Notes, all of which are stated at cost and amortized to interest expense using the effective interest rate method over the life of the debt. Accumulated amortization related to loan origination costs aggregated $6,717 and $3,956 at December 31, 2000 and 1999, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash, trade accounts receivable, accounts payable and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The fair value of the Senior Subordinated Notes was $160,875 based on the December 31, 2000 monthly closing bids in the over-the-counter markets. The carrying value of bank debt approximates fair value as the interest on the bank debt is reset every 30 to 90 days to reflect current market rates.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable from construction and industrial customers. As of December 31, 2000, cash and cash equivalents beyond the FDIC insurance limits were concentrated with banks located in the United States. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers and the Company's geographic dispersion. The Company performs credit evaluations of its customers' financial condition and generally does not require collateral on accounts receivable. The Company maintains an allowance for doubtful accounts on its receivables based upon expected collectibility.
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, 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.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE RECOGNITION
Revenues from equipment rentals are recognized ratably over the contract term and for certain contracts based upon actual work completed to date. A contract is considered complete when the work performed under the contract has received final acceptance. Revenues from equipment sales are recognized at the point of delivery.
OTHER COMPREHENSIVE INCOME
The Company does not have any components of other comprehensive income that would have to be reported in accordance with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
INCOME TAXES
Provisions are made to record deferred income taxes in recognition of items reported differently for financial reporting purposes than for federal and state income tax purposes. The Company records deferred income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes."
RECLASSIFICATIONS
Certain reclassifications of prior-year financial statement amounts have been made to conform with the current-year reporting.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The statement requires that all derivatives be recognized as either assets or liabilities in the statement of financial position and that the instruments be measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS No. 133 is effective for the Company's fiscal quarters beginning January 1, 2001. At December 31, 2000, the Company did not have any derivative instruments and did not expect this statement to have a significant impact on the consolidated financial statements.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. EARNINGS PER SHARE
4. ACQUISITIONS
In 2000, the Company purchased the following companies for a total purchase price of $15,500:
Effective April 1, 2000, the Company completed an exchange of all stock of its subsidiary, Safety Lights & Leasing, Inc., for all of the stock of Texoma, Inc., a rental equipment company, and approximately $18,000 in cash. No gain or loss was recognized on this transaction.
In 1999, the Company completed the acquisition of 19 companies with a total purchase price of $284,000.
In 1998, the Company completed the acquisition of 12 companies with a total purchase price of $419,600.
These transactions have been accounted for by the purchase method of accounting and are included in the Company's results of operations from the closing date of each respective acquisition. The purchase prices were allocated based on the fair values of assets acquired and liabilities assumed.
The following unaudited financial information represents the pro forma results of operations as if the 1999 and 2000 acquisitions had been completed on January 1, 1999, after giving effect to certain
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
adjustments including increased depreciation and amortization of property and equipment and other assets, interest expense for acquisition debt and amortization of related intangibles and goodwill. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have been achieved had these acquisitions been completed as January 1, 1999, nor are the results indicative of the Company's future results of operations.
Pro forma earnings per share are presented below as if the following transactions occurred on January 1, 1999: (i) the 23 acquisitions completed in 1999 and 2000 and the related financing, (ii) the Company's offerings of Senior Subordinated Notes discussed in Note 9, (iii) the issuance of the Convertible Note discussed in Note 9 and (iv) acquisition-related borrowings under the Company's credit facility.
5. INVENTORY
Inventory, net consisted of the following at December 31:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at December 31:
Property and equipment depreciation expense aggregated $16,054, $9,665 and $3,700 for the years ended December 31, 2000, 1999 and 1998, respectively.
7. INTANGIBLE ASSETS
Intangible assets, net consisted of the following at December 31:
Amortization expense aggregated $11,990, $9,194 and $4,100 for the years ended December 31, 2000, 1999 and 1998, respectively.
8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following at December 31:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
9. DEBT
Debt consisted of the following at December 31:
During 1997, the Company entered into a credit facility agreement with First Union Commercial Corporation (as amended, the "Old Credit Facility"). The Old Credit Facility provided for a secured revolving line of credit of $140,000. During 1998, the Company entered into a new credit facility, with First Union National Bank, as the agent, and certain other financial institutions (as amended, the "Credit Facility"). This provided for a secured credit facility, including a term loan of $100,000 and a revolving credit facility loan of $300,000. Proceeds from the Credit Facility were used to repay approximately $59,513 of indebtedness under the Company's Old Credit Facility. In conjunction with the extinguishment, the Company reported an extraordinary item of $1,424 ($0.06 per share), net of a tax benefit of $969 related to the write-off of unamortized loan costs associated with the Old Credit Facility. During 1999, the Company amended its Credit Facility to increase the available borrowings from $400,000 up to a maximum amount of $750,000. Based upon the available borrowing base at December 31, 2000, the Company had $112,646 available on the revolving credit facility loan, and up to $153,000 if incremental borrowings were used to purchase rental equipment. The Credit Facility is collateralized by substantially all of the Company's assets.
During 1997, the Company issued $100,000 of Senior Subordinated Notes due 2004 (the "Series A Notes"). During 1998, the Company completed its exchange of $100,000 of Senior Subordinated Notes due 2004, Series B (the "Series B Notes"), which have been registered for public trading, for the Series A Notes (originally issued during 1997, at a discount netting proceeds of $98,767).
Also during 1998, the Company issued $125,000 of Senior Subordinated Notes due 2004, Series C (the "Series C Notes") at a discount netting proceeds of $122,288. During 1999, the Company issued $50,000 of additional Series C Notes, at a discount netting proceeds of $49,000. Later during 1999, the Company completed its exchange of $175,000 of Senior Subordinated Notes due 2004, Series D (the "Series D Notes"), which have been registered for public trading, for the Series C Notes.
The Company accretes the original issue discount of the Series B Notes and the Series D Notes over the term of the notes using the effective interest rate method.
The Company is a holding company with no independent operations, and the Company's assets (excluding the intercompany receivables and common stock of its subsidiaries) are insignificant. All of the Company's subsidiaries make full, unconditional, joint and several guarantees of the Series B Notes and Series D Notes, and all of these subsidiaries are wholly owned by the Company. The separate financial
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
statements of each of these wholly owned subsidiaries are not presented as management believes that separate financial statements and other disclosures concerning these subsidiaries are not individually meaningful for presentation or material to investors. In addition, the Company has pledged the stock of each of its subsidiaries as further security for the Company's obligations under the Credit Facility. The Company's weighted average interest rate was 8.9% in 2000, 8.6% in 1999 and 8.7% in 1998.
The Credit Facility and the indentures for the Series B and Series D Notes contain certain covenants that require the Company to, among other things, satisfy certain financial tests relating to 1) the ratio of senior debt to EBITDA, 2) minimum interest coverage ratio and 3) the ratio of funded debt to EBITDA, and set certain limitations on the granting of liens, asset sales, additional indebtedness, transactions with affiliates, restricted payments, investments, issuances of stock and payment of dividends. The Company is currently in compliance with all covenants of the Credit Facility and the indentures governing the Series B and Series D Notes, and while the Company expects to be in compliance with the covenants and satisfy the financial ratios and tests related to the Credit Facility in the future, there can be no assurance that the Company will meet such financial ratios and tests.
During 1998, the Company issued a convertible note (the "Convertible Note") for $15,000 in connection with its acquisition of all of the issued and outstanding capital stock of Shaughnessy Crane Services, Inc. During 1999, the Company repaid the Convertible Note plus accrued interest of $937.
The Company's debt, including capital leases, matures as follows:
10. SENIOR REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1999, the Company issued 100 shares of Senior Redeemable Convertible Preferred Stock, Series A (the "Preferred Shares") for proceeds of approximately $100,000, less a 5% facility fee. Each Preferred Share is convertible at the option of the holder into a number of shares of the Company's Common Stock equal to $1,000 divided by the conversion price (the "Conversion Price") then in effect. The Conversion Price is $13, subject to adjustment based upon (i) certain issuances of Common Stock at a price per share below the then current Conversion Price and (ii) standard anti-dilution adjustments. Each Preferred Share is convertible at the option of the Company into a number of shares of Common Stock equal to $1,000 divided by the then current Conversion Price if at any time after one year from the issue date of the Preferred Shares the average closing market price of the Common Stock over a 60 consecutive trading day period equals or exceeds $20 per share. Each holder of Preferred Shares is entitled to vote with the Company's Common Stock on an as-if converted basis. The $5,000 facility fee is being accreted over the life of the Preferred Stock as a reduction of stockholders' equity.
Each holder of Preferred Shares is entitled to receive dividends and other distributions on parity with each holder of Common Stock in an amount equal to the dividends per share payable on the number of shares of Common Stock into which such Preferred Shares would be convertible on the record date. On April 30, 2009, the Company will be obligated to redeem all of the shares of Preferred Stock then
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
outstanding, at a price per share equal to $1,000 plus an amount per share equal to all declared and unpaid dividends thereon.
If a change of control occurs, the Company will within five business days thereafter offer to purchase from each holder of Preferred Shares all outstanding Preferred Shares then held by such holder at a purchase price equal to the greater of (i) the amount, if any, that each holder of Preferred Shares would be entitled to receive per share of Common Stock in connection with the change of control if the holder had converted its Preferred Shares and (ii) $20 in cash per share of Common Stock assuming the holder had converted its Preferred Shares. If a liquidation or winding-up of the Company (other than a change of control) occurs, no distribution will be made to the holders of shares of any class of junior stock (including Common Stock) unless, prior thereto, the holders of Preferred Shares received an amount per Preferred Share equal to the greater of: (i) $1,000 plus all declared and unpaid dividends and (ii) the proceeds in liquidation that the holders of Preferred Shares would have received in respect of all shares of Common Stock issuable to the holders upon conversion.
11. COMMON STOCK
On June 4, 1996, in connection with the Company's formation, the Company authorized 25 shares of Class A Common Stock (24 of which were reserved for issuance to the Company's majority stockholder), $0.01 par value, and 150 shares of Class B Common Stock (75 of which were reserved for issuance to the Company's majority stockholder), $0.01 par value. On October 28, 1997, the authorized shares of Class A Common Stock were increased to 50 shares.
In connection with its initial public offering of 7,000 shares of Common Stock on July 13, 1998, the Company exchanged all of its Class A and Class B Common Stock for newly established Common Stock. The Class A and Class B Common Stock was converted into an aggregate of 116 shares of newly established Common Stock. Each share of newly established Common Stock was then split into 139 shares of Common Stock. In conjunction with the July 1998 acquisitions of Falconite, Inc. and R&R Rentals, Inc., the Company issued 278 and 296 shares of the Common Stock, respectively. On August 19, 1998, the Company sold 375 additional shares of the Common Stock in connection with the underwriters' exercise of their over-allotment option. On February 14, 2000, senior management elected to have their 1999 bonuses paid in the form of the issuance of 47 shares of the Common Stock. Repurchases of Common Stock are authorized by the Company's Board of Directors.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
12. STOCK OPTION PLAN
During 1998, the Company established a plan in which options to purchase shares of Common Stock can be granted to directors, officers and key employees of the Company, and other individuals. Up to 4,461 shares of Common Stock may be issued under this plan. Granted options under the plan vest over five years from the grant date and expire 10 years from the grant date. A summary of options activity for the years ended December 31, 2000, 1999 and 1998 is as follows:
SFAS No. 123, "Accounting for Stock-Based Compensation," allows entities to choose between a fair value based method of accounting for employee stock options or similar equity instruments and the current intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25"). Entities electing to account for employee stock options or similar equity instruments under APB No. 25 must make pro forma disclosures of net income and earnings per share as if the fair value method of accounting has been applied. The Company has elected to account for its employee stock options under APB No. 25.
Had compensation expense for the Company's stock based compensation plans been determined based on the fair value at the assumed grant date for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and net earnings per share would have been as follows for the years ended December 31:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The determination of compensation expense for the pro forma information was based upon the estimated fair value of the options granted on the date of their grant by using the Black-Scholes option pricing model at the following weighted average assumptions by grant year:
The weighted average fair value of options granted was $3.90, $3.83 and $5.22, in 2000, 1999 and 1998, respectively. The number of options exercisable was 456, 366 and 89 at December 31, 2000, 1999 and 1998, respectively.
13. INCOME TAXES
The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate of 35% to income before income taxes as a result of the following:
Income tax expense was as follows:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Deferred income tax assets and liabilities are computed based on temporary differences between the financial statement and income tax bases of assets and liabilities, using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or benefits are based on the changes in the deferred income tax assets or liabilities from period-to-period.
Deferred income taxes have been provided for the temporary differences between the financial reporting bases and the tax bases of the Company's assets and liabilities as follows:
Realization of deferred income tax assets depends upon generating sufficient future taxable income in the periods in which the assets reverse or the benefits expire. The Company has not provided a valuation allowance for its deferred income tax assets, as management believes it is more likely than not that the Company's deferred income tax assets will be realized through future taxable earnings. The net operating loss carry-forward of approximately $179,947 expires principally in 2012 through 2020.
14. LEASE COMMITMENTS
The Company leases certain rental fleet equipment, facilities, office equipment and vehicles under operating leases, some of which contain renewal options. Future minimum rental commitments as of December 31, 2000 under operating leases are:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Rent expense was $19,947, $7,256 and $3,230 for the years ended December 31, 2000, 1999 and 1998, respectively.
15. CONTINGENCIES
The Company is party to legal proceedings and potential claims arising in the ordinary course of its business. In the opinion of management, the ultimate resolution of these matters will have no material adverse effect on the Company's financial position, results of operations or cash flows.
16. EMPLOYEE BENEFIT PLANS
The Company sponsors a profit sharing and 401(k) plan (the "Plan") in which employees over 21 years of age with greater than one-half year of service are eligible. Under the Plan, the Company makes a discretionary contribution to a trust based on each eligible employee's base annual wages. In addition, eligible employees can defer up to 15% of their salary with a partially matching contribution by the Company of 50% of the first 5% of the employee contribution. The employer contributions vest over a 5 year period. Contributions by the Company to the Plan were $3,840, $2,726 and $1,316 for the years ended December 31, 2000, 1999 and 1998, respectively.
17. RELATED PARTY TRANSACTIONS
Pursuant to a Professional Services Agreement dated January 6, 1997, the Company paid management fees of $200 per year and investment fees of 1% of all debt and equity financings of the Company to an affiliate of the Company's majority stockholder, who owned 95% of the Class A Common Stock and 83% of the Class B Common Stock prior to the Company's initial public offering. Total fees paid during the year ended December 31, 1998 were $700. This agreement was terminated in conjunction with the Company's initial public offering.
Stock subscriptions receivable of $102 as of December 31, 2000 and 1999 represents notes due from officers of the Company related to purchases of Common Stock and are secured by the purchased shares. Interest on the notes accrues at the federal funds rate and is payable in full at maturity on January 6, 2007, or upon termination of employment.
The Company incurred expenses of $2,067 and $1,252 for rent under certain lease obligations to former owners, members of management and their affiliates during the years ended December 31, 2000 and 1999, respectively.
During 2000, the Company acquired St. Clair Equipment Company for $2,300 from one of the Company's directors. A liability of $222 related to this acquisition was recorded as of December 31, 2000.
18. SEGMENT INFORMATION
The Company operates in one industry segment primarily consisting of the rental and sale of equipment, and related merchandise and parts. The Company's operations are managed as one segment, or strategic unit, because they offer similar products and services in similar markets and the factors determining strategic decisions are comparable for all products and services.
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected quarterly financial data for the years ended December 31, 2000 and 1999 follows:
NATIONAL EQUIPMENT SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (AMOUNTS IN THOUSANDS OF DOLLARS)
- ---------
* The amounts in Column C(2) are additions to the reserve related to the acquisition of four, 19 and 12 businesses in 2000, 1999 and 1998, respectively.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, NATIONAL EQUIPMENT SERVICES, INC. HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF EVANSTON, STATE OF ILLINOIS, ON MARCH 30, 2001.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED ON MARCH 30, 2001 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
INDEX TO EXHIBITS
- ---------
*Management contract or compensatory plan or arrangement.
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-49223).
(2) Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-43553).
(3) Incorporated by reference to the Company's Current Report on Form 8-K dated September 17, 1998 (File No. 001-14163).
(4) Incorporated by reference to the Company's Registration Statement on Form S-4 (File No. 333-71829).
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 001-14163).
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1999 (File No. 001-14163).
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1999 (File No. 001-14163).
(8) Incorporated by reference to the Company's Current Report on Form 8-K dated August 2, 1999 (File No. 001-14163).
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 1999 (File No. 001-14163).