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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number: 001-14145
NEFF CORP.
(Exact Name of registrant as specified in its charter)
DELAWARE 65-0626400
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3750 N.W. 87th AVENUE, SUITE 400, MIAMI, FLORIDA 33178
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 513-3350
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- - ------------------- -----------------------
Class A Common Stock
Par Value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
None
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes __ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [X].
As of March 28, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $49.7 million. As of March
28, 2000, there were 16,065,350 shares of the registrant's Class A Common Stock
outstanding.
Documents incorporated by reference:
Portions of the Company's Proxy Statement in connection with its Annual
Meeting to be held on June 16, 2000 (the "2000 Proxy Statement"). Specifically,
the sections in the 1999 Proxy Statement entitled "Ownership of Shares of
Certain Beneficial Owners," "Certain Relationships and Related Transactions,"
"Executive and Director Compensation," and "Compensation Committee Interlocks
and Insider Participation" are incorporated by reference into Part III of this
Report.
Part I
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
The matters discussed herein may include forward-looking statements that
involve risks and uncertainties which could result in operating performance that
is materially different from that implied in the forward-looking statements.
Risks that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, risks inherent in
the Company's growth strategy, such as the uncertainty that the Company will be
able to identify, acquire and integrate attractive acquisition candidates; the
Company's dependence on additional capital for future growth and the high degree
to which the Company is leveraged. Additional information concerning these and
other risks and uncertainties is contained from time to time in the Company's
filings with the Securities and Exchange Commission.
The Company cautions that the factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statements speak only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combinations of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
ITEM 1. BUSINESS
General
Neff is one of the largest equipment rental companies in the United States,
with 84 rental locations in 18 states. The Company rents a wide variety of
equipment, including backhoes, air compressors, loaders, lifts and compaction
equipment to construction and industrial customers. In addition, the Company
sells used equipment, spare parts and merchandise and provides ongoing repair
and maintenance services.
According to industry sources, the equipment rental industry grew from
approximately $600 million in revenues in 1982 to over $20 billion in 1999. This
growth has been driven primarily by construction and industrial companies that
have increasingly outsourced equipment needs to reduce investment in non-core
assets and convert costs from fixed to variable. The equipment rental industry
is highly fragmented, with an estimated 18,000 equipment rental companies in the
United States. As a result, the Company believes that there are substantial
consolidation opportunities for well-capitalized operators such as the Company.
Relative to smaller competitors, the Company has several advantages, including
increased purchasing power, larger inventories to service larger accounts and
the ability to transfer equipment among rental locations in response to changing
patterns of customer demand.
2
Competitive Strengths
The Company believes it has several competitive strengths, which provide it
with the opportunity for continued growth and increased profitability.
Strong Market Position. Neff is one of the largest construction and
industrial equipment rental companies in the United States, and is a leading
competitor with a significant presence in the Southeast and Gulf Coast regions.
We operate 84 rental locations in 18 states, including Florida, Georgia,
Alabama, Mississippi, South Carolina, North Carolina, Tennessee, Louisiana,
Texas, Oklahoma, Arizona, Nevada, Utah, California, Oregon, Washington, Virginia
and Colorado. From December 31, 1995 to December 31, 1999, we increased our
equipment rental locations from eight to 84 and expanded our rental fleet from
$62 million to $413 million based on original cost. We believe our size and
geographic diversity help insulate us from regional economic downturns.
High Quality Rental Fleet. We believe our rental fleet is one of the
newest, most comprehensive and well-maintained rental fleets in the equipment
rental industry. As of December 31, 1999, the average age of our rental fleet
was approximately 24 months. We make ongoing capital investment in new
equipment, engage in regular sales of used equipment and conduct an advanced
preventative maintenance program. We believe this maintenance program increases
fleet utilization, extends the useful life of equipment and produces higher
resale values.
Excellent Customer Service. We differentiate ourselves from our competitors
by providing high quality, responsive service to our customers. Service
initiatives include (i) reliable on-time equipment delivery directly to
customers' job sites; (ii) on-site repairs and maintenance of rental equipment
by factory trained mechanics, generally available 24 hours a day, seven days a
week; and (iii) ongoing training of an experienced sales force to consult with
customers regarding their equipment needs.
State-of-the-Art Management Information System. We have developed a
customized, state-of-the-art management information system capable of monitoring
operations at up to 300 sites. We use this system to maximize fleet utilization
and determine the optimal fleet composition by market. The system links all of
our rental locations and allows management to track customer and sales
information, as well as the location, rental status and maintenance history of
every piece of equipment in the rental fleet. Rental location managers can
search our entire rental fleet for needed equipment, quickly determine the
closest location of such equipment, and arrange for delivery to the customer's
work site, thus maximizing equipment utilization.
Experienced Management Team. Since 1995, we have significantly increased
the quality and depth of our management team to help oversee our growth
strategy. Our senior management team has extensive experience in the equipment
rental industry and our regional management has, on average, 21 years of
experience and substantial knowledge of the local markets served within their
regions. We believe that our management team has the ability to continue the
Company's strong growth as well as manage the Company on a much larger scale. We
are not dependent on recruiting additional operating, acquisition, finance or
other personnel to implement our growth strategy.
3
Business Strategy
Our objective is to increase revenue, cash flow and profitability by
building and maintaining a leading market position in the equipment rental
industry. Key elements of our business strategy include:
Increase Profitability of Recently Opened Rental Locations. Since March 1,
1995, we have opened 26 start-up rental equipment locations including 10
locations in 1997, 5 locations in 1998 and 1 location in 1999. Because we incur
significant expenses in connection with the opening of new locations, management
believes that our financial performance does not yet fully reflect the benefit
of these rental locations. Based on our historical experience, a new equipment
rental location tends to realize significant increases in revenues, cash flow
and profitability during the first three years of operation as more prospective
customers become aware of its operation and as the rental equipment fleet is
customized to local market demand. Because there is relatively little
incremental operating expense associated with such revenues, cash flow and
profitability increase significantly as a rental location matures.
Increase Fleet at Existing Locations. We believe we can capitalize on the
demand for rental equipment in the markets we serve and increase revenues by
increasing the size of the rental fleet and adding new product lines at existing
locations. We believe that this strategy allows us to attract new customers and
serve as a single source supplier for our customers. Because the start-up
expenditures associated with increasing the fleet and expanding product lines at
existing locations are relatively modest, these investments typically generate
higher and faster returns than investments in new locations.
Acquire Equipment Rental Companies. We intend to expand through
acquisitions of equipment rental companies and believe there are a significant
number of acquisition opportunities in North America, which would complement our
existing operations. After completing an acquisition, we generally integrate the
operations of the acquired company into our management information system,
consolidate equipment purchasing and resale functions and centralize fleet
management as quickly as possible while assuring consistent, high-quality
service to the acquired company's customers. Since July 1997, we have made
several strategic acquisitions, which have more than doubled our number of
rental locations, significantly enhanced our geographic presence and further
diversified our customer base.
We believe we can successfully implement our acquisition strategy because
of (i) our access to financial resources; (ii) the potential for increased
profitability due to the centralizing of certain administrative functions,
enhanced systems capabilities, greater purchasing power and economies of scale;
and (iii) the potential for owners of the businesses being acquired to
participate in our planned growth while realizing liquidity. We have developed a
set of financial, geographic and management criteria designed to assist
management in the evaluation of acquisition candidates.
These criteria are used to evaluate a variety of factors, including, but
not limited to, (i) historical and projected financial performance; (ii)
composition and size of the candidate's customer base; (iii) relationship of the
candidate's geographic location to the Company's market areas; (iv) potential
synergies gained through acquisition of the candidate; and (v) liabilities,
contingent or otherwise, of the candidate.
Selective Openings of Start-up Equipment Rental Locations. We intend to
expand our operations by opening additional start-up locations in markets where
we are not able to identify attractive acquisition candidates. We have been
successful in opening start-up equipment rental locations in existing markets
and new markets.
4
We have opened 26 start-up equipment rental locations since March 1995. Our
decision to open a start-up equipment rental location is based upon a review of
demographic information, business growth projections and the level of existing
competition. Because our management team has extensive experience opening
start-up locations, our growth strategy is not dependent on the availability of
acquisition candidates on satisfactory terms.
In June 1998, we expanded our operations into South America by acquiring
65% of the outstanding stock of S.A. Argentina. S.A. Argentina rents and sells
industrial and construction equipment throughout South America, including
Argentina, Brazil, Uruguay, Paraguay, Chile and Bolivia.
Sales of Subsidiaries. On November 18, 1999, the Company completed the sale
of Sullair Argentina S.A. The Company received $42.5 million, of which $12.5
million was a receivable that was received in February 2000. The Company
recorded a loss on the sale of $4.2 million.
On December 17, 1999, the Company completed the sale of Neff Machinery,
Inc., a wholly-owned subsidiary. The Company received $90.5 million and recorded
a gain on the sale of $3.8 million.
Operations
Our operations primarily consist of renting equipment, and, to a lesser
extent, selling used equipment, complementary parts and merchandise to a wide
variety of construction and industrial customers. In addition, to service our
customer base more fully, we also act as a dealer of new equipment on behalf of
several nationally known equipment manufacturers and provide ongoing maintenance
and repair services for the equipment we sell and rent. Our locations are
grouped together by geographic area and a regional manager oversees operations
within each region.
Equipment Rentals. We are one of the largest equipment rental companies in
the United States, with 84 rental locations in 18 states. Our rental fleet is
comprised of a complete line of light and heavy construction and industrial
equipment from a wide variety of manufacturers, including John Deere, Case,
Bomag, Bosch, Sullivan Industries, Ingersoll-Rand, Gradall, Lull, JLG, Bobcat,
MultiQuip and Wacker.
5
Major categories of equipment represented the following percentages (based
on original cost) of the Company's total rental fleet as of December 31, 1999:
Percentage of Total Rental Fleet
Major Equipment Category (based on original cost)
Earthmoving .......................... 39.3 %
Material Handling ....................... 16.6
Aerial .......................... 12.8
Other .......................... 6.4
Compaction .......................... 6.1
Trucks .......................... 5.9
Compressors .......................... 5.5
Cranes .......................... 2.3
Generators .......................... 1.6
Welders .......................... 1.3
Pumps .......................... 1.3
Lighting .......................... 0.9
We attempt to differentiate ourselves from our competitors by providing a
broad selection of new and well-maintained rental equipment, and through
high-quality, responsive service to our customers. As of December 31, 1999, our
equipment rental fleet had an original cost of approximately $413 million and an
average age of 24 months, which management believes compares favorably with
other leading equipment rental companies. We make ongoing capital investments in
new equipment, engage in regular sales of used equipment and conduct an advanced
preventative maintenance program. This program increases fleet utilization,
extends the useful life of equipment and produces higher resale values.
In addition to providing a new and reliable equipment rental fleet,
management believes providing high quality customer service is essential to our
future success. The equipment rental business is a service industry requiring
quick response times to satisfy customers' needs. Though some activity is
arranged with lead-time, much of the rental initiation process takes place
within a 48-hour period. Consequently, equipment availability, branch location
and transportation capabilities play a major role in earning repeat business.
Rental customers prefer a quick selection process and seek quick, concise
communication when ordering equipment. Punctuality and reliability are key
components of the servicing process, as well as maintenance performance, timely
equipment removal at the rental termination and simplified billing. Our service
initiatives include (i) reliable on-time equipment delivery directly to
customers' job sites; (ii) on-site repairs and maintenance of rental equipment
by factory trained mechanics, which are generally available 24 hours a day,
seven days a week; and (iii) ongoing training of an experienced sales force to
consult with customers regarding their equipment needs.
New Equipment Sales. We are a distributor of new equipment on behalf of
several nationally known equipment manufacturers. Typically, dealership
agreements do not have a specific term and may be terminated by either party
upon specific events and/or written notice. In the future we may continue, amend
or terminate dealership agreements.
6
Used Equipment Sales. We maintain a regular program of selling used
equipment in order to adjust the size and composition of our rental fleet to
changing market conditions and to maintain the quality and low average age of
our rental fleet. Management attempts to balance the objective of obtaining
acceptable prices from equipment sales against the revenues obtainable from used
equipment rentals. We are generally able to achieve favorable resale prices for
our used equipment due to our strong preventative maintenance program and our
practice of selling used equipment before it becomes obsolete or irreparable. We
believe the proactive management of our rental fleet allows us to adjust the
rates of new equipment purchases and used equipment sales to maximize equipment
utilization rates and respond to changing economic conditions. Such proactive
management, together with our broad geographic diversity, minimizes the impact
of regional economic downturns.
Parts and Service. We sell a full complement of parts, supplies and
merchandise to our customers in conjunction with our equipment rental and sales
business. We also offer maintenance service to our customers that own equipment
and generate revenues from damage waiver charges, delivery charges and warranty
income. We believe that these revenues are more stable than equipment sales
revenues because of the recurring nature of the parts and service business. We
also believe that during economic downturns, the parts and service business may
actually increase as customers postpone new equipment purchases and instead
attempt to maintain their existing equipment.
Management Information System
We have developed a state-of-the-art, customized management information
system, capable of monitoring operations on a real-time basis at up to 300 sites
that can be upgraded to support additional locations or terminals. We currently
employ eight management information system employees who continually update and
refine the system. We use this system to maximize fleet utilization and
determine the optimal fleet composition by market. This system links all of our
rental locations and allows management to track customer and sales information,
as well as the location, rental status and maintenance history of every piece of
equipment in the rental fleet. Using this system, rental equipment branch
managers can search our entire rental fleet for needed equipment, quickly
determine the closest location of such equipment and arrange for delivery to the
customer's work site. This practice helps diminish "lost rents," improves
utilization and makes equipment available in markets where it can earn increased
revenues. Our communications system can handle multiple protocols and allows the
integration of systems running on different platforms. This feature allows us to
include systems used by locations acquired in an acquisition of an existing
equipment rental company in its central databases while the acquired locations
are integrated into our system.
Customers
Our customers include commercial, industrial and civil construction
contractors, manufacturers, public utilities, municipalities, golf courses,
shipyards, commercial farmers, military bases, offshore platform operators and
maintenance contractors, refineries and petrochemical facilities and a variety
of other industrial accounts.
During 1999 we served over 27,000 customers. Our top 10 customers
represented 3.4% of our total revenues in 1999. Our rental equipment customers
vary in size from large Fortune 500 companies who have elected to outsource much
of their equipment needs to small construction contractors, subcontractors, and
machine operators whose equipment needs are job-based and not easily measured in
advance. Our new and used equipment sales customers are generally large
construction contractors who regularly purchase wholesale goods and annually
budget for fleet maintenance purchases.
7
We do not currently provide our own purchase financing to customers. We
rent equipment, sell parts, and provide repair services on account to customers
who are screened through a credit application process. Customers can finance
purchases of large equipment with a variety of creditors, including
manufacturers, banks, finance companies and other financial institutions.
Sales and Marketing
We maintain a strong sales and marketing orientation throughout our
organization in order to increase our customer base and better understand and
serve our customers. Managers at each of our branches are responsible for
supervising and training all sales employees at that location and directing the
salesforce by conducting regular sales meetings and participating in selling
activities. Managers develop relationships with local customers and assist them
in planning their equipment requirements. Managers are also responsible for
managing the mix of equipment at their locations, keeping abreast of local
construction activity and monitoring competitors in their respective markets.
To stay informed about their local markets, salespeople track new equipment
sales and construction projects in the area through Equipment Data Reports, FW
Dodge Reports and PEC Reports (Planning, Engineering and Construction), follow
up on referrals and visit construction sites and potential equipment users who
are new to the local area. Our salespeople also use targeted marketing
strategies to address the specific needs of local customers.
Purchasing
We purchase equipment from vendors with reputations for product quality and
reliability. Our Vice President of Asset Management and Procurement directs
fleet purchasing, asset utilization and fleet maintenance for our rental fleet.
We believe our size and the quantity of equipment we purchase enables us to
purchase equipment directly from vendors pursuant to national purchasing
agreements at lower prices and on more favorable terms than many smaller
competitors. We seek to maintain close relationships with our vendors to ensure
the timely delivery of new equipment. We believe that we have sufficient
alternative sources of supply for the equipment we purchase in each of our
principal product categories.
The following table summarizes our principal categories of equipment and
specifies the Company's major suppliers of such equipment:
Product Category Primary Vendors
Air Compressors and Equipment.................Ingersoll-Rand, Sullivan and Sullair
Earthmoving Equipment (such as Backhoes,
Loaders, Dozers, Excavators and Material
Handling Equipment).........................John Deere, Case, JCB, Kobelco, Volvo and Bobcat
Compaction Equipment, Rollers
and Recyclers...............................Bomag, Wacker, MultiQuip and Rammax
Pumps.........................................MultiQuip, Wacker and Thompson
Generators....................................MultiQuip, Wacker and Yamaha
Welders.......................................Miller and Lincoln
Electric Tools................................Bosch, Dewalt and Milwaukee
Light Towers..................................Specialty Lighting, Coleman and Ingersoll - Rand
Forklifts.....................................Lull, Gradall, Toyota and Clark
Trucking......................................International, Ford and GMC
Aerial........................................JLG, Genie Industries, and Snorkel
Concrete......................................Partner, Edco, Whiteman, Miller, MultiQuip, Wacker and
Stone
Hydraulic Hammers.............................Kent and Tramac
8
Locations
Our locations typically include (i) offices for sales, administration and
management; (ii) a customer showroom displaying equipment and parts; (iii) an
equipment service area; and (iv) outdoor and indoor storage facilities for
equipment. Each location offers a full range of rental equipment, with the mix
designed to meet the anticipated needs of the customers in each location.
Each stand-alone rental equipment location is staffed by, on average,
approximately 15 full-time employees, including a branch manager, a rental
coordinator, service manager, sales representatives, an office administrator,
mechanics and drivers. Additionalpart-time employees are also used to staff the
rental equipment operations located at the same sites.
Competition
The equipment rental industry is highly fragmented and very competitive. We
compete with independent third parties in all of the markets in which we
operate. Most of our competitors in the rental business tend to operate in
specific, limited geographic areas, although some larger competitors do compete
on a national basis. We also compete with equipment manufacturers, which sell
and rent equipment directly to customers. Some of our competitors have greater
financial resources and name recognition than we have.
Environmental and Safety Regulation
Our facilities and operations are subject to certain federal, state and
local laws and regulations relating to environmental protection and occupational
health and safety, including those governing wastewater discharges, the
treatment, storage and disposal of solid and hazardous wastes and materials, and
the remediation of contamination associated with the release of hazardous
substances. We believe that we are in material compliance with such requirements
and do not currently anticipate any material capital expenditures for
environmental compliance or remediation for the current or succeeding fiscal
years. Certain of our present and former facilities have used substances and
generated or disposed of wastes which are or may be considered hazardous, and we
may incur liability in connection therewith. Moreover, there can be no assurance
that environmental and safety requirements will not become more stringent or be
interpreted and applied more stringently in the future. Such future changes or
interpretations, or the identification of adverse environmental conditions
currently unknown to us, could result in additional environmental compliance or
remediation costs. Such compliance and remediation costs could be material to
our financial condition or results of operations.
In particular, at our owned and leased facilities we store and dispense
petroleum products from aboveground storage tanks and have in the past stored
and dispensed petroleum products from underground storage tanks. We also use
hazardous materials, including solvents, to clean and maintain equipment and
generate and dispose of solid and hazardous wastes, including used motor oil,
radiator fluid and solvents. In connection with such activities, we have
incurred capital expenditures and other compliance costs which are expensed on a
current basis and which, to date, have not been material to our financial
condition. Based on currently available information, we believe that we will not
be required to incur material capital expenditures or other compliance or
remediation costs on environmental and safety matters in the foreseeable future.
9
Employees
As of February 25, 2000, we had approximately 1,260 employees. None of our
employees are represented by a union or covered by a collective bargaining
agreement. We believe our relations with our employees are good.
ITEM 2. PROPERTIES
We lease approximately 18,000 square feet for our corporate headquarters in
an office building in Miami, Florida. We own the buildings and/or the land at 3
of our locations. All other sites are leased, generally for terms of five years
with renewal options. Owned and leased sites range from approximately 7,000 to
25,000 square feet on lots ranging up to 22 acres, and include showrooms,
equipment service areas and storage facilities. We do not consider any specific
leased location to be material to our operations. We believe that equally
suitable alternative locations are available in all areas where we currently do
business.
ITEM 3. LEGAL PROCEEDINGS
On December 17, 1999, the Company completed the sale of Neff Machinery,
Inc., a wholly-owned subsidiary. The Company received $90.5 million and recorded
a gain on the sale of $3.8 million. The terms of the purchase and sale agreement
(the "Agreement") provided for an adjustment to the purchase price based on the
assets and liabilities of Neff Machinery, Inc. at the date of closing. In the
opinion of the Company, it is due additional consideration of $8.8 million under
the terms of the Agreement. The purchaser believes it is due $20.3 million under
the terms of the Agreement.
Because of the uncertainty of the outcome of this dispute, the Company has
not recorded any additional amounts that may be receivable or payable under the
terms of the Agreement.
The Company and the members of its board of directors are defendants in at
least six lawsuits filed in the Delaware Court of Chancery. Five of the suits
were filed on February 29, 2000, and one was filed on March 1, 2000. The
plaintiffs in the suits are Neff shareholders, and purport to bring the suits as
class actions on behalf of all persons who own the common stock of the Company.
The complaints allege, among other things, that the Company and the individual
defendants acted improperly in responding to a buyout bid made by a member of
management in February 2000. The plaintiffs seek, among other things, injunctive
relief and damages. The Company has not yet responded to the complaints. The
Board of Directors has established a Special Committee to evaluate the buyout
offer and review the plaintiffs' claims in the lawsuits.
The Company is also a party to pending legal proceedings arising in the
ordinary course of business. While the results of such proceedings cannot be
predicted with certainty, we do not believe any of these matters are material to
our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1999, no matter was submitted to a vote of the
security holders of the Company.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Price Range of Common Stock
On May 21, 1998, our Class A Common Stock (the "Common Stock") began
trading on the New York Stock Exchange under the symbol "NFF". The following
table sets forth the high and low closing sales prices of Common Stock as
reported on the respective exchange for the periods indicated.
High Low
Year ended December 31, 1999:
First Quarter........................... 8.00 5.56
Second Quarter.......................... 15.75 6.44
Third Quarter........................... 18.44 10.25
Fourth Quarter.......................... 12.75 6.25
Year ended December 31, 1998:
First Quarter........................... NA NA
Second Quarter.......................... 13.00 9.88
Third Quarter........................... 14.19 7.75
Fourth Quarter.......................... 8.69 5.38
As of March 28, 2000, the Company had 64 shareholders of record. The
Company believes the number of beneficial owners is substantially greater than
the number of record holders because a large portion of the Common Stock is held
of record in broker "street names" for the benefit of individual investors.
Dividend Policy
We have not paid any cash dividends on our Common Stock during the two-year
period ended December 31, 1999. We presently intend to retain all earnings for
the development of our business and do not anticipate paying any cash dividends
on our Common Stock in the foreseeable future. In addition, our revolving credit
agreement precludes us from purchasing, redeeming or retiring any of our capital
stock or from paying dividends. The payment of dividends is also limited by
provisions of the indentures governing our senior subordinated notes issued in
May and December 1998 and due 2008. The declaration and payment of any future
cash dividends will depend on a number of factors including future earnings,
capital requirements, the financial condition and prospects of the Company and
any restrictions under credit agreements existing from time to time, as well as
such other factors as the Board of Directors may deem relevant. There can be no
assurances that we will pay any dividends in the future.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for each of the five years ended December 31, 1999. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this Annual
Report. Certain amounts in the prior years have been reclassified to conform
with the current year presentation.
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Statement of Operations (amounts in thousands, except per share data)
Revenues
Rental revenue............................. $ 222,862 $ 179,014 $ 69,512 $35,808 $ 20,019
Equipment sales............................ 121,865 108,352 50,578 44,160 33,943
Parts and service.......................... 47,284 36,724 22,132 15,045 13,292
-------- -------- -------- -------- -------
Total revenues.......................... 392,011 324,090 142,222 95,013 67,254
-------- -------- -------- -------- -------
Cost of revenues
Cost of equipment sold..................... 100,871 83,783 40,766 33,605 26,562
Depreciation of rental equipment (1)....... 55,159 56,336 24,231 19,853 11,747
Maintenance of rental equipment............ 66,763 49,858 18,752 8,092 3,469
Cost of parts and service.................. 30,166 23,690 13,741 8,143 7,504
-------- -------- -------- -------- -------
Total cost of revenues................. 252,959 213,667 97,490 69,693 49,282
-------- -------- -------- -------- -------
Gross profit................................. 139,052 110,423 44,732 25,320 17,972
-------- -------- -------- -------- -------
Selling, general and administrative expenses. 74,893 60,347 31,329 18,478 10,956
Other depreciation and amortization.......... 10,731 8,833 2,806 1,432 916
Write down of assets held for sale........... 1,444 - - - -
Officer stock option compensation (2)........ - 3,198 4,400 - -
-------- -------- -------- -------- -------
Income from operations....................... 51,984 38,045 6,197 5,410 6,100
-------- -------- -------- -------- -------
Other expenses............................... 41,520 35,855 14,338 6,337 3,090
-------- -------- -------- -------- -------
Income (loss) before income taxes, minority
interest and extraordinary item.............. 10,464 2,190 (8,141) (927) 3,010
(Provision for) benefit from income taxes (3) (3,877) 134 1,748 (461) (1,176)
-------- -------- -------- -------- -------
Income (loss) before minority interest and
extraordinary item......................... 6,587 2,324 (6,393) (1,388) 1,834
Minority interest............................ (1,733) (1,111) - - -
-------- -------- -------- -------- -------
Income (loss) before extraordinary item...... 4,854 1,213 (6,393) (1,388) 1,834
Extraordinary loss,net....................... - (2,675) (451) (809) -
-------- -------- -------- -------- -------
Net income (loss)............................ $ 4,854 $ (1,462) $ (6,844) $ (2,197) $ 1,834
======== ======== ======== ======== ========
Basic earnings (loss) per common share :
Income (loss) before extraordinary item....... $ 0.23 $ (0.23) $ (1.64) $ (0.56) $ 0.22
Extraordinary loss, net....................... - (0.15) (0.05) (0.10) -
-------- -------- -------- -------- -------
Net income (loss)............................. $ 0.23 $ (0.38) $ (1.69) $ (0.66) $ 0.22
======== ======== ======== ======== =======
Diluted earnings (loss) per common share :
Income (loss) before extraordinary item....... $ 0.22 $ (0.23) $ (1.64) $ (0.56) $ 0.22
Extraordinary loss, net....................... - (0.15) (0.05) (0.10) -
-------- -------- -------- -------- -------
Net income (loss)............................. $ 0.22 $ (0.38) $ (1.69) $ (0.66) $ 0.22
======== ======== ======== ======== =======
Weighted average common shares outstanding :
Basic...................................... 21,165 17,213 8,465 8,465 8,465
======== ======== ======== ======== =======
Diluted.................................... 21,887 17,213 8,465 8,465 8,465
======== ======== ======== ======== =======
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - (continued)
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
Balance Sheet Data (end of period): (amounts in thousands)
Net book value of rental equipment.............$ 285,863 $ 321,220 $ 179,547 $ 76,794 $ 45,596
Total assets................................... 471,706 572,369 279,654 109,118 68,816
Total debt..................................... 335,852 406,993 226,203 58,250 48,345
Redeemable preferred stock..................... - - 53,747 46,299 11,430
Total stockholders' equity (deficit)........... 104,208 99,360 (24,735) (7,508) (1,931)
Other Data:
EBITDA(4)......................................$ 117,874 $ 103,214 $ 33,234 $ 26,695 $ 18,763
EBITDA margin(5)............................... 30.1% 31.8% 23.4% 28.1% 27.9%
Rental equipment purchases.....................$ 221,671 $ 199,198 $ 143,515 $ 86,886 $ 52,795
_____________________
1) Depreciation of rental equipment for 1996, 1997 and 1999 reflects the
Company's change in depreciation policy to recognize extended estimated service
lives and increased residual values of its rental equipment. See the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Annual Report.
2) Officer stock option compensation expense represents a noncash charge
with respect to the change in estimated market value of the shares to be issued
to the Chief Executive Officer under an option agreement.
3) Prior to December 26, 1995, the Company operated as a Subchapter S
corporation under the provisions of the Internal Revenue Code. Income (loss)
before extraordinary items for 1995 is restated to reflect what the data would
have been if the Company had Subchapter C status in this year.
4) EBITDA represents income from operations plus depreciation and
amortization. EBITDA is not intended to represent cash flow from operations and
should not be considered as an alternative to operating or net income computed
in accordance with GAAP, as an indicator of the Companys operating performance,
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP) or as a measure of liquidity. The Company believes that
EBITDA is a standard measure commonly reported and widely used by analysts and
investors as a measure of profitability for companies with significant
depreciation and amortization expense. However, not all companies calculate
EBITDA using the same methods; therefore, the EBITDA figures set forth above may
not be comparable to EBITDA reported by other companies.
5) EBITDA margin represents EBITDA as a percentage of total revenues.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the year ended December 31,
1999 to the year ended December 31, 1998 and the year ended December 31, 1998 to
the year ended December 31, 1997. Consolidated results of operations should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto, appearing elsewhere in this Annual Report.
Overview
Since 1995, the Company has pursued an aggressive growth strategy,
increasing its number of equipment rental and sales locations to 84, as of
December 31, 1999. The Company has achieved this growth through the addition of
53 equipment rental locations as a result of acquisitions, and the opening of 26
start-up equipment rental locations primarily throughout the southeast and
southwest regions of the United States. The Company intends to continue to
pursue its aggressive growth strategy by (i) making additional acquisitions of
equipment rental companies; (ii) increasing fleet at its existing equipment
rental locations in both existing and new product lines; (iii) continuing to
open new equipment rental locations.
Since March 1, 1995, the Company has opened 26 start-up rental equipment
locations. Management believes the Company's recent financial performance does
not fully reflect the benefit of these rental locations. Based on the Company's
historical experience, a new equipment rental location tends to incur costs
during the early period of operations without the benefit of the revenue stream
of a mature location. New rental locations realize significant increases in
revenues and cash flow during the first three years of operation, and generally
become profitable in the third year of operation as more equipment is added to
the rental fleet and as the location matures. Because there is relatively little
incremental operating expense associated with such revenues, there is a greater
proportionate increase in cash flow and profitability as a rental location
matures. The Company believes the revenues, cash flow and profitability of the
26 start-up locations opened since March 1, 1995 will increase significantly as
these locations mature.
The Company primarily derives revenue from (i) the rental of equipment;
(ii) sales of new and used equipment and (iii) sales of parts and service. The
Company's primary source of revenue is the rental of equipment to construction
and industrial customers. Growth in rental revenue is dependent upon several
factors, including the demand for rental equipment, the amount of equipment
available for rent, rental rates and the general economic environment. The level
of new and used equipment sales is primarily a function of the supply and demand
for such equipment, price and general economic conditions. The age, quality and
mix of the Company's rental fleet also affect revenues from the sale of used
equipment. Revenues derived from the sale of parts and service is generally
correlated with sales of new equipment.
Costs of revenues include cost of equipment sold, depreciation and
maintenance costs of rental equipment and cost of parts and service. Cost of
equipment sold consists of the net book value of rental equipment at the time of
sale and cost for new equipment sales. Depreciation of rental equipment
represents the depreciation costs attributable to rental equipment. Maintenance
of rental equipment represents the costs of servicing and maintaining rental
equipment on an ongoing basis. Cost of parts and service represents costs
attributable to the sale of parts directly to customers and service provided for
the repair of customer owned equipment.
14
Depreciation of rental equipment is calculated on a straight-line basis
over the estimated service life of the asset (generally two to eight years with
a 20% residual value). Since January 1, 1996, the Company has, from time to
time, made certain changes to its depreciation assumptions to recognize extended
estimated service lives and increased residual values of its rental equipment.
The Company believes that these changes in estimates will more appropriately
reflect its financial results by better allocating the cost of its rental
equipment over the service lives of these assets. In addition, the new lives and
residual values more closely conform to those prevalent in the industry.
Selling, general and administrative expenses include sales and marketing
expenses, payroll and related costs, professional fees, property and other taxes
and other administrative overhead. Other depreciation and amortization
represents the depreciation associated with property and equipment (other than
rental equipment) and the amortization of goodwill and intangible assets.
Results of Operations
In view of the Company's growth, management believes that the
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
In addition, the Company's results of operations may fluctuate from period to
period in the future as a result of the cyclical nature of the industry in which
the Company operates.
The following table sets forth, for the periods indicated, information
derived from the consolidated statements of operations of the Company expressed
as a percentage of total revenues. There can be no assurance that the trends in
the table below will continue in the future.
Year Ended December 31,
-----------------------
Revenues : 1999 1998 1997
-------- -------- --------
Rental revenue.................................. 56.9 % 55.3 % 48.9 %
Equipment sales................................. 31.1 33.4 35.6
Parts and service............................... 12.0 11.3 15.5
-------- -------- --------
Total revenues............................. 100 % 100 % 100 %
-------- -------- --------
Cost of revenues:
Cost of equipment sold.......................... 25.7 25.8 28.6
Depreciation of rental equipment................ 14.1 17.4 17.0
Maintenance of rental equipment................. 17.0 15.4 13.2
Cost of parts and services...................... 7.7 7.3 9.7
-------- -------- --------
Total cost of revenues..................... 64.5 65.9 68.5
-------- -------- --------
Gross profit...................................... 35.5 34.1 31.5
Selling, general and administrative expenses 19.1 18.6 22.0
Other depreciation and amortization............ 2.7 2.7 2.0
Writedown of assets held for sale.............. 0.4 - -
Officer stock option compensation.............. - 1.1 3.1
-------- -------- --------
Income from operations........................... 13.3 % 11.7 % 4.4 %
======== ======== ========
EBITDA........................................... 30.1 % 31.8 % 23.4 %
======== ======== ========
15
1999 Compared to 1998
Revenues. Total revenues for 1999 increased 21.0% to $392.0 million from
$324.1 million in 1998. This growth in revenues is primarily attributable to
revenues generated by acquisitions of approximately $38.8 million and an
increase in revenues from the maturation of the 26 new rental locations opened
since March 1995 of approximately $26.4 million.
Gross Profit. Gross profit for 1999 increased 26.0% to $139.1 million or
35.5% of total revenues from $110.4 million or 34.1% of total revenues in 1998.
This increase is primarily attributable to an increase in gross profit of
approximately $13.1 million associated with the growth in revenues arising from
acquisitions and approximately $12.9 million associated with the maturation of
the 26 new rental locations opened since March 1995. The increase in gross
profit as a percentage of revenue is primarily attributable to improved rental
revenue margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 24.2% to $74.9 million or 19.1% of total
revenues from $60.3 million or 18.6% of total revenues in 1998. The increase in
selling, general and administrative expenses is primarily attributable to
increased regional and corporate personnel to support the continued revenue
growth of the Company. The Company had 84 locations at December 31, 1999,
compared to 86 at December 31, 1998.
Other Depreciation and Amortization. Other depreciation and amortization
expense for 1999 increased 21.6% to $10.7 million or 2.7% of total revenues from
$8.8 million or 2.7% of total revenues in 1998. This increase is primarily
attributable to amortization of goodwill resulting from acquisitions and to
increased expenditures on computer equipment, management information systems and
property and equipment needed to support the Company's expansion.
Officer Stock Option Compensation. Officer stock option expense was $0
million for 1999 and $3.2 million for 1998. The expense in 1998 represented
changes in estimated market value of the shares to be issued to a key employee
under an option agreement.
Interest Expense. Interest expense for 1999 increased 22.0% to $39.9
million from $32.7 million in 1998. This increase is primarily attributable to
the Company's borrowings related to acquisitions and to additional borrowings
related to the Company's continued investment in rental equipment.
Extraordinary Loss. During 1998, as a result of modifications to the
Company's Credit Facility, the Company recorded extraordinary losses from the
write-off of debt issue costs associated with the early extinguishment of debt
of $2.7 million, net of related income taxes.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is
not presented as an alternative to operating results or cash flow from
operations as determined by Generally Accepted Accounting Principles ("GAAP"),
but rather to provide additional information related to the ability of the
Company to meet its capital requirements and pursue its business strategy.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
EBITDA for 1999 increased 14.2% to $117.9 million or 30.1% of total
revenues from $103.2 million or 31.8% of total revenues in 1998. The increase in
EBITDA is primarily attributable to the maturation of new rental locations and
acquisitions as discussed above. In 1998, EBITDA included charges for officer
stock option compensation of $3.2 million.
16
1998 Compared to 1997
Revenues. Total revenues for 1998 increased 127.9% to $324.1 million from
$142.2 million in 1997. This growth in revenues was primarily attributable to
revenues generated by acquisitions of approximately $114.9 million and an
increase in revenues from the maturation of the 26 new rental locations opened
since March 1995 of approximately $47.4 million.
Gross Profit. Gross profit for 1998 increased 146.9% to $110.4 million or
34.1% of total revenues from $44.7 million or 31.5% of total revenues in 1997.
This increase was primarily attributable to an increase in gross profit of
approximately $44.1 million associated with the growth in revenues arising from
acquisitions and approximately $17.4 million associated with the maturation of
the 26 new rental locations opened since March 1995. The increase in gross
profit as a percentage of revenue was primarily attributable to improved rental
revenue margins.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 92.6% to $60.3 million or 18.6% of total
revenues from $31.3 million or 22.0% of total revenues in 1997. The increase in
selling, general and administrative expenses was primarily attributable to the
increase in the number of locations operated by the Company and increased
regional and corporate personnel to support the continued growth of the Company.
The Company had 86 locations at December 31, 1998, compared to 53 at December
31, 1997.
Other Depreciation and Amortization. Other depreciation and amortization
expense for 1998 increased 214.8% to $8.8 million or 2.7% of total revenues from
$2.8 million or 2.0% of total revenues in 1997. This increase was primarily
attributable to amortization of goodwill resulting from acquisitions and to
increased expenditures on computer equipment, management information systems and
property and equipment needed to support the Company's expansion.
Officer Stock Option Compensation. Officer stock option expense was $3.2
million for 1998 and $4.4 million for 1997. The expense represented changes in
estimated market value of the shares to be issued to a key employee under an
option agreement.
Interest Expense. Interest expense for 1998 increased 172.9% to $32.7
million from $12.0 million in 1997. This increase was primarily attributable to
the Company's borrowings related to acquisitions and to additional borrowings
related to the Company's continued investment in rental equipment.
Extraordinary Loss. During 1998, as a result of modifications to the
Company's Credit Facility, the Company recorded extraordinary losses from the
write-off of debt issue costs associated with the early extinguishment of debt
of $2.7 million, net of related income taxes.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA is
not presented as an alternative to operating results or cash flow from
operations as determined by Generally Accepted Accounting Principles ("GAAP"),
but rather to provide additional information related to the ability of the
Company to meet its capital requirements and pursue its business strategy.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
EBITDA for 1998 increased 210.6% to $103.2 million or 31.8% of total
revenues from $33.2 million or 23.4% of total revenues in 1997. The increase in
EBITDA was primarily attributable to the maturation of new rental locations and
acquisitions as discussed above. In 1998 and 1997, EBITDA included charges for
officer stock option compensation of $3.2 million and $4.4 million,
respectively.
17
Liquidity and Capital Resources
During 1998, the Company completed an initial public offering of its Class
A Common Stock (the "Offering") and the sale of $200 million of Senior
Subordinated Notes due 2008 (the "Senior Notes") to reduce the Company's
indebtedness, extend its debt maturities to reflect the long-term nature of its
assets and provide increased operational and financial flexibility to allow the
Company to pursue its growth strategy.
Proceeds from the Offering and Senior Notes were used to repay a $100.0
million term loan, redeem the Company's Series A Cumulative Preferred Stock,
repay a mortgage related to properties the Company owns and reduce outstanding
borrowings under the Company's revolving credit facility.
During 1999, the Company's operating activities provided net cash flow of
$43.5 million as compared to $42.7 million for 1998. This increase is primarily
attributable to the growth in the Company's operations resulting from an
increase in the number of rental locations operated by the Company.
Net cash provided by (used in) investing activities was $1.6 million for
1999 as compared to $(266.5) million in the same period for the prior year. The
change in cash from investing activities was due to sales of subsidiaries and
decreased acquisitions in 1999.
Net cash provided by (used in) financing activities was $(46.0) million for
1999 as compared to $225.3 million for 1998. The net cash used in financing
activities was primarily attributable to net borrowings made under the Company's
revolving credit facility.
As of December 31, 1999, the Company had approximately $82.3 million
available under its revolving credit facility. Based upon current expectations,
the Company believes that cash flow from operations, together with amounts,
which may be borrowed under the revolving credit facility, will be adequate for
it to meet its capital requirements and pursue its business strategy for the
next 12 months.
Inflation and General Economic Conditions
Although the Company cannot accurately anticipate the effect of inflation
on its operations, it does not believe that inflation has had, or is likely in
the foreseeable future to have, a material impact on its results of operations.
The Company's operating results may be adversely affected by events or
conditions in a particular region, such as regional economic, weather and other
factors.
In addition, the Company's operating results may be adversely affected by
increases in interest rates that may lead to a decline in economic activity,
while simultaneously resulting in higher interest payments by the Company under
its variable rate credit facilities.
Although much of the Company's business is with customers in industries
that are cyclical in nature, management believes that certain characteristics of
the equipment rental industry and the Company's operating strategies should help
to mitigate the effects of an economic downturn. These characteristics include
(i) the flexibility and low cost offered to customers by renting, which may be a
more attractive alternative to capital purchases; (ii) the Company's ability to
redeploy equipment during regional recessions; and (iii) the diversity of the
Company's industry and customer base.
Market Risk
The Company's financial instruments consist of cash, accounts receivable,
and debt. Cash and accounts receivable are short term, non-interest bearing
instruments and not subject to market risk.
For fixed rate debt instruments, interest rate changes affect their fair
market value but do not impact earnings or cash flows. Conversely for variable
rate debt instruments, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flows.
At December 31, 1999, the Company had fixed rate debt of $198.7 million and
variable rate debt of $137.2 million. Holding debt levels constant, a one
percentage point increase in interest rates would decrease the fair market value
of the fixed rate debt by approximately $10.7 million and decrease earnings and
cash flows for variable rate debt by approximately $0.8 million.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements and Schedules
Page Numbers
Reports of Independent Certified Public Accountants ................ 20
Consolidated Balance Sheets as of December 31, 1999 and 1998 ....... 22
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 ................................. 23
Consolidated Statements of Stockholder's Equity (Deficit) for
the years ended December 31, 1999, 1998 and 1997 ................. 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 ................................. 25
Notes to Consolidated Financial Statements ........................ 26
SCHEDULES:
Report of Independent Certified Public Accountants ................ 42
II-Valuation and Qualifying Accounts and Reserves ................. 43
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
19
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Neff Corp.
We have audited the accompanying consolidated balance sheets of Neff Corp.
and subsidiaries (the "Company"), as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity (defecit)
and cash flows for each of the three years in the period ended December 31,
1999. 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 did not audit the 1998 financial statements
of Sullair Argentina Sociedad Anonima (a consolidated subsidiary), which
statements reflect total assets of $71,960,577 at December 31, 1998, and total
revenues and net income of $27,138,214 and $3,175,507, respectively, for the
period from July 1, 1998 through December 31, 1998. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included by Sullair Argentina
Sociedad Anonima, is based solely on the report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and, for 1998, the report of the other
auditors, such consolidated financial statements present fairly, in all material
respects, the financial position of Neff Corp. and subsidiaries at December 31,
1999 and 1998 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche
Miami, Florida
March 23, 2000
20
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Sullair Argentina Sociedad Anonima
1. We have audited the consolidated balance sheet of Sullair Argentina
Sociedad Anonima and its subsidiary Sullair San Luis Sociedad Anonmia as of
December 31, 1998, and the related consolidated statements of income and of
changes in shareholders' equity and in financial position (cash flows) for the
six month period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these consolidated financial
statements based on our audits.
2. We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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. An audit does not provide assurance that the
Company's computerized systems or any other system, such as those from customers
and suppliers, are or would be year 2000 compliant. We believe that our audits
provide a reasonable basis for our opinion.
3. Accounting principles generally accepted in Argentina require companies
with controlling financial interest in the other companies to present both
parent company, where investments in subsidiaries are accounted for by the
equity method, and consolidated financial statements, as primary and
supplementary information, respectively. Because of the special purpose of the
financial statements, parent company financial statements are not included. This
procedure has been adopted for the convenience of the reader of the financial
statements.
4. In our opinion, the consolidated financial statements audited by us
present fairly, in all material respects, the financial position of Sullair
Argentina Sociedad Anonima and its subsidiary Sullair San Luis Sociedad Anonima
at December 31, 1998, and the results of their operations, the changes in their
shareholders' equity and the changes in their financial position (cash flows)
for the six-month period ended December 31, 1998, in conformity with accounting
principles generally accepted in Argentina.
5. Accounting principles generally accepted in Argentina vary in certain
important respects from accounting principles generally accepted in the United
States of America. The application of the latter would have affected the
determination of consolidated net income for the mentioned periods, and the
determination of consolidated shareholders' equity and financial position at
December 31, 1998, to the extent summarized in Notes 10 and 11 to the
consolidated financial statements of Sullair Argentina Sociedad Anonima.
/s/Price Waterhouse & Co.
Buenos Aires, Argentina
February 16, 1999
21
NEFF CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
1999 1998
-------- --------
ASSETS
Cash and cash equivalents..................................... $ 3,374 $ 4,340
Accounts receivable, net of allowance for doubtful accounts of
$2,904 in 1999 and $3,229 in 1998........................ 53,740 59,022
Inventories................................................... 3,860 29,164
Rental equipment, net......................................... 285,863 321,220
Property and equipment, net................................... 25,638 45,114
Goodwill, net................................................. 88,008 96,722
Net deferred tax asset........................................ - 2,780
Intangible assets, net........................................ 1,003 1,459
Prepaid expenses and other assets............................. 10,220 12,548
-------- --------
Total assets....................................... $ 471,706 $ 572,369
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable........................................ $ 7,527 $ 24,405
Accrued expenses........................................ 22,734 27,090
Credit facility......................................... 137,182 191,189
Senior subordinated notes............................... 198,670 198,522
Notes payable........................................... - 17,282
Capitalized lease obligations........................... 742 1,487
Net deferred tax liability.............................. 643 -
-------- --------
Total liabilities.................................. 367,498 459,975
-------- --------
Commitments and Contingencies (Note 12).......................
Minority interest............................................. - 13,034
-------- --------
Stockholders' equity
Class A Common Stock; $.01 par value; 100,000 shares
authorized; 16,065 shares issued and outstanding in
1999 and 1998......................................... 161 161
Class B special Common Stock; $.01 par value, liquidation
preference $11.67; 20,000 shares authorized; 5,100
shares issued and outstanding in 1999 and 1998........ 51 51
Additional paid-in capital.............................. 127,759 127,765
Accumulated deficit..................................... (23,763) (28,617)
-------- --------
Total stockholders' equity......................... 104,208 99,360
-------- --------
Total liabilities and stockholders' equity......... $ 471,706 $ 572,369
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
22
NEFF CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31,
1999 1998 1997
---- ---- ----
Revenues
Rental revenue..................................................... $ 222,862 $ 179,014 $ 69,512
Equipment sales.................................................... 121,865 108,352 50,578
Parts and service.................................................. 47,284 36,724 22,132
------- ------- -------
Total revenues................................................ 392,011 324,090 142,222
------- ------- -------
Cost of revenues
Cost of equipment sold............................................. 100,871 83,783 40,766
Depreciation of rental equipment................................... 55,159 56,336 24,231
Maintenance of rental equipment.................................... 66,763 49,858 18,752
Cost of parts and service.......................................... 30,166 23,690 13,741
------- ------- ------
Total cost of revenues........................................ 252,959 213,667 97,490
------- ------- ------
Gross profit.............................................................. 139,052 110,423 44,732
------- ------- ------
Other operating expenses
Selling, general and administrative expenses....................... 74,893 60,347 31,329
Other depreciation and amortization................................ 10,731 8,833 2,806
Writedown of assets held for sale.................................. 1,444 - -
Officer stock option compensation.................................. - 3,198 4,400
------ ------ ------
Total other operating expenses................................ 87,068 72,378 38,535
------ ------ ------
Income from operations.................................................... 51,984 38,045 6,197
------ ------ ------
Other expense
Interest expense................................................... 39,901 32,677 11,976
Loss on sale of subsidiaries....................................... 422 - -
Amortization of debt issue costs................................... 1,197 3,178 2,362
----- ------ ------
Total other expense........................................... 41,520 35,855 14,338
------ ------ ------
Income (loss) before income taxes, minority interest and
extraordinary item..................................................... 10,464 2,190 (8,141)
(Provision for) benefit from income taxes................................. (3,877) 134 1,748
------ --- -----
Income (loss) before minority interest and extraordinary item............. 6,587 2,324 (6,393)
Minority interest......................................................... (1,733) (1,111) -
------ ------ ------
Income (loss) before extraordinary item................................... 4,854 1,213 (6,393)
Extraordinary loss, net of income taxes................................... - (2,675) (451)
----- ------ ------
Net income (loss)........................................................ $ 4,854 $ (1,462) $ (6,844)
===== ====== ======
Basic income (loss) per common share :
Income (loss) before extraordinary item................................... $ 0.23 $ (0.23) $ (1.64)
Extraordinary loss, net................................................... - (0.15) (0.05)
----- ----- -----
Net income (loss)......................................................... $ 0.23 $ (0.38) $ (1.69)
===== ===== =====
Basic weighted average common shares outstanding.......................... 21,165 17,213 8,465
====== ====== =====
Diluted income (loss) per common share :
Income (loss) before extraordinary item................................... $ 0.22 $ (0.23) $ (1.64)
Extraordinary loss, net................................................... - (0.15) (0.05)
------ ------ -----
Net income (loss)......................................................... $ 0.22 $ (0.38) $ (1.69)
====== ====== =====
Diluted weighted average common shares outstanding........................ 21,887 17,213 8,465
====== ====== =====
The accompanying notes are an integral part of these consolidated financial statements.
23
NEFF CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
(in thousands)
Additional
Common Stock A Common Stock B Paid-in Accumulated
-------------- --------------
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- ------
Balance, December 31, 1996 ........................ 8,465 $ 85 - - - $ (7,593) $ (7,508)
Net loss .......................................... - - - - - (6,844) (6,844)
Adjustment for acquired property
and equipment (Note 13), net of taxes .......... - - - - - (2,936) (2,936)
Dividends in kind - Series A Preferred Stock ...... - - - - - (657) (657)
Preferred stock dividends accrued -
Series B and C ................................. - - - - - (3,200) (3,200)
Accretion of Series A, B and C Preferred Stock .... - - - - - (3,590) (3,590)
------ ------ ------ ------ ------- ------
Balance, December 31, 1997 ........................ 8,465 85 - - - (24,820) (24,735)
Net loss .......................................... - - - - - (1,462) (1,462)
Preferred stock dividends accrued -
Series A, B and C .............................. - - - - - (1,010) (1,010)
Accretion of Series A, B and C Preferred Stock .... - - - - - (1,325) (1,325)
Exchange of Preferred Stock Series B and C for Class
B Common Stock ................................ - - 6,000 $ 60 $ 44,876 - 44,936
Conversion of Class B Common Stock
to Class A Common Stock ........................ 900 9 (900) (9) - - -
Net proceeds from Common Stock Offering ........... 6,700 67 - - 85,663 - 85,730
Redemption of Series A Preferred Stock ............ - - - - (2,768) - (2,768)
Other ............................................. - - - - (6) - (6)
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1998 ........................ 16,065 161 5,100 51 127,765 (28,617) 99,360
Net income ........................................ - - - - - 4,854 4,854
Other ............................................. - - - - (6) - (6)
------ ------ ------ ------ ------ ------ ------
Balance, December 31, 1999 ........................ 16,065 $ 161 5,100 $ 51 $ 127,759 $ (23,763) $ 104,208
====== ====== ===== ====== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
24
NEFF CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities
Net income (loss).......................................................... $ 4,854 $ (1,462) $ (6,844)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities net of acquisitions.................................
Depreciation and amortization....................................... 67,087 68,347 29,399
Officer stock option compensation................................... - 3,198 4,400
Gain on sale of equipment........................................... (20,994) (24,569) (9,812)
Minority interest................................................... 1,733 1,111 -
Loss on sale of subsidiaries........................................ 422 - -
Extraordinary loss on debt extinguishment........................... - 4,280 722
Deferred income taxes............................................... 3,423 (510) (1,748)
Writedown of assets held for sale................................... 1,444 - -
Change in operating assets and liabilities (net of acquisitions
and sales)
Accounts receivable............................................ (18,739) (14,488) (8,341)
Other assets................................................... (5,288) (403) (2,957)
Accounts payable and accrued expenses.......................... 9,513 7,192 4,104
------- ------- -------
Net cash provided by operating activities................. 43,455 42,696 8,923
------- ------- -------
Cash Flows from Investing Activities
Purchases of equipment..................................................... (221,671) (199,198) (143,515)
Proceeds from sale of equipment............................................ 121,865 108,352 50,578
Proceeds from sale of subsidiaries......................................... 120,500 - -
Purchases of property and equipment........................................ (2,803) (15,015) (16,747)
S.A. Argentina Earn-out payment............................................ (5,518) - -
Cash paid for acquisitions................................................. (10,750) (160,646) (63,605)
------- ------- -------
Net cash provided by (used in) investing activities....... 1,623 (266,507) (173,289)
------- ------- -------
Cash Flows from Financing Activities
Debt issue costs........................................................... (128) (12,277) (2,425)
Net borrowings (repayments) under Senior Credit Facility................... (54,007) 29,364 103,576
Proceeds from issuance of senior subordinated notes........................ - 198,516 -
Proceeds from common stock offering........................................ - 85,730 -
Borrowings (repayments) under mortgage note................................ - (13,400) 13,400
Borrowings (repayments) under capitalized lease obligations................ (745) (833) 866
Borrowings (repayments) under term loan.................................... - (49,916) 49,916
Net borrowings (repayments) under notes payable............................ 8,836 1,997 (135)
Redemption of Series A preferred stock..................................... - (13,915) -
Distribution to stockholders............................................... - - (2,936)
------- ------- -------
Net cash provided by (used in) financing activities....... (46,044) 225,266 162,262
------- ------- -------
Net increase (decrease) in cash and cash equivalents....................... (966) 1,455 (2,104)
Cash and cash equivalents, beginning of year............................... 4,340 2,885 4,989
------- ------- -------
Cash and cash equivalents, end of year..................................... $ 3,374 $ 4,340 $ 2,885
======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
25
NEFF CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-GENERAL
Description of Business
Neff Corp. and its subsidiaries (the "Company") own and operate equipment
rental locations throughout the southern and western regions of the United
States. The Company also sells used equipment, parts and merchandise and
provides ongoing repair and maintenance services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Neff Corp. and its wholly-owned and majority-owned subsidiaries. The financial
statements of Sullair Argentina Sociedad Anonima ("S.A. Argentina") included in
the consolidated financial statements of the Company have been adjusted to
reflect U.S. Generally Accepted Accounting Principles. Significant intercompany
transactions and balances have been eliminated in consolidation.
Stock Split
In May 1998, the Company effected an 84.65 for 1.00 stock split. The
accompanying consolidated financial statements reflect the stock split on a
retroactive basis from the beginning of the periods presented.
Acquisitions
In August 1997, the Company purchased the common stock of Industrial
Equipment Rentals, Inc. ("IER") for approximately $63.6 million. This purchase
was funded by a $50 million term loan and borrowings under the Company's credit
facility (see Note 5). IER had rental equipment operations similar to the
Company's in Alabama, Louisiana, Mississippi and Texas. The transaction was
accounted for under the purchase method. In connection with this purchase,
goodwill of approximately $29.2 million was recorded.
In January 1998, the Company acquired substantially all of the assets of
Richbourg's Sales and Rentals, Inc. ("Richbourg") for approximately $100
million. Richbourg has rental equipment operations similar to the Company's with
15 locations in three states. This transaction was accounted for under the
purchase method. In connection with this purchase, goodwill of approximately
$40.8 million was recorded.
Also during 1998, the Company acquired the net assets or outstanding
securities of seven equipment rental companies (collectively, "the Other 1998
Acquisitions") in separate transactions for an aggregate purchase price of $25.4
million. The acquisition of these businesses added 4 locations in Texas, 4 in
Florida and 3 locations in California. These transactions were all accounted for
under the purchase method of accounting. In connection with these purchases,
goodwill of approximately $14.6 million was recorded. Revenues on an unaudited
pro forma basis would have increased by $48.2 million and $132.3 million, during
1998 and 1997, respectively, had the acquisitions of IER, Richbourg and the
Other 1998 Acquisitions occurred on January 1, 1997.
26
The net loss and the net loss per share (diluted) would have been decreased
by $1.8 million and by $0.10 during 1998, respectively. The net loss and the net
loss per share (diluted) would have been increased by $1.4 million and by $0.16
during 1997, respectively, had the acquisition of IER, Richbourg and the Other
1998 Acquisitions occurred on January 1, 1997.
On June 30, 1998, the Company acquired 65% of the outstanding stock of S.A.
Argentina, for approximately $36.1 million and earn-out payments equal to 82.8%
of S.A. Argentina's net income for 1998 and 1999, with such earn-out payments
not to exceed $12.6 million in the aggregate. The Company also had an option to
purchase the remaining 35% of outstanding stock of S.A. Argentina. S.A.
Argentina rents and sells industrial and construction equipment throughout South
America. In connection with the purchase, goodwill of approximately $14.0
million was recorded. Earn-out payments of $5.5 million were made in 1999 and
recorded to goodwill. The Company's investment in S.A. Argentina was sold in
November 1999.
In 1999, the Company acquired the net assets of three equipment rental
companies for an aggregate purchase price of $10.8 million. The acquisitions of
these businesses added 5 locations in Virginia, 2 in Colorado, 1 location in
Oregon and 1 location in Washington. These transactions were accounted for under
the purchase method of accounting and goodwill of approximately $8.0 million was
recorded. The pro forma effect of the 1999 acquisitions on the results of
operations are not presented as they are not considered material.
Sales of Subsidiaries
On November 18, 1999, the Company completed the sale of Sullair Argentina
S.A. The Company received $42.5 million, of which $12.5 million was a receivable
that was received in February 2000. The Company recorded a loss on the sale of
$4.2 million.
The following amounts are included in the consolidated financial statements
of the Company for Sullair Argentina S.A. (in thousands):
1999 1998 1997
---- ---- ----
Assets $ - $ 71,961 $ -
=========== =========== ===========
Liabilities $ - $ 35,125 $ -
=========== =========== ===========
Revenues $ 47,604 $ 27,138 $ -
=========== =========== ===========
Net Income $ 3,218 $ 3,176 $ -
=========== =========== ===========
On December 17, 1999, the Company completed the sale of Neff Machinery,
Inc., a wholly-owned subsidiary. The Company received $90.5 million and recorded
a gain on the sale of $3.8 million. The terms of the purchase and sale agreement
(the "Agreement") provided for an adjustment to the purchase price based on the
assets and liabilities of Neff Machinery Inc. at the date of closing. In the
opinion of the Company, it is due additional consideration of $8.8 million under
the terms of the Agreement. The purchaser believes it is due an additional $20.3
million under the terms of the Agreement. Because of the uncertainty of the
outcome of this dispute, the Company has not recorded any additional amounts
that may be receivable or payable under the terms of the Agreement.
27
The following amounts are included in the consolidated financial statements
of the Company for Neff Machinery, Inc. (in thousands):
1999 1998 1997
----------- ----------- -----------
Assets....................... $ - $ 56,654 $ 78,141
=========== =========== ===========
Liabilities.................. $ - $ 28,090 $ 54,410
=========== =========== ===========
Revenues..................... $ 95,996 $ 93,328 $ 82,131
=========== =========== ===========
Net Income................... $ 5,100 $ 3,020 $ 1,647
=========== =========== ===========
The Company's earnings and cash flows reflect the operations of Sullair
Argentina S.A. and Neff Machinery, Inc. through November 18, 1999 and December
17, 1999, respectively.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
Recognition of Revenue
Rental agreements are structured as operating leases and the related
revenues are recognized over the rental period. Sales of equipment and parts are
recognized at the time of shipment or, if out on lease, at the time a sales
contract is finalized. Equipment may at times be delivered to customers for a
trial period. Revenue on such sales is recognized at the time a sales contract
is finalized. Service revenues are recognized at the time the services are
rendered.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
28
Inventories
Inventories, which consist principally of parts and new equipment held for
sale, are stated at the lower of cost or market, with cost determined on the
first-in, first-out basis for parts and specific identification basis for
equipment. Substantially all inventory represents finished goods held for sale.
Rental Equipment
Rental equipment is stated at cost less accumulated depreciation.
Depreciation is recorded using the straight-line method over the estimated
useful life of the related equipment (generally two to eight years with an
estimated 20% residual value). For certain equipment, depreciation is matched
against the related rental income earned by computing depreciation on individual
equipment at the rate of 50%, 80% and 80% for 1999, 1998 and 1997, respectively,
of the rental income earned. Routine repairs and maintenance are expensed as
incurred; improvements are capitalized at cost.
The Company routinely reviews the assumptions utilized in computing
depreciation of its rental equipment. Changes to the assumptions (such as
service lives and/or residual values) are made when, in the opinion of
management, such changes more appropriately allocate asset costs to operations
over the service life of the assets. Management utilizes, among other factors,
historical experience and industry comparison in determining the propriety of
any such changes.
During 1999 and 1997, the Company made certain changes to its depreciation
assumptions to recognize extended estimated service lives and increased residual
values of its rental equipment. The Company believes that these changes in
estimates will more appropriately reflect its financial results by better
allocating the cost of its rental equipment over the service life of these
assets.
These changes in accounting estimates increased income or reduced (loss)
before extraordinary item and increased net income or reduced (loss) by
approximately $10.0 million, and $3.3 million or $0.46, and $0.39 per diluted
common share for the years ended December 31, 1999 and 1997, respectively.
Rental fleet accumulated depreciation at December 31, 1999 and 1998 was
approximately $74.1 million and $63.4 million, respectively.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded using accelerated and straight-line methods over the
estimated useful lives of the related assets. Significant improvements are
capitalized at cost. Repairs and maintenance are expensed as incurred.
The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and is included in depreciation and amortization expense in the
consolidated statements of operations.
29
Intangible Assets
Intangible assets primarily result from business combinations and include
agreements not to compete and other identifiable intangible assets. These assets
are amortized on a straight-line basis over their estimated useful life (five to
15 years). Accumulated amortization at December 31, 1999 and 1998 was
approximately $0.3 million and $2.9 million, respectively.
Goodwill arising from acquisitions is being amortized over 40 years using
the straight-line method. Accumulated amortization at December 31, 1999 and 1998
was approximately $3.7 million and $2.6 million, respectively.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets primarily include debt issue costs,
prepaid expenses and deposits. Debt issue costs are amortized over the term of
the debt on a straight-line basis, which approximates the interest method.
Stock Options
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), Accounting
for Stock-Based Compensation, which requires companies to either recognize
expense for stock-based awards based on their fair value on the date of grant or
provide footnote disclosures regarding the impact of such changes. The Company
adopted the disclosure provisions of SFAS 123 on January 1, 1996, but will
continue to account for options issued to employees or directors under the
Company's stock option plans in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees.
Reclassifications
Certain amounts for the prior years have been reclassified to conform with
the current year presentation.
NOTE 3-ACCOUNTS RECEIVABLE
The majority of the Company's customers are engaged in the construction and
industrial business throughout the southern and western regions of the United
States.
The Company extends credit to its customers based upon an evaluation of the
customer's financial condition and credit history. For sales of certain
construction equipment, the Company's policy is to secure its accounts
receivable by obtaining liens on the customer's projects and issuing notices
thereof to the projects' owners and general contractors. All other receivables
are generally unsecured.
30
NOTE 4-PROPERTY AND EQUIPMENT
Property and equipment consists of the following (dollars in thousands):
December 31, Estimated
-------------- Useful Lives
1999 1998 (in Years)
---- ---- ---------
Land..................................................... $ - $ 8,343 -
Buildings and improvements............................... 16,567 15,874 2-30
Office equipment......................................... 7,344 7,083 2-7
Service equipment and vehicles........................... 9,841 20,364 2-5
Shop equipment........................................... 4,370 4,227 7
Capitalized lease equipment.............................. 860 1,401 3-5
-------- -------- --------
38,982 57,292
Less accumulated depreciation (13,344) (12,178)
-------- --------
$ 25,638 $ 45,114
======== ========
The Company has entered into lease arrangements for certain property and
equipment, which are classified as capital leases. As of December 31, 1999,
future minimum lease payments under capitalized lease obligations are as follows
(in thousands):
2000............................................... $ 495
2001............................................... 271
2002............................................... 32
Thereafter......................................... -
-----
Total future minimum lease payments................ 798
Less amounts representing interest (6.00% to 13.5%) (56)
-----
Present value of net future minimum lease payments $ 742
=====
31
NOTE 5-NOTES PAYABLE AND DEBT
Notes payable and debt consist of the following (in thousands):
December 31
1999 1998
---- ----
$219.5 million revolving line of credit with interest ranging from the
Lender's Prime Rate plus 1.25% to LIBOR plus up to 2.25%. At December
31, 1999, the Lender's Prime Rate was 8.5% and LIBOR Rate was 5.81%. $ 137,182 $ 191,189
10.25% Senior Subordinated Notes issued May 1998 due June 2008. 100,000 100,000
10.25% Senior Subordinated Notes issued December 1998 due June 2008,
with an effective interest rate of 10.5%, net of unamortized discount
of $1,330 and $1,478, respectively. 98,670 98,522
S.A. Argentina unsecured loans from various banks with interest rates
of LIBOR plus 1.5% to 3.5%. - 16,541
Various notes payable assumed through acquisitions of IER with
interest rates ranging from 7% to 12%. - 741
--------- ---------
$ 335,852 $ 406,993
========= =========
In May 1998, the Company amended and restated its $250 million revolving
credit facility (as amended and restated, the "New Credit Facility"). In
September 1998, the New Credit Facility was increased to $310 million.
Subsequent to the sale of Sullair Argentina S.A. and Neff Machinery, Inc. during
the fourth quarter of 1999 (see Note 1), the New Credit facility was decreased
to $219.5 million. Borrowings under the New Credit Facility are based upon
eligible accounts receivable, rental fleet and inventory amounts. The interest
rates on balances outstanding under the New Credit Facility vary based upon the
leverage ratio maintained by the Company. The New Credit Facility expires in
April 2003 and the Company is charged a commitment fee on the aggregated daily
unused balance of the New Credit Facility which varies between 0.2% and 0.5%
based on the leverage ratio maintained by the Company. The New Credit Facility
is secured by substantially all of the Company's assets and contains certain
restrictive covenants which, among other things, require the Company to maintain
certain financial coverage ratios and places certain restrictions on the payment
of dividends.
In connection with the Richbourg acquisition (see Note 1), the Company
executed a $100 million term loan (the "Richbourg Term Loan"). In May 1998, the
Company completed the sale of $100 million of Senior Subordinated Notes due 2008
(the "May Notes") as well as the initial public offering (see Note 6). The net
proceeds of approximately $182.7 million from the sale of the May Notes and the
initial public offering were used to repay the Richbourg Term Loan, redeem the
Company's Series A Cumulative Redeemable Preferred Stock, repay the mortgage
notes payable and reduce the amount outstanding under the New Credit Facility.
32
In December 1998, the Company completed the sale of $100 million Senior
Subordinated Notes due 2008 (the "December Notes"). The net proceeds of
approximately $95.2 million from the December Notes were used to reduce amounts
outstanding under the New Credit Facility. The terms of the December Notes are
substantially the same as the May Notes.
The May and December Notes are senior unsecured obligations of the Company
and are redeemable at the option of the Company, in whole or in part, on or
after June 1, 2003, at pre-established redemption prices together with accrued
and unpaid interest to the redemption date.
During 1998 and 1997 the Company recorded extraordinary losses of
approximately $2.7 million and $0.5 million, respectively net of related income
taxes, from the write-off of debt issue costs associated with the early
extinguishment of debt.
NOTE 6-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
During December 1995, the Company issued 300,000 shares of Series A
Cumulative Redeemable Preferred Stock ("Series A"), and a detachable stock
purchase warrant (the "Redeemable Warrant") for $12.0 million ($11.4 million net
of certain related costs). Series A provided for the semiannual payment of
preferential dividends at an annual rate of 8% (5% beginning January 1, 1997) of
the liquidation value. The dividends were payable in cash or in additional
shares.
The Redeemable Warrant granted the holder the right to acquire
approximately 20% of the common stock of the Company at a purchase price of $.01
per share.
The Series A and the Redeemable Warrant were recorded at their pro rata
estimated fair value in relation to the proceeds received on the date of
issuance ($8.0 million for the Series A and $3.4 million for the Redeemable
Warrant, net of issue costs). Series A was a