ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001 Commission File Number: 001-14145
(Exact Name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
Internal Revenue Service - Employer No. 65-0626400
3750 N.W. 87th AVENUE, SUITE 400, MIAMI, FLORIDA 33178
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 513-3350
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock par value $.01 per share
Name of each exchange on which registered
NONE
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 1, 2002, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $3.7 million. As of March 1, 2002, 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 7, 2002 (the “2002 Proxy Statement”). Specifically, the sections in the 2002 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.
====================================================================================================================Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
The matters discussed in this Annual Report may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Act of 1934, as amended. Statements in Item 1, Business, and Item 7, Management’s Discussion and Analysis of Operations and Financial Condition, of this Annual Report, together with other statements beginning with such words as “believes”, “intends”, “plans”, “expects” and similar expressions include forward-looking statements that are based on management’s expectations given facts as currently known by management. Actual results may differ materially from those discussed in these forward-looking statements. Factors that could cause our future results to differ materially from those in the forward-looking statements are described in this Annual Report under the section “Risk Factors” and include, but are not limited to our dependence on additional capital for future growth, the high degree to which we are leveraged, the restrictions on our operations imposed by our debt instruments, competition in our industry, and general economic conditions.
Any forward-looking statements speak only as of the date on which the statement is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances occurring after the date on which the statement is made. New factors that may affect our operating results emerge from time to time, and it is not possible for management to predict the materialization of all new factors. Further, management cannot assess the impact of each factor on our business or the extent to which any factor, or combinations of factors, may cause our actual results to differ materially from those discussed in any forward-looking statements.
General
Neff Corp. (“Neff” or the “Company”) is one of the largest equipment rental companies in the United States, with 74 rental locations in 16 states as of March 1, 2002. We rent a wide variety of equipment, including backhoes, air compressors, loaders, lifts and compaction equipment, to construction, governmental and industrial customers. In addition, we sell new and used equipment, spare parts and merchandise and provide ongoing repair and maintenance services.
According to industry sources, the equipment rental industry grew from approximately $600 million in revenues in 1982 to over $25 billion in 2001. This growth has been driven primarily by construction and industrial companies, and other equipment users such as governmental entities, that have increasingly outsourced equipment needs to reduce capital investment in non-core assets, convert costs from fixed to variable, lower storage and maintenance costs and access a broad selection of equipment, including the latest technology. The equipment rental industry is highly fragmented, with an estimated 18,000 equipment rental companies in the United States. Relative to smaller competitors, we have several advantages, including increased purchasing power, larger inventories to service larger accounts and the ability to transfer equipment among our rental locations in response to changing patterns of customer demand.
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Competitive Strengths
We believe that we have several competitive strengths that provide us with the opportunity for 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 74 rental locations in 16 states, including Florida, Georgia, South Carolina, North Carolina, Tennessee, Louisiana, Texas, Oklahoma, Arizona, Nevada, Utah, California, Oregon, Washington, Virginia and Colorado. From December 31, 1995 to December 31, 2001, we increased our equipment rental locations from 8 to 74 and expanded our rental fleet from $62 million to $434 million based on original cost. We believe our size gives us an advantage over our smaller competitors, while our geographic diversity helps 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, 2001, the average age of our rental fleet was approximately 34 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. We expect to reduce our sales of used equipment during 2002 to reduce our capital expenditures which should result in an average rental fleet age of 39-42 months at December 31, 2002.
Excellent Customer Service. We differentiate ourselves from our competitors by providing high quality, responsive service to our customers. Service initiatives include (1) reliable on-time equipment delivery directly to our customers’ job sites; (2) on-site repairs and maintenance of rental equipment by factory trained mechanics, generally available 24 hours a day, seven days a week; and (3) 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. 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, maximizing equipment utilization.
Experienced Management Team. Since 1995, we have significantly increased the quality and depth of our management team. Our senior management team has extensive experience in the equipment rental industry and our regional management has, on average, 23 years of experience and substantial knowledge of the local markets served within their regions.
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Business Strategy
Our objective is to increase revenues, cash flow and profitability by building and maintaining a leading market position in the equipment rental industry. Key elements of our business strategy include:
Improve Utilization of Fleet. We will continue our efforts to improve the utilization of our rental fleet by carefully managing inventory levels at all locations. We carefully weigh the benefits of each new investment in rental fleet against the returns expected from that investment at our locations. In addition, we will continue to adjust the selection of equipment available at each location in order to provide product lines that are tailored to most efficiently meet the demands of our customers.
Reduce Outstanding Debt. We intend to use all available free cash flow from operations to pay down outstanding debt on our credit facility during 2002. By reducing our outstanding debt, we hope to decrease leverage, reduce interest expense and increase profitability.
Selective Openings of Start-up Equipment Rental Locations. We intend to explore the possibility of expanding our operations by opening additional start-up locations. We have been successful in opening start-up equipment rental locations in existing markets and new markets. 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.
Operations
Our operations primarily consist of renting equipment, and to a lesser extent, selling used equipment and complementary parts and merchandise to a wide variety of construction and industrial customers. In addition, to service our customer base more fully, we also sell new equipment and provide ongoing maintenance and repair services for the equipment we sell and rent.
Our locations are grouped together by geographic area into different regions. A regional vice-president oversees operations within each region.
Equipment Rentals. We are one of the largest equipment rental companies in the United States, with 74 rental locations in 16 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, Volvo and Wacker.
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Major categories of equipment represented the following percentages (based
on original cost) of our total rental fleet as of December 31, 2001:
Percentage of Total Rental Fleet
Major Equipment Category (based on original cost)
------------------------ ---------------------------------
Earthmoving................................... 42.3 %
Material Handling............................. 19.4
Aerial........................................ 14.8
Trucks........................................ 9.5
Compaction.................................... 5.1
Compressors................................... 3.8
Welders....................................... 1.3
Generators.................................... 1.2
Lighting...................................... 0.8
Pumps......................................... 0.8
Other......................................... 1.0
We attempt to differentiate ourselves from our competitors by providing a broad selection of well-maintained rental equipment, and through high-quality, responsive service to our customers. As of December 31, 2001, our equipment rental fleet had an original cost of approximately $434 million and an average age of 34 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 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 efficient communication when ordering equipment. Punctuality and reliability are key components of the servicing process, as well as maintenance performance, timely equipment removal at the end of the rental period and simplified billing.
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Our service initiatives include:
reliable on-time equipment delivery directly to customers' job sites;
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
ongoing training of an experienced sales force to consult with customers regarding their equipment needs.
New and Used Equipment Sales. We maintain a regular program of selling used equipment in order to adjust the size and composition of our rental fleet in response to changing market conditions and our business plan. Management attempts to balance the objective of obtaining acceptable prices from equipment sales against the revenues obtainable from future rentals of the equipment. 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. In order to serve our customer base more fully, we also sell new equipment to customers.
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 believe that these revenues are more stable than equipment sales revenues because of the recurring nature of the parts and service business.
Management Information System
We have developed a state-of-the-art, customized management information system that is capable of monitoring our operations on a real-time basis. We currently employ five management information system employees who continually update and refine the system. 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. We use this system to maximize fleet utilization and determine the optimal fleet composition by geographic market.
Using this system, 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.
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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 businesses and governmental entities.
During 2001 we served over 27,906 customers. Our top 10 customers represented 4.1% of our total revenues in 2001. 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 equipment and annually budget for their fleet maintenance purchases.
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 successfully screened through our 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 supervising the sales force 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 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 the quantity of equipment we purchase enables us to purchase equipment directly from vendors at lower prices and on more favorable terms than many of our smaller competitors. We seek to maintain close relationships with our vendors to ensure the timely delivery of new equipment. We do not rely on any one vendor exclusively for a particular type of equipment, and we believe that we have sufficient alternative sources of supply for the equipment we purchase, in each of our principal product categories.
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The following table summarizes our principal categories of equipment and specifies our 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, Rammer, Stanley and Tramac
Locations
Our locations typically include (1) offices for sales, administration and management; (2) a customer showroom displaying equipment and parts; (3) an equipment service area; and (4) outdoor and indoor storage facilities for equipment. Each location offers a full range of rental equipment, with the mix of equipment available designed to meet the anticipated needs of the customers in each location.
Each location is staffed by, on average, 15 full-time employees, including a branch manager, a rental coordinator, a service manager, sales representatives, an office administrator, mechanics and drivers. Additional part-time employees are also used as necessary.
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 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. These larger competitors may have the ability to set market rates for rental equipment in certain geographic areas in which we operate. If competitive pressure forces us to lower our rental rates, this could reduce our rental revenues and materially adversely affect our financial condition or results of operations.
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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 compliance with such requirements and do not currently anticipate making any material capital expenditures or incurring material costs for environmental compliance or remediation for the current or succeeding fiscal years.
Employees
As of March 1, 2002, we had approximately 1,004 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.
RISK FACTORS
These are not the only risks and uncertainties we face. The following important factors, among others, could adversely impact our business, operating results, financial condition and cash flows. These factors could cause our actual results to differ materially from those projected in any forward-looking statements made in this Annual Report on Form 10-K or presented elsewhere by management from time to time.
We are dependent on additional capital for future growth
Although we believe that we have sufficient funds for working capital, we may need to raise additional funds in the future if we need to respond to competitive pressures or decide to accelerate our growth rate by increasing our rental equipment fleet, opening more start-up locations or making additional acquisitions. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and the terms of our existing indebtedness. We cannot assure you that we will be able to raise additional funds on terms acceptable to us, or at all. If we raise additional funds through the sale of equity or convertible debt securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. Our failure to obtain any required future financing on terms acceptable to us could materially and adversely effect our financial condition.
We have a substantial amount of debt
As of February 28, 2002, we had total indebtedness of approximately $310 million. The degree to which Neff is leveraged could have important consequences to holders of our common stock including, but not limited to:
our leverage may limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate or other purposes;
a substantial portion of our cash flow from operations will be dedicated to the payment of the principal of, and interest on, our indebtedness; and
our substantial leverage may make us more vulnerable to economic downturns, limit our ability to withstand competitive pressures and reduce our flexibility to respond to changing business and economic conditions.
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Our ability to finance future acquisitions, start-ups and internal growth is limited by the covenants contained in our $200 million revolving credit facility (the "Credit Facility") and in the indentures governing $200 million in subordinated debt securities that we issued and sold in 1998 (the "Indentures"). These covenants restrict our ability, among other things to:
dispose of assets;
engage in mergers or consolidations;
incur debt;
pay dividends;
repurchase our capital stock;
create liens on our assets;
make capital expenditures;
make investments or acquisitions; and
engage in transactions with our affiliates.
Our Credit Facility also requires us to maintain specified financial ratios, including minimum cash flow levels and interest coverage. These covenants may significantly limit our ability to respond to changing business and economic conditions and to secure additional financing, and we may be prevented from engaging in transactions, including acquisitions, that might be considered important to our business strategy or otherwise beneficial to us.
Our ability to comply with the restrictive covenants in our Credit Facility and the Indentures may be affected by events that are beyond our control. The breach of any of these covenants could result in a default under the Credit Facility or the Indentures. In the event of a default under the Credit Facility, our lenders could declare all amounts borrowed under the Credit Facility, together with accrued interest and other fees, to be due and payable. In the event of a default under the Indentures, the trustee under each indenture or the holders of our senior subordinated notes may declare the principal of and accrued interest on the notes to be due and payable. A default that is not cured or that can not be cured under our Credit Facility would constitute a default under the Indentures, and vice versa. We cannot assure you that we would be able to repay all amounts due under the Credit Facility or the Indentures in the event these amounts are declared due upon a breach of the Credit Facility or of the Indentures. As of December 31, 2001, we were in compliance with all restrictive covenants under the Credit Facility and the Indentures. However, if the Company's revenues for 2002 are less than expected or if the Company's expenses are more than expected, operating results and related cash flows will be less than planned. Such a shortfall might cause the Company to be in default of one of the financial covenants in its Credit Facility that depend on the Company's operating results.
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Our quarterly and annual operating results may fluctuate and the price of our common stock may change in response to those fluctuations
Our quarterly and annual revenues and operating results have varied in the past and may continue to fluctuate in the future depending on factors such as:
general economic conditions in our markets;
changes in our, and our competitors' pricing;
the timing of start-up locations and acquisitions and related costs;
the effectiveness of efforts to integrate start-up locations and acquired businesses with existing operations;
rental patterns of our customers; and
increased competition.
In addition, equipment rental businesses often experience a slowdown in demand during the winter months when adverse weather conditions affect construction activity. Due to these and other factors, we believe that quarter-to-quarter comparisons of our operating results may not be meaningful. You should not rely on our results for any one quarter as an indication of our future performance. In future periods, our operating results may fall below the expectations of public market analysts or investors. If this occurs, the price of our common stock is likely to decrease.
We face intense competition. If we are unable to compete successfully, we will lose market share and our business will suffer
The equipment rental industry is highly competitive. Our competitors include large national rental companies, regional competitors that operate in one or more states, smaller independent businesses with one or two rental locations, and equipment vendors and dealers who both sell and rent equipment to customers. Some of our competitors have greater financial resources, are more geographically diverse, and have greater name recognition than we do. If existing or future competitors reduce prices and we must also reduce prices to remain competitive, our operating results would be adversely affected. In addition, other equipment rental companies may compete with us for acquisition candidates or start-up locations, which may increase acquisition prices and reduce the number of suitable acquisition candidates or expansion locations.
We depend on our senior management
Neff is managed by a small number of key executive officers. The loss of the services of these key executives could have a material adverse effect on our business. We do not maintain any key man life insurance policies on any of our officers. Our success also depends on our ability to hire and retain qualified management personnel. We cannot assure you that we will be able to hire and retain the personnel we need.
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Any acquisitions we make could disrupt our business, increase our expenses and adversely affect our financial condition or operations.
In the future, we may make material acquisitions of, or large investments in, other equipment rental businesses. We cannot assure you that we would successfully integrate any businesses or personnel that we might acquire with our existing operations. Any future acquisitions or investments we might make would present risks commonly associated with these types of transactions, including:
difficulty in combining the operations or work force of an acquired business;
potential loss of key personnel of an acquired business;
disruptions of our on-going business;
difficulty in maintaining uniform standards, controls, procedures and policies;
potential negative impact on results of operations due to amortization of intangible assets acquired other than goodwill or assumption of liabilities;
risks associated with entering markets with which we have limited previous experience; and
diversion of management attention.
We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and common stock. Additional equity issued in connection with future acquisitions could result in dilution of our stockholders' equity interest. Fluctuations in our stock price may make acquisitions more expensive or prevent us from being able to complete acquisitions on terms that are acceptable to us.
We may incur substantial costs in order to comply with environmental and safety regulations
We 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.
These laws often impose liability without regard to whether the owner or lessee of real estate knew of, or was responsible for, the presence of hazardous or toxic substances. Some 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 with these activities. Although we investigate each business or property that we acquire or lease, these businesses or properties may have undiscovered potential liabilities relating to non-compliance with environmental laws and regulations that we will be required to investigate and/or remediate. While we do not currently expect to make any material capital expenditures for environmental compliance or remediation in the foreseeable future, we cannot assure you that environmental and safety requirements will not become more stringent or be interpreted and applied more stringently in the future, which could cause us to incur additional environmental compliance or remediation costs. These compliance and remediation costs could materially adversely affect our financial condition or results of operations.
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We may be liable for claims that our insurance will not cover
Our business exposes us to possible claims for personal injury or death resulting from the use of equipment that we rented or sold and from injuries caused in motor vehicle accidents in which our delivery and service personnel are involved. We carry comprehensive insurance subject to a deductible at a level management believes is sufficient to cover existing and future claims. We cannot assure you that existing or future claims will not exceed the level of our insurance or that such insurance will continue to be available on economically reasonable terms, or at all. In addition, our insurance may not cover claims for punitive damages or for damages arising from intentional misconduct.
The market price for our common stock may fluctuate widely
The trading price for our common stock has been and may continue to be highly volatile. The market price of our common stock could fluctuate substantially due to factors, many of which are beyond our control, such as:
actual or anticipated variations in our quarterly results of operations;
additions or departures of key personnel;
announcements of acquisitions, new products or new services by us or our competitors;
changes in earnings estimates or recommendations by securities analysts;
changes in business or regulatory conditions affecting us;
changes in the market valuations of other equipment rental companies;
trading of our common stock; and
general market conditions.
Our principal stockholders have substantial control over our affairs
Neff is controlled by members of the Mas family. Juan Carlos Mas, our Chief Executive Officer, his brothers, Jorge Mas and Jose Ramon Mas, who are also members of our board of directors, and Santos Fund I, L.P. ("Santos"), a limited partnership controlled by the Mas family beneficially own approximately 44.9% of our common stock. In addition, General Electric Capital Corporation ("GE Capital") owns Class B Special common stock that represents 24.1% of the outstanding equity of Neff. Neff, GE Capital, Santos and the Mas family have entered into a Stockholders' Agreement. The agreement provides that if GE Capital transfers common stock representing 15% or more of the equity of Neff to a third party, the parties to the agreement will cause Neff's Board of Directors to increase by one member and will cause the nominee designated by the purchaser of GE Capital's common stock to be elected as the additional director.
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The Mas family, Santos and GE Capital, or a transferee who acquires the common stock held by GE Capital, acting together will have the ability to exert substantial influence over all matters requiring approval by our stockholders. These matters include the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, they may dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination which you, as a stockholder, may otherwise view favorably.
Future sales of our common stock may adversely affect our common stock price
If our stockholders sell a large number of shares of common stock or if we issue a large number of shares in connection with future acquisitions or financings, the market price of our common stock could decline significantly. In addition, the perception in the public market that our stockholders might sell a large number of shares of common stock could cause a decline in the market price of our common stock. An additional 1.9 million shares of our common stock may be issued upon the exercise of vested stock options we have previously granted, all of which could be sold in the public market if issued, subject to compliance with Rule 144 of the Securities Act in the case of shares held by our affiliates.
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 2 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.
Neff, the members of our Board of Directors, two of our principal stockholders and United Rentals, Inc. ("United") were defendants in at least nine lawsuits filed in the Delaware Court of Chancery in January 2001. All of the suits were filed after Neff announced that it had received a proposal from United to acquire all of the outstanding shares of our Class A common stock held by the public. The plaintiffs in the suits were stockholders of Neff who purported to bring the suits as class actions on behalf of all persons, other than the defendants, who own our Class A common stock. The complaints alleged, among other things, that certain members of the Board of Directors, GE Capital and Santos breached their fiduciary duties to our public shareholders and engaged in self-dealing in negotiating the terms of the United proposal. The plaintiffs sought, among other things, injunctive relief and damages. On February 26, 2001, Neff announced that the United proposal had expired and negotiations with United had terminated. The lawsuits have been dismissed.
On December 17, 1999, we completed the sale of Neff Machinery, Inc. ("Machinery"), a wholly-owned subsidiary of Neff. Neff received $90.5 million and recorded a gain on the sale of $3.8 million. The Machinery sale agreement (the "Agreement") provides for a post-closing purchase price adjustment based on the difference between the net worth of Machinery as of June 30, 1999 (the date of a pro forma balance sheet prepared in advance of the execution of the Agreement) and the closing date (on the basis of a balance sheet prepared after closing). Neff takes the position that this provision was designed in general to provide an upward adjustment in the purchase price based on any increase in Machinery's retained earnings during the period from June 30, 1999 to the closing date.
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Following preparation of a closing date balance sheet, the purchaser told Neff that Neff owed the purchasers an adjustment payment of $20.3 million. Neff responded by informing the purchaser that the purchaser owed Neff additional consideration of $8.8 million. In its response, Neff noted that Machinery had been profitable during the period between June 30, 1999 and the closing date. In fact, a significant portion of the additional consideration Neff claimed it was owed is attributable to Machinery's earnings during this period. Neff believes that the difference between its position and the purchaser's position is generally the result of a difference in contract interpretation. Neff's position is that the Agreement requires all of Machinery's assets and liabilities to be valued, for purposes of the closing date balance sheet, using the same standards used to prepare the June 30, 1999 pro forma balance sheet. The purchaser's position is that the Agreement allows many of Machinery's assets and liabilities to be valued, for purposes of the closing date balance sheet, at the lower of book or market value, irrespective of the valuation standards used to prepare the June 30, 1999 pro forma balance sheet.
The largest monetary dispute concerns Machinery's rental fleet. The book value (cost less accumulated depreciation) of the rental fleet as of the closing was approximately $50.5 million. The gross book value of the rental fleet was approximately $63.7 million. Neff's position is that Machinery's rental fleet should be measured on the closing date balance sheet at its book value, consistent with Neff's historical financial statements and the June 30, 1999 pro forma balance sheet. The purchaser argues that Machinery's rental fleet as of the closing date should be measured at the lower of book or market value, which the purchaser maintains is approximately $14.6 million lower than Neff's valuation of the rental fleet under accounting principles generally accepted in the United States of America ("GAAP"). Neff also disputes the market values assigned by the purchaser to the rental fleet.
The next largest item in dispute between Neff and the purchaser relates to the treatment of floor plan financing programs with equipment manufacturers. The purchaser assumed approximately $3 million of floor plan liabilities as of the closing and included those liabilities on the closing date balance sheet prepared by the purchaser. Floor plan financing was not included on the June 30, 1999 pro forma balance sheet. As of June 30, 1999, the amount of the floor plan financing was approximately $6 million.
Neff maintains that this debt was erroneously omitted from the June 30, 1999 pro forma balance sheet and maintains that the June 30, 1999 pro forma balance sheet should be corrected accordingly. The purchaser opposes this adjustment on the grounds that the Agreement does not expressly contemplate adjustments to the pro forma balance sheet. The purchaser also maintains that floor plan financing was properly omitted from the June 30, 1999 pro forma balance sheet.
The balance of the difference between Neff's and the purchaser's claims relates to the following items: (1) The closing date balance sheet prepared by the purchaser includes a reserve for bad debt as of the closing date. Neff maintains that the magnitude of the purchaser's proposed bad debt reserve is higher than appropriate under GAAP. The difference between Neff's position on the issue and the purchaser's position is approximately $2.4 million; (2) The purchaser contends that Machinery's real estate should be valued on the closing date balance sheet at the lower of book or market value. Neff maintains that, under GAAP, Machinery's real estate should be stated at book value unless assets are impaired, in which case the assets should be written down to fair market value. Neff further maintains that the assets are not impaired. The difference between Neff's position on this issue and the purchaser's position is approximately $2.3 million; and (3) The purchaser has written down a portion of Machinery's parts inventory for parts it claims are inactive or are obsolete. Neff maintains that the write down is inappropriate because the parts are included on the "active" parts inventory lists of their respective manufacturers as of December 31, 1999, and are required in many cases to be stocked pursuant to agreements with those manufacturers. The difference between Neff's position on this issue and the purchaser's position is approximately $2.1 million.
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On May 5, 2000, Neff filed suit in Florida state court, seeking, inter alia, a declaration that the Agreement as written requires that the inventory be valued as of the closing in accordance with GAAP applied on a basis consistent with the Company's historical financial statements and the June 30, 1999 pro forma balance sheet. In the alternative, Neff sought to have the Agreement reformed to so require. Neff Corp. v. Nortrax Equipment Co. - Southeast, L.L.C., Case No. 00-11524 CA01 (Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida). On or about May 25, 2000, the purchaser filed a motion to stay the litigation and compel arbitration.
In August 2001, the parties filed a stipulation in which they agreed that all disputes pertaining to the closing balance sheet and the June 30, 1999 pro forma balance sheet will be resolved by an arbitrator selected by the parties (the "Arbitrator"). The Arbitrator will, acting in accordance with the Federal Arbitration Act and the terms of the Agreement, determine whether and to what extent the closing net asset value of Machinery derived from the closing balance sheet requires adjustment and whether the Agreement and the June 30,1999 pro forma balance sheet should be reformed. Pursuant to the Agreement, the Arbitrator shall refer to a nationally recognized firm of personal property appraisers selected by the parties, or to a real estate appraiser selected by the parties, those items, if any, that it determines are to be valued at market. The parties have each submitted opening statements and replies thereto to the Arbitrator, and in November and December 2001, the Arbitrator held a hearing at which each side presented testimony. The Arbitrator has not yet rendered a decision.
We are also a party to other 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 other matters are material to our financial condition or results of operations.
During the fourth quarter of 2001, no matter was submitted to a vote of the security holders of Neff.
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Price Range of Common Stock
On May 21, 1998, our Class A common stock began trading on the New York Stock Exchange ("NYSE") under the symbol "NFF". In November 2001, the NYSE suspended trading in our Class A common stock and we began to trade under the symbol "NFFCA" on the NASD Over-the-Counter Bulletin Board ("OTC"). The following table sets forth the high and low closing sales prices of our Class A common stock as reported on the NYSE and the OTC market for the periods indicated.
Year ended December 31, 2001:
HIGH LOW
---- ---
First Quarter ................ $ 2.66 $ 0.40
Second Quarter ................ $ 1.35 $ 0.35
Third Quarter ................ $ 1.10 $ 0.55
Fourth Quarter ................ $ 0.75 $ 0.33
Year ended December 31, 2000:
HIGH LOW
---- ---
First Quarter ................ $ 9.38 $ 5.94
Second Quarter ................ $ 7.31 $ 3.00
Third Quarter ................ $ 5.50 $ 2.94
Fourth Quarter ................ $ 4.25 $ 0.75
As of March 1, 2002, we had 89 shareholders of record. We believe the number of beneficial owners is substantially greater than the number of record holders because a large portion of our Class A 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, 2001. 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 Credit Facility 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 in 2008.
The declaration and payment of any future cash dividends will depend on a number of factors including future earnings, capital requirements, our financial condition and prospects and any restrictions under credit or other agreements existing from time to time, as well as any other factors as our Board of Directors may deem relevant. We cannot assure you that we will pay any dividends in the future.
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The data set forth below should be read in conjunction with Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Neff’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.
For the Years Ended December 31,
---------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(Amounts in thousands, except per share data)
Revenues
Rental revenue .................. $ 183,360 $192,990 $222,862 $179,014 $69,512
Equipment sales ................. 33,520 51,179 121,865 108,352 50,578
Parts and service ............... 14,122 15,923 47,284 36,724 22,132
------- ------- ------- ------- -------
Total revenues ............. 231,002 260,092 392,011 324,090 142,222
------- ------- ------- ------- -------
Cost of revenues
Cost of equipment sold .......... 29,388 43,660 100,871 83,783 40,766
Depreciation of rental
equipment (1) ............... 43,479 44,724 55,159 56,336 24,231
Maintenance of rental
equipment .................. 64,838 64,883 66,763 49,858 18,752
Cost of parts and service ....... 9,569 10,495 30,166 23,690 13,741
------- ------- ------- ------- -------
Total cost of revenues ...... 147,274 163,762 252,959 213,667 97,490
------- ------- ------- ------- -------
Gross profit .................... 83,728 96,330 139,052 110,423 44,732
------- ------- ------- ------- -------
Selling, general and
administrative expenses ..... 55,497 61,574 74,893 60,347 31,329
Other depreciation and
amortization ................ 10,121 9,884 10,731 8,833 2,806
Write-down of assets held
for sale ................... - 4,272 1,444 - -
Cost incurred in efforts to sell
the company .................. - 4,282 - - -
Officer stock option
compensation (2)............. - - - 3,198 4,400
Branch closure and other
related costs................ 5,702 - - - -
------- ------- ------- ------- -------
Income from operations .......... 12,408 16,318 51,984 38,045 6,197
------- ------- ------- ------- -------
Other expenses .................. 32,551 34,763 41,520 35,855 14,338
------- ------- ------- ------- -------
Income (loss) before income taxes,
minority interest and
extraordinary item .......... (20,143) (18,445) 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 ......... (20,143) (18,445) 6,587 2,324 (6,393)
Minority interest ............... - - (1,733) (1,111) -
------- ------- ------- ------- -------
Income (loss) before extraordinary
item ......................... (20,143) (18,445) 4,854 1,213 (6,393)
Extraordinary loss, net ......... (1,449) - - (2,675) (451)
------- ------- ------- ------- -------
Net income (loss) ............... $ (21,592) $(18,445) $ 4,854 $ (1,462) $(6,844)
======= ======= ======= ======= =======
Basic income (loss) per common share:
Income (loss) before extraordinary
item ......................... $ (0.95) $ (0.87) $ 0.23 $ (0.23) $ (1.64)
Extraordinary loss, net ......... (0.07) - - (0.15) (0.05)
------- ------- ------- ------- -------
Net income (loss) ............... $ (1.02) $ (0.87) $ 0.23 $ (0.38) $ (1.69)
======= ======= ======= ======= =======
Diluted income (loss) per common share:
Income (loss) before extraordinary
item ......................... $ (0.95) $ (0.87) $ 0.22 $ (0.23) $ (1.64)
Extraordinary loss, net ......... (0.07) - - (0.15) (0.05)
------- ------- ------- ------- -------
Net income (loss) ............... $ (1.02) $ (0.87) $ 0.22 $ (0.38) $ (1.69)
======= ======= ======= ======= =======
Weighted average common shares
outstanding:
Basic ........................... 21,165 21,165 21,165 17,213 8,465
======= ======= ======= ======= =======
Diluted ......................... 21,165 21,165 21,887 17,213 8,465
======= ======= ======= ======= =======
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Year Ended December 31,
2001 2000 1999 1998 1997
------ ------ ------ ------- ------
(Amounts in thousands, except percent and location data)
Balance Sheet Data (end of period):
Net book value of rental equipment..$258,391 $306,265 $285,863 $321,220 $179,547
Total assets........................ 414,457 474,967 471,706 572,369 279,654
Total debt.......................... 317,184 345,939 335,852 406,993 226,203
Redeemable preferred stock.......... - - - - 53,747
Total stockholders' equity
(deficit)................... 64,171 85,763 104,208 99,360 (24,735)
Other Data:
EBITDA(3)...........................$ 71,710 $ 79,480 $119,318 $106,412 $ 37,634
EBITDA margin(4)..................... 31.0% 30.6% 30.4% 32.8% 26.5%
Rental equipment purchases .........$ 27,934 $109,578 $221,671 $199,198 $143,515
Number of locations (end of period).. 74 82 84 86 53
- ---------------------
1) Depreciation of rental equipment for 1997 and 1999 reflects Neff's change in depreciation policy to recognize extended estimated service lives and increased residual values of our rental equipment. See Neff's Consolidated Financial Statements and the Notes thereto included elsewhere in this Annual Report.
2) Officer stock option compensation expense represents a non-cash charge with respect to the changes in the difference between the estimated market value of the shares issuable to a former executive officer under an option agreement, and the exercise price for the shares.
3) EBITDA represents income from operations plus depreciation, amortization, and non-cash expenditures, including branch closure and other related costs in 2001, write-down of assets in 2000 and 1999, officer stock option compensation expense in 1998 and 1997, and costs incurred in efforts to sell the Company in 2000. 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 Neff's operating performance, as an alternative to cash flows from operating activities (as determined in accordance with GAAP) or as a measure of liquidity. We believe that EBITDA is a fairly standard measure in our industry, commonly reported and widely used by analysts and investors as a measure of profitability for companies with significant depreciation, amortization and non-cash expenditures. 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.
4) EBITDA margin represents EBITDA as a percentage of total revenues.
The following discussion and analysis compares the year ended December 31, 2001 to results for the year ended December 31, 2000, and the year ended December 31, 2000 to the historical and pro forma results for year ended December 31, 1999. This discussion should be read in conjunction with Neff's Consolidated Financial Statements and the Notes thereto, appearing elsewhere in this Annual Report.
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Overview
We derive revenue from (1) the rental of equipment; (2) sales of new and used equipment and (3) sales of parts and service. Our 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 our 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 our rental fleet also affect revenues from the sale of used equipment. Revenues derived from the sale of parts and service generally correlates with rental revenues.
As part of our strategy to improve utilization and return on fleet investments, we plan to reduce our short term capital expenditures on fleet assets during 2002 in order to apply operating cash flow to pay down debt. The reduction in capital expenditures could lead to a reduction in used equipment sales as we age the fleet and seek to maximize return on existing fleet investments. We will also continue to carefully analyze the market potential of each branch and may contemplate the closing of branches that are not generating adequate return on investment or are in a market that we do not believe has significant future potential.
We own and lease rental equipment fleet for our operations. As of December 31, 2001 we owned rental fleet assets with a net book value of $258.4 million. We also lease rental fleet under operating leases that had an original cost of $53.7 million. Operating Lease expense related to rental fleet under operating leases was $10.1 million for 2001.
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 and includes operating lease payments made on leased fleet. 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.
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 10-20% residual values). Since January 1, 1996, we have, from time to time, made certain changes to our depreciation assumptions to recognize extended estimated service lives and increased residual values of our rental equipment. We believe that these changes in estimates will more appropriately reflect our financial results by better allocating the cost of our rental equipment over the service lives of these assets. In addition, the new lives and residual values more closely conform to those prevalent in our 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.
On March 21, 2001, the Company adopted a plan to close nine of its branches. Management expected all of the nine branches to be closed by March 31, 2002. During the first quarter of 2001, the Company recognized a charge of $9.1 million associated with these branch closings. During the fourth quarter of 2001, management decided not to close two of the stores it had previously decided to close and to close two other stores instead. The change in the branch closure plan resulted in a reduction of expenses associated with the branch closings of $3.4 million which was recorded in the fourth quarter of 2001. The expense reduction of $3.4 million was the result of reversing $4.7 million associated with the previously announced closings, of which $3.6 million was goodwill, and new charges of $1.3 million associated with the closure of the two other branches in the fourth quarter. The change in the branch closure plan caused the Company to recognize a charge of $5.7 million for the year ended December 31, 2001 that included $1.1 million of goodwill, $3.0 million to write-down equipment held for sale, employee termination benefits of $0.2 million and other related costs of $1.4 million. The employee termination benefits were paid to approximately 33 administrative, sales and maintenance employees who were terminated in connection with the branch closings.
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Results of Operations
Management believes that the period-to-period comparisons of Neff's financial results may not necessarily be meaningful and should not be relied upon as an indication of future performance. In addition, our results of operations may fluctuate from period-to-period in the future as a result of the cyclical nature of the industry in which we operate.
Sale of Subsidiaries. During the fourth quarter of 1999, we sold our equity interest in two subsidiaries, Sullair Argentina Sociedad Anonima ("S.A. Argentina") and Neff Machinery, Inc. ("Machinery"). Our pro forma results for the Company for 1999, assuming the sales of S.A. Argentina and Machinery took place on January 1, 1999, are presented below with the other years presented for comparative purposes.
The following table sets forth, for the periods indicated, information derived from the consolidated statements of operations of Neff, and pro forma results for 1999, expressed as a percentage of total revenues. We cannot assure you that the trends in the table below will continue in the future.
For the years ended December 31,
-----------------------------------
Historical Pro Forma
2001 % 2000 % 1999 % 1999 %
-------- ----- ------- ---- ------- ----- ------- ----
Revenues
Rental revenue..............$183,360 79.4 $192,990 74.2 $222,862 56.9 $179,062 72.0
Equipment sales............. 33,520 14.5 51,179 19.7 121,865 31.1 54,234 21.8
Parts and service........... 14,122 6.1 15,923 6.1 47,284 12.0 15,257 6.2
------- ----- ------- ----- ------- ---- ------- ----
Total revenues......... 231,002 100.0 260,092 100.0 392,011 100.0 248,553 100.0
------- ----- ------- ----- ------- ----- ------- -----
Cost of revenues
Cost of equipment sold...... 29,388 12.7 43,660 16.8 100,871 25.7 45,086 18.1
Depreciation of
rental equipment..... 43,479 18.8 44,724 17.2 55,159 14.1 40,821 16.4
Maintenance of
rental equipment..... 64,838 28.1 64,883 25.0 66,763 17.0 56,556 22.8
Cost of parts and service... 9,569 4.2 10,495 4.0 30,166 7.7 8,745 3.5
------ ----- ------- ----- ------- ---- ------- ----
Total cost of revenues...147,274 63.8 163,762 63.0 252,959 64.5 151,208 60.8
------ ----- ------- ----- ------- ---- ------- ----
Gross profit................. 83,728 36.2 96,330 37.0 139,052 35.5 97,345 39.2
------ ----- ------- ----- ------- ---- ------- ----
Other operating expenses
Selling, general and
administrative expenses.... 55,497 24.0 61,574 23.7 74,893 19.1 56,555 22.8
Other depreciation and
amortization......... 10,121 4.4 9,884 3.8 10,731 2.7 8,707 3.5
Write-down of assets held
for sale............. - - 4,272 1.7 1,444 0.4 1,444 0.6
Costs incurred in efforts to
sell the company........... - - 4,282 1.7 - - - -
Branch closure and other
related costs........ 5,702 2.4 - - - - - -
------ ----- ------- ----- ------- ---- ------- ----
Income from operations.......$12,408 5.4 $ 16,318 6.3 $ 51,984 13.3 $30,639 12.3
------ ----- ------- ----- ------- ---- ------- ----
EBITDA.......................$71,710 31.0 $ 79,480 30.6 $119,318 30.4 $81,611 32.8
======= ===== ======= ===== ======= ==== ======= ====
Certain amounts for the prior periods have been reclassified to conform with
the current period presentation.
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2001 Compared to 2000 (in thousands, except percent data)
This section compares our operating results for 2001 with our operating results for 2000.
Total Revenues. Total revenues for the year ended December 31, 2001 decreased 11.2% to $231,002 from $260,092 for the year ended December 31, 2000. The decrease in total revenues is primarily due to a decrease of $9,630 or 5.0% in rental revenues and a $17,659 or 34.5% decrease in sales of rental equipment during the year ended December 31, 2001 compared with the year ended December 31, 2000. Total revenues at locations open for more than one year decreased 1.0% for the year ended December 31, 2001 compared with the year ended December 31, 2000.
Gross Profit. Gross profit for the year ended December 31, 2001 decreased 13.1% to $83,728 or 36.2% of total revenues from $96,330 or 37.0% of total revenues for the year ended December 31, 2000. The decrease in gross profit is partly due to a decrease in rental revenue profit margins resulting from decreased utilization of the rental fleet in response to economic conditions and competitive pressures during 2001. The decrease in gross profit was also due to reduced profits from the sale of used equipment due to a decrease in sales margins as well as equipment sales volume.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2001 decreased 9.9% to $55,497 or 24.0% of total revenues from $61,574 or 23.7% of total revenues for the year ended December 31, 2000. The decrease in selling, general and administrative expenses is primarily attributable to the closure of branches during 2001 and our continued effort to reduce selling, general and administrative expenses in our continuing operations.
Depreciation of Rental Equipment. Depreciation of rental equipment for 2001 decreased 2.8% to $43,479 or 18.8% of total revenues from $44,724 or 17.2% of total revenues in 2000. The decrease in the dollar amount of depreciation is due primarily to decreased levels of rental fleet due to branch closures.
Other Depreciation and Amortization. Other depreciation and amortization expense for the year ended December 31, 2001 increased 2.4% to $10,121 or 4.4% of total revenues from $9,884 or 3.8% of total revenues for the year ended December 31, 2000. The increase is due to increased amortization of debt issuance costs as a result of fees paid for various amendments to our former $219 million credit facility (the "Former Credit Facility").
Interest Expense. Interest expense for the year ended December 31, 2001 decreased 8.2% to $30,727 from $33,456 for the year ended December 31, 2000. The decrease is primarily attributable to decreased borrowings under Neff's variable rate debt during 2001, as well as reductions in interest rates charged on our variable rate debt.
Write-Down of Assets Held for Sale. There was no write-down of assets held for sale during 2001, except for those write-downs included in the branch closure and other related costs. Write-down of assets held for sale represents a charge of $4,272 to write-down fleet assets primarily utilized by the oil industry to estimated fair value during the second quarter of 2000.
Cost Incurred in Efforts to Sell the Company. There were no costs incurred in efforts to sell the Company during 2001. In 2000 we recorded a charge of $4,282 during 2000 to record expenses related to consulting and legal fees associated with efforts to sell Neff during 1999 and 2000.
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2000 Compared to 1999 (in thousands, except percent data)
This section compares 2000 operating results with both our historical operating results for 1999 and with pro forma operating results for 1999. The pro forma operating results of 1999 exclude the operations of two of the Company's subsidiaries, S.A. Argentina and Machinery, which were sold in the fourth quarter of 1999. Pro forma operating results assume that the sales of S.A. Argentina and Machinery occurred on January 1, 1999.
Total Revenues. Total revenues for 2000 decreased 33.7% to $260,092 from $392,011 in 1999. This decrease in revenues is primarily attributable to the sales of S.A. Argentina and Machinery.
Pro Forma Total Revenues. Total revenues for the year ended December 31, 2000 increased 4.6% to $260,092 from $248,553 for the year ended December 31, 1999. The increase in total revenues is partly due to an increase of $13,928 or 7.8% in rental revenues resulting from the continued expansion of our rental fleet at existing locations. The increase in total revenues was mitigated by a $3,055 or 5.6% decrease in sales of rental equipment during the year ended December 31, 2000 compared with the year ended December 31, 1999. Total revenues at locations open for more than one year increased 7.2% for the year ended December 31, 2000 compared with the year ended December 31, 1999.
Gross Profit. Gross profit for 2000 decreased 30.7% to $96,330 or 37.0% of total revenues from $139,052 or 35.5% of total revenues in 1999. This decrease is primarily attributable to the sales of S.A. Argentina and Machinery.
Pro Forma Gross Profit. Gross profit for the year ended December 31, 2000 decreased 1.0% to $96,330 or 37.0% of total revenues from $97,345 or 39.2% of total revenues for the year ended December 31, 1999. The decrease in gross profit is primarily due to a decrease in gross profit margin resulting from decreases in rental rates in response to competitive pressures during 2000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses in 2000 decreased 17.8% to $61,574 or 23.7% of total revenues from $74,893 or 19.1% of total revenues in 1999. The decrease in selling, general and administrative expenses is primarily attributable to the sales of S.A. Argentina and Machinery.
Pro Forma Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2000 increased 8.9% to $61,574 or 23.7% of total revenues from $56,555 or 22.8% of total revenues for the year ended December 31, 1999. The increase in selling, general and administrative expenses is primarily attributable to the allocation of increased resources to support the continued expansion of our rental fleet at existing locations.
Depreciation of Rental Equipment. Depreciation of rental equipment for 2000 decreased 18.9% to $44,724 or 17.2% of total revenues from $55,159 or 14.1% of total revenues in 1999. The decrease was primarily due to the sales of S.A. Argentina and Machinery.
Pro Forma Depreciation of Rental Equipment. Depreciation of rental equipment for 2000 increased 9.6% to $44,724 or 17.2% of total revenues from $40,821 or 16.4% of total revenues in 1999. The increase is due primarily to increased investments in rental fleet at existing locations.
Other Depreciation and Amortization. Other depreciation and amortization expense for 2000 decreased 7.9% to $9,884 or 3.8% of total revenues from $10,731 or 2.7% of total revenues in 1999. This decrease is primarily attributable to the sales of S.A. Argentina and Machinery.
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Pro Forma Other Depreciation and Amortization. Other depreciation and amortization expense for the year ended December 31, 2000 increased 13.5% to $9,884 or 3.8% of total revenues from $8,707 or 3.5% of total revenues for the year ended December 31, 1999. The increase is due to increased investment in non-rental equipment during the year 2000.
Interest Expense. Interest expense for 2000 decreased 16.2% to $33,456 from $39,901 in 1999. This decrease is primarily attributable to the paydown of debt with the proceeds of the sales of S.A. Argentina and Machinery.
Pro Forma Interest Expense. Interest expense for the year ended December 31, 2000 increased 17.4% to $33,456 from $28,508 for the year ended December 31, 1999. The increase is primarily attributable to increased borrowings to finance the expansion of our rental fleet assets at existing locations and rate increases on the Former Credit Facility.
Write-Down of Assets Held for Sale. Write-down of assets held for sale represents a charge of $4,272 to write-down fleet assets primarily utilized by the oil industry to estimated fair value during the second quarter of 2000. A write-down of similar assets held for sale of $1, 444 was recorded during 1999.
Cost Incurred in Efforts to Sell the Company. We recorded a charge of $4,282 during 2000 to record expenses related to consulting and legal fees associated with efforts to sell Neff during 1999 and 2000.
Liquidity and Capital Resources
During 2001, our operating activities provided net cash flow of $30.4 million as compared to $44.0 million for 2000. This decrease is primarily attributable to increased net loss combined with changes in working capital as a result of our operations.
Net cash provided by (used in) investing activities was $4.8 million for 2001 as compared to $(53.9) million in the same period for the prior year. The change in cash from investing activities was due primarily to reduced purchases of rental equipment offset partially by reduced sales of rental equipment in 2001 compared with the prior year.
Net cash provided by (used in) financing activities was $(34.1) million for 2001 as compared to $9.7 million for 2000. The change in cash from financing activities is due primarily to the net repayment of outstanding debt of $28.9 million in 2001 compared with net borrowings of $9.9 in 2000.
During the fourth quarter of 2001, the Company entered into our new $200 million Credit Facility with a group of lenders led by Fleet Capital. The Company used proceeds from the Credit Facility to repay its former revolving credit facility. Proceeds from the borrowing on the Credit Facility were used to repay the Company’s outstanding debt on the Former Credit Facility. The Company’s maximum availability under the Credit Facility is based upon eligible accounts receivable, rental fleet and inventory amounts. The interest rates on balances outstanding under the Credit Facility vary based upon the leverage ratio maintained by the Company. The Credit Facility expires in December 2005. The Company is charged a commitment fee on the aggregated daily unused balance of the Credit Facility which varies between 0.50% and 0.63%.
The 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 restrict the payment of dividends by the Company. During 2001 the Company recorded an extraordinary loss of approximately $1.5 million, net of related income taxes, from the write-off of debt issue costs associated with the repayment of the Former Credit Facility.
Our Credit Facility contains financial covenants requiring us to maintain a debt to EBITDA ratio (4.55:1 at December 31, 2001), and an EBITDA to interest expense ratio (2.30:1 at December 31, 2001). As of December 31, 2001 the Company was in compliance with all of the financial covenants under the Credit Facility. If the Company’s revenues for 2002 are less than expected or if the Company’s expenses are more than expected, operating results and related cash flows will be less than planned. Such a shortfall might cause the Company to be in default of one of the financial covenants in its Credit Facility that depend on the Company’s operating results. Such default could potentially result in a demand for payment on the outstanding balance of the Credit Facility. Management is confident that, should such a default occur, the Company would be able to obtain amendments to the Credit Facility to cure the default, and have adequate capital resources to meet its needs however, there can be no assurances that the Company could obtain such amendments. We expect our operations will continue to produce free cash flow during 2002 and we intend to use all free cash flow to repay outstanding debt on the Credit Facility during 2002.
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Inflation and General Economic Conditions
Although we cannot accurately anticipate the effect of inflation on our operations, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our operating results. Neff'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, our 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 for us under our variable rate credit facilities.
Although much of our business is with customers in industries that are cyclical in nature, management believes that certain characteristics of the equipment rental industry and our operating strategies should help to mitigate the effects of an economic downturn. These characteristics include (1) the flexibility and low cost offered to customers by renting, which may be a more attractive alternative to capital purchases; (2) our ability to redeploy equipment during regional recessions; and (3) the diversity of our industry and customer base.
Market Risk
Our financial instruments consist of cash, accounts receivable and fixed rate debt and variable rate debt. Cash and accounts receivable are short term, non-interest bearing instruments and are not subject to market risk.
We are exposed to market risks related to changes in interest rates. Interest rate changes affect the fair market value of fixed rate debt instruments 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, 2001, we had fixed rate debt of $199.0 million and variable rate debt of $118.2 million. Holding debt levels constant, a one percentage point increase in interest rates would decrease the fair market value of our fixed rate debt by approximately $4.5 million and increase interest expense for our variable rate debt by approximately $1.2 million.
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New Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137") and further amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138"). SFAS 133, as amended by SFAS 137 and SFAS 138, was effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company adopted SFAS 133 on January 1, 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of SFAS 133 as amended by SFAS 137 and SFAS 138 did not have a material impact on its financial position.
In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” (“SFAS 141”), and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 requires that the purchase method of accounting be used for all business combinations, among other things and applies to all business combinations initiated after June 30, 2001 and all business combinations accounted for using the purchase method for which the acquisition date is July 1, 2001 or later. The Company has not entered into any business combinations during 2001. SFAS 142, which became effective January 1, 2002, changes the accounting for goodwill from an amortization method to an impairment-only approach and requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. For the year ended December 31, 2001, 2000 and 1999 goodwill amortization was approximately $2.3 million, $2.3 million and $2.3 million, respectively. Based on our preliminary assessment of SFAS 142, we expect that this amortization will no longer be recorded in future periods. The Company is in the process of evaluating the effect the adoption of these standards will have on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The provisions of SFAS 143 will be effective for fiscal years beginning after June 15, 2002; however early application is permitted. The Company is currently evaluating the implications of adoption of SFAS 143 on its financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and the Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business. The provisions of SFAS 144 will be effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the implications of adoption of SFAS 144 on its financial position or results of operations.
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Index to Financial Statements and Schedules
Page
Numbers
---------
Independent Auditors' Report ........................................... 28
Consolidated Balance Sheets as of December 31, 2001 and 2000 ........... 29
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999 ...................................... 30
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2001, 2000 and 1999 ...................... 31
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999 ...................................... 32
Notes to Consolidated Financial Statements ............................. 33
SCHEDULES:
Independent Auditors' Report ........................................... 52
Schedule II-Valuation and Qualifying Accounts and Reserves ............. 53
All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.
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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, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Neff Corp. and subsidiaries at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 29, 2002
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December 31, December 31,
2001 2000
-------- --------
ASSETS
Cash and cash equivalents ........................ $ 4,305 $ 3,102
Accounts receivable, net of allowance for doubtful
accounts of $2,947 in 2001 and $3,323 in 2000 .. 31,458 42,341
Inventories ....................................... 2,415 2,783
Rental equipment, net ............................ 258,391 306,265
Property and equipment, net ...................... 21,790 26,401
Goodwill, net .................................... 82,296 85,696
Prepaid expenses and other assets ................ 13,802 8,379
-------- --------
Total assets ............................. $ 414,457 $ 474,967
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable .............................. $ 10,067 $ 18,029
Accrued expenses .............................. 22,997 24,780
Credit facility ............................... 118,217 147,121
Senior subordinated notes ..................... 198,967 198,818
Capitalized lease obligations ................. 38 456
-------- --------
Total liabilities ........................... 350,286 389,204
-------- --------
Commitments and contingencies (note 12)
Stockholders' equity
Class A Common Stock; $.01 par value; 100,000 shares
authorized; 16,065 shares issued and outstanding in
2001 and 2000 ................................ 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 2001 and 2000 .............................. 51 51
Additional paid-in capital ..................... 127,759 127,759
Accumulated deficit ............................ (63,800) (42,208)
-------- --------
Total stockholders' equity .................. 64,171 85,763
-------- --------
Total liabilities and stockholders' equity .. $ 414,457 $ 474,967
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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For the Years Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Revenues
Rental revenue .................................... $ 183,360 $ 192,990 $ 222,862
Equipment sales ................................... 33,520 51,179 121,865
Parts and service ................................. 14,122 15,923 47,284
-------- -------- --------
Total revenues ............................... 231,002 260,092 392,011
-------- -------- --------
Cost of revenues
Cost of equipment sold ............................ 29,388 43,660 100,871
Depreciation of rental equipment .................. 43,479 44,724 55,159
Maintenance of rental equipment ................... 64,838 64,883 66,763
Cost of parts and service ......................... 9,569 10,495 30,166
-------- -------- --------
Total cost of revenues ....................... 147,274 163,762 252,959
-------- -------- --------
Gross profit ........................................ 83,728 96,330 139,052
-------- -------- --------
Other operating expenses
Selling, general and administrative expenses ...... 55,497 61,574 74,893
Other depreciation and amortization ............... 10,121 9,884 10,731
Write-down of assets held for sale ................ - 4,272 1,444
Costs incurred in efforts to sell the company ...... - 4,282 -
Branch closure and other related costs ............ 5,702 - -
-------- -------- --------
Total other operating expenses ............... 71,320 80,012 87,068
-------- -------- --------
Income from operations .............................. 12,408 16,318 51,984
-------- -------- --------
Other expenses
Interest expense .................................. 30,727 33,456 39,901
Loss on sale of subsidiaries ...................... - - 422
Amortization of debt issue costs .................. 1,824 1,307 1,197
-------- -------- --------
Total other expenses ......................... 32,551 34,763 41,520
-------- -------- --------
Income (loss) before income taxes, minority interest
and extraordinary item ........................... (20,143) (18,445) 10,464
Provision for income taxes .......................... - - (3,877)
-------- -------- --------
Income (loss) before minority interest and
extraordinary item ............................... (20,143) (18,445) 6,587
Minority interest ................................... - - (1,733)
-------- -------- --------
Income (loss) before extraordinary item ............. (20,143) (18,445) 4,854
Extraordinary loss, net of income taxes ............. (1,449) - -
-------- -------- --------
Net income (loss) ................................... $ (21,592) $ (18,445) $ 4,854
======== ======== ========
Basic income (loss) per common share:
Income (loss) before extraordinary item .......... $ (0.95) $ (0.87) $ 0.23
Extraordinary loss, net .......................... (0.07) - -
--------