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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, 1998 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
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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 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $38.3 million. As of March
15, 1999, 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 May 24, 1999 (the "1999 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 fastest growing equipment rental companies in the United
States, with 87 rental locations in 17 states and South America. The Company
rents a wide variety of equipment, including backhoes, air compressors, loaders,
lifts and compaction equipment to construction and industrial customers. The
Company also acts as a dealer of new equipment on behalf of several nationally
recognized equipment manufacturers. 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 an estimated $18 billion in
1997. 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 17,000 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.
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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 fastest growing 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 87 rental locations in 17 states, including Florida, Georgia,
Alabama, Mississippi, South Carolina, North Carolina, Tennessee, Louisiana,
Texas, Oklahoma, Arizona, Nevada, Utah, California, Oregon, Washington, and
Colorado, and South America. From December 31, 1995 to December 31, 1998, we
increased our equipment rental locations from eight to 86 and expanded our
rental fleet from $62 million to $430.1 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, 1998, the average age of our rental fleet
was approximately 23 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 seven regional managers have, 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.
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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 11
locations in 1997 and five locations in 1998. 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 primarily 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 also acquired 65% of Sullair Argentina
Sociedad Anonima ("S.A. Argentina"), a leading equipment rental company and
dealer of new equipment in Argentina.
Selective Openings of Start-up Equipment Rental Locations. Although we
intend to expand our operations primarily through acquisitions, we may open
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. 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.
Acquisition Strategy
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,
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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.
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. S.A. Argentina's
revenues for the year ended December 31, 1998 were approximately $53.7 million.
The former management of S.A. Argentina oversees the day-to-day operations of
S.A. Argentina. We have the option to purchase the remaining 35% of the
outstanding stock of S.A. Argentina. This option will be exercisable from
January 1, 2001 until June 30, 2003. In addition, the stockholders of S.A.
Argentina have the option during the same period to require us to purchase the
remaining 35% of the outstanding stock of S.A. Argentina. The exercisability of
these options is subject to certain additional terms and conditions, including
restrictions imposed by the terms of our indebtedness on our ability to make
acquisitions and incur additional indebtedness.
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 fastest growing equipment rental
companies in the United States, with 87 rental locations in 17 states and South
America. 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, Terex Americas, JCB, Sullivan Industries,
Ingersoll-Rand, Gradall, Lull, JLG, Bobcat, MultiQuip and Wacker.
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Major categories of equipment represented the following percentages (based
on original cost) of the Company's total rental fleet as of December 31, 1998:
Percentage of Total Rental Fleet
Major Equipment Category (based on original cost)
Earthmoving ....................... 40.1%
Material Handling ................. 16.2
Aerial ............................ 12.9
Compressors ....................... 6.2
Trucks ............................ 5.7
Compaction ........................ 5.3
Welders ........................... 2.3
Cranes ............................ 2.1
Generators ........................ 2.1
Pumps ............................. 1.4
Lighting .......................... 1.3
Other ............................. 4.4
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, 1998, our
equipment rental fleet had an original cost of approximately $430.1 million and
an average age of 23 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. We are the sole authorized
distributors of John Deere industrial and construction equipment in six of our
stores located in central and southern Florida. We also have distributor
arrangements with Bomag to sell heavy compaction equipment, and with Terex
Americas to sell off-road trucks, in central and southern Florida. Our sales
line consists of nine categories of John Deere, Bomag and Terex Americas
equipment and a total of 58 different machines, including: John Deere backhoe
loaders, forklifts, crawler dozers, four-wheel-drive loaders, scrapers, skid
steers, motor graders and excavators; Bomag vibratory rollers, static rollers,
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recyclers and trash compactors; and a complete line of articulated off-road
trucks manufactured by Terex Americas.
Our ability to sell new equipment offers flexibility to our customers and
enhances our customer relations. In addition, our dealership operations provide
us with several competitive advantages, including the opportunity to achieve
favorable pricing by combining equipment purchases for our dealership and rental
fleets, the reduction of costs in certain locations by sharing service,
maintenance and administrative personnel and better knowledge of local markets
by pooling management information.
In addition to standard equipment sales, we also offer customers the option
to rent-to-purchase equipment for a period of time. Under this program, the
customer applies a portion of the rental payment to the purchase price, thus
accruing equity over the term of the rental period. Our rent-to-purchase
customers generally rent new equipment for a period of six to 18 months with the
option to purchase at the end of the rental period. Sales under our
rent-to-purchase program represented approximately 65% of our new equipment
sales in 1998.
We effectively compete against other dealers by offering John Deere and
other quality equipment lines for sale, and by providing high quality service.
All personnel, from management to mechanics, are factory trained. The training
of mechanics is continually upgraded as new product lines are introduced. We can
transfer equipment from one store to another based upon a particular customer's
needs. Customers also have the opportunity to rent equipment from our rental
fleet if their own equipment is under repair. The parts department features
ample stock and maintenance vehicles, which are equipped to handle minor repairs
in the field and limit costly down time.
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
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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 1998 we served over 75,000 customers. Our
top 10 customers represented 6.0% of our total revenues in 1998.
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.
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.
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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
equipment 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 Atlas Copco
Earthmoving Equipment (such as
Backhoes,Loaders, Dozers,
Excavators and Material
Handling Equipment) ................ John Deere, Case, JCB, Kobelco and Bobcat
Compaction Equipment, Rollers
and Recyclers ...................... Bomag, Wacker, MultiQuip and Stone
Pumps ............................... MultiQuip, Wacker and Thompson
Generators .......................... MultiQuip, Wacker and Atlas Copco
Welders ............................. MultiQuip, Miller and Lincoln
Electric Tools ...................... Bosch, Kango and Hitachi
Light Towers ........................ Specialty Lighting, Coleman and Amida
Forklifts ........................... JCB, Gradall, Lull and Ingersoll-Rand
Trucking ............................ Terex Americas, Ford and GMC
Aerial .............................. Skyjack, JLG, Mark Industries and Genie
Industries
Concrete ............................ Partner, Edco, Whiteman, Miller,
MultiQuip, Wacker and Stone
Hydraulic Hammers ................... Kent and Tramac
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 for rental,
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. Each dealership has approximately 25 full-time employees
including a branch manager, parts manager, service manager, sales
representatives, departmental personnel, including mechanics, and administrative
staff. These employees are in addition to the full-time employees used to staff
the rental equipment operations located at the same sites.
Dealership Agreements
Neff Machinery, Inc. ("Neff Machinery"), one of our subsidiaries, has
entered into several dealership agreements with each of John Deere, Bomag and
Terex Americas in central and southern Florida. These dealership agreements
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appoint Neff Machinery as the equipment manufacturer's authorized dealer in
certain "Areas of Responsibility," which generally includes 100% of certain
counties in southern and central Florida. Under the dealership agreements, the
equipment manufacturers agree to sell equipment to Neff Machinery for resale in
these areas. The dealership agreements typically do not have a specific term,
but may be terminated by either party upon 120 days written notice, or
immediately by the equipment manufacturer for cause, which generally includes,
among other things, default by Neff Machinery under any security agreement
between Neff Machinery and the equipment manufacturer, dissolution or
liquidation of Neff Machinery, or a significant change in the control, ownership
or capital structure of Neff Machinery without the equipment manufacturer's
prior written consent.
The John Deere dealership agreement further provides that John Deere may
terminate the agreement for cause if GE Capital's beneficial ownership of equity
in the Company exceeds 25% before September 25, 1999 or exceeds 20% on or after
September 25, 1999.
We receive cash incentives and volume-related discounts from the equipment
manufacturers, which we represent. We use most of these cash rebates and
marketing fund contributions to give customers price discounts. In addition,
John Deere, Bomag and Terex Americas offer us standard dealer cash discounts or
limited interest-free financing.
Competition
Equipment Rentals. 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.
Equipment Sales. The equipment distribution market consists of many firms
which operate dealerships representing equipment manufacturers, such as
Caterpillar, John Deere, Case and Komatsu. As the authorized dealer of John
Deere equipment in central and southern Florida, we compete with dealers who
sell other manufacturers' equipment in the same area. Key competitive factors
include fleet quality, pricing and the ability of a particular dealer to provide
satisfactory service and parts. John Deere provides promotional programs, which
help the dealerships increase market share against competitors.
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 to us. Such compliance and remediation costs could be material
to our financial condition or results of operations.
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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.
Employees
As of February 26, 1999, we had approximately 1,600 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 16,000 square feet for our corporate headquarters in an office
building in Miami, Florida. We own the buildings and/or the land at 10 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
The Company is 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
None.
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PART II
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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, 1998:
First Quarter ............... N/A N/A
Second Quarter .............. 13.00 9.88
Third Quarter ............... 14.19 7.75
Fourth Quarter .............. 8.69 5.38
As of March 15, 1999, the Company had 38 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, 1998. 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.
12
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, 1998. 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,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- --------- --------
Statement of Operations (amounts in thousands, except per share data)
Revenues
Rental revenue ...................................... $179,014 $ 69,512 $ 35,808 $ 20,019 $ 16,226
Equipment sales ..................................... 108,352 50,578 44,160 33,943 22,996
Parts and service ................................... 36,724 22,132 15,045 13,292 10,304
-------- -------- -------- --------- --------
Total revenues ................................... 324,090 142,222 95,013 67,254 49,526
-------- -------- -------- --------- --------
Cost of revenues
Cost of equipment sold .............................. 83,783 40,766 33,605 26,562 17,111
Depreciation of rental equipment .................... 56,336 24,231(1) 19,853(1) 11,747 8,911
Maintenance of rental equipment ..................... 49,858 18,752 8,092 3,469 2,806
Cost of parts and service ........................... 23,690 13,741 8,143 7,504 5,987
-------- -------- -------- --------- --------
Total cost of revenues ........................... 213,667 97,490 69,693 49,282 34,815
-------- -------- -------- --------- --------
Gross profit .......................................... 110,423 44,732 25,320 17,972 14,711
-------- -------- -------- --------- --------
Selling, general and administrative expenses .......... 60,347 31,329 18,478 10,956 8,493
Other depreciation and amortization ................... 8,833 2,806 1,432 916 225
Officer stock option compensation(2) .................. 3,198 4,400 -- -- --
-------- -------- -------- --------- --------
Income from operations ................................ 38,045 6,197 5,410 6,100 5,993
-------- -------- -------- --------- --------
Other expense ......................................... 35,855 14,338 6,337 3,090 1,669
-------- -------- -------- --------- --------
Income (loss) before income taxes, minority interest
and extraordinary item ............................... 2,190 (8,141) (927) 3,010 4,324
(Provision for) benefit from income taxes(3) .......... 134 1,748 (461) (1,176) (1,612)
-------- -------- -------- --------- --------
Income (loss) before minority interest and
extraordinary item .................................. 2,324 (6,393) (1,388) 1,834 2,712
Minority interest ..................................... (1,111) -- -- -- --
-------- -------- -------- --------- --------
Income (loss) before extraordinary item ............... 1,213 (6,393) (1,388) 1,834 2,712
Extraordinary loss, net ............................... (2,675) (451) (809) -- --
-------- -------- -------- --------- --------
Net income (loss) ..................................... $ (1,462) $ (6,844) $ (2,197) $ 1,834 $ 2,712
======== ======== ======== ========= ========
Basic and diluted earnings per share
Income (loss) before extraordinary item ............... $ (0.23) $ (1.64) $ (0.56) $ 0.22 $ 0.32
Extraordinary loss, net ............................... (0.15) (0.05) (0.10) -- --
-------- -------- -------- --------- --------
Net income (loss) ..................................... $ (0.38) $ (1.69) $ (0.66) $ 0.22 $ 0.32
======== ======== ======== ========= ========
Basic and diluted weighted average common shares
outstanding ........................................ 17,213 8,465 8,465 8,465 8,465
======== ======== ======== ========= ========
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA -(continued)
Year Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- --------- --------
(amounts in thousands, except per share data)
Balance Sheet Data (end of period):
Net book value of rental equipment .................... $321,220 $179,547 $ 76,794 $ 45,596 $ 29,602
Total assets .......................................... 572,369 279,654 109,118 68,816 46,851
Total debt ............................................ 406,993 226,203 58,250 48,345 37,983
Redeemable preferred stock ............................ -- 53,747 46,299 11,430 --
Total stockholders' equity (deficit) .................. 99,360 (24,735) (7,508) (1,931) 4,205
Other Data:
EBITDA(4) ............................................. $103,214 $ 33,234 $ 26,695 $ 18,763 $ 15,129
EBITDA margin(5) ...................................... 31.8% 23.4% 28.1% 27.9% 30.5%
Rental equipment purchases ............................ $199,198 $143,515 $ 86,886 $ 52,795 $ 31,185
Number of locations (end of period) ................... 86 53 16 8 6
- ----------
1) Depreciation for rental equipment for 1996 and 1997 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 1994 and 1995 is restated to reflect
what the data would have been if the Company had Subchapter C status in
these years.
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 Company's
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.
14
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,
1998 to the year ended December 31, 1997 and the year ended December 31, 1997 to
the year ended December 31, 1996. 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 86, as of
December 31, 1998. The Company has achieved this growth through the addition of
52 equipment rental locations as a result of acquisitions, and the opening of 26
new 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; and (iv) expanding its dealership operations.
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.
15
Depreciation of rental equipment is calculated on a straight-line basis
over the estimated service life of the asset (generally two to seven years with
a 10% residual value). Since January 1, 1996, the Company has 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,
-----------------------------
1998 1997 1996
------ ------ ------
Revenues:
Rental revenue .............................. 55.3% 48.9% 37.7%
Equipment sales ............................. 33.4 35.6 46.5
Parts and service ........................... 11.3 15.5 15.8
------ ------ ------
Total revenues ........................... 100.0% 100.0% 100.0%
------ ------ ------
Cost of revenues:
Cost of equipment sold ...................... 25.8 28.6 35.4
Depreciation of rental equipment ............ 17.4 17.0 20.9
Maintenance of rental equipment ............. 15.4 13.2 8.5
Cost of parts and services .................. 7.3 9.7 8.6
------ ------ ------
Total cost of revenues ................... 65.9 68.5 73.4
------ ------ ------
Gross profit .................................. 34.1 31.5 26.6
Selling, general and administrative expenses. 18.6 22.0 19.4
Other depreciation and amortization ......... 2.8 2.0 1.5
Officer stock option compensation ........... 1.0 3.1 --
------ ------ ------
Income from operations ........................ 11.7% 4.4% 5.7%
====== ====== ======
EBITDA ........................................ 31.8% 23.4% 28.1%
====== ====== ======
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 is 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 is 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 is 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 is 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 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 $3.2
million for 1998 and $4.4 million for 1997. The expense represents 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 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 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 is primarily attributable to the maturation of new rental locations and
17
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.
1997 Compared to 1996
Revenues. Total revenues for 1997 increased 49.7% to $142.2 million from
$95.0 million in 1996. This growth in revenues primarily resulted from an
increase in revenues of (i) approximately $12.3 million attributable to the
continued maturation of existing rental locations; (ii) approximately $16.3
million associated with the Company's acquisition of 26 rental locations in
August 1997; and (iii) approximately $9.2 million from the opening of 11 new
rental locations during the period.
Gross Profit. Gross profit for 1997 increased 76.7% to $44.7 million or
31.5% of total revenues from $25.3 million or 26.6% of total revenues in 1996.
These increases can primarily be attributed to an increase in gross profit of
(i) approximately $9.3 million from the continued growth of revenues from the 10
locations opened during 1995 and 1996; (ii) approximately $6.2 million from the
growth in revenues arising from the acquisition of 26 rental locations in August
1997; and (iii) approximately $3.2 million from the growth in revenues
associated with the opening of 11 new rental locations during 1997. These
increases in gross profit include approximately $3.3 million related to the
change in the Company's depreciation policy to recognize extended service lives
and increased salvage values of its rental equipment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1997 increased 69.5% to $31.3 million or 22.0% of
total revenues from $18.5 million or 19.4% of total revenues in 1996. The
increase in selling, general and administrative expenses as a percent of
revenues is primarily attributable to the opening of 11 new rental locations and
the increase in regional and corporate personnel in anticipation of continued
growth through acquisitions and new location openings. In 1996, selling, general
and administrative expenses included approximately $0.9 million of expenses
related to the investigation of alternative financing arrangements.
Other Depreciation And Amortization. Other depreciation and amortization
expense for 1997 increased 95.9% to $2.8 million from $1.4 million in 1996. The
increase in other depreciation and amortization is primarily attributable to
increased expenditures on computer equipment, management information systems and
property and equipment needed to support the Company's expansion.
Officer Stock Option Compensation Expense. Officer stock option
compensation expense was $4.4 million for 1997 and represents a change in
estimated market value of the shares to be issued to a key employee under an
option agreement.
Interest Expense. Interest expense for 1997 increased to $12.0 million from
$6.0 million in 1996. This increase is attributable to additional borrowings
related to the Company's continued investment in rental equipment and the
Company's acquisition of 26 locations in August 1997.
Extraordinary Loss. During 1997, 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 $0.5 million, net of related income taxes.
Earnings Before Interest, Taxes, Depreciation and Amortization. EBITDA for
1997 increased 24.4% to $33.2 million or 23.4% of total revenues from $26.7
18
million or 28.1% of total revenues in 1996. In 1997, EBITDA included
approximately $4.4 million of officer stock option compensation charges. The
increase in EBITDA is primarily attributable to the growth in revenues
associated with the new locations and the growth in revenues from the August
1997 acquisition previously discussed.
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 1998, the Company's operating activities provided net cash flow of
$42.7 million as compared to $8.9 million for 1997. 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 used in investing activities was $266.5 million for 1998 as
compared to $173.3 million in the same period for the prior year. This increase
is primarily attributable to an increase in the number of acquisitions made by
the Company in 1998.
Net cash provided by financing activities was $225.3 million for 1998 as
compared to $162.3 million for 1997. The net cash provided by financing
activities was primarily attributable to net proceeds received from the Offering
and Senior Notes.
As of December 31, 1998, the Company had approximately $108.3 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.
Year 2000
The Company is aware of the issues associated with the programming code in
existing computer and software systems as the millennium ("Year 2000")
approaches. The Year 2000 problem is pervasive and complex, as virtually every
computer operation could be affected in some way by the rollover of the
two-digit year value to "00". The issue is whether systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause complete system failures. The Company has completed an assessment of the
effect of Year 2000 issues on its computer systems. Based upon this assessment,
management believes the Company is Year 2000 compliant. The total cost to the
Company to become Year 2000 compliant was not material. The Company has received
confirmation from all of its current systems' vendors that each of their systems
will properly handle the rollover to the Year 2000. Although there can be no
assurance, management believes the Year 2000 problem will not have a material
effect on the financial position, results of operations or cash flows of the
19
Company. In addition, there can be no assurance that the systems of other
companies with which the Company does business will properly handle the rollover
to the Year 2000 and will not have an adverse effect on the Company's
operations.
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, 1998, the Company had fixed rate debt of $199.3 million and
variable rate debt of $207.7 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 $10.1 million and decrease earnings and
cash flows for variable rate debt by approximately $1.3 million.
The Company's investment in S.A. Argentina is not subject to exchange rate
exposures because Argentine law requires that the peso, Argentina's official
currency, be exchangeable for not less than one dollar.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Index to Financial Statements and Schedules
Page Numbers
Reports of Independent Certified Public Accountants ............. 22
Consolidated Balance Sheets as of December 31, 1998 and 1997 .... 24
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 ............................... 25
Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1998, 1997 and 1996 ............... 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ............................... 27
Notes to Consolidated Financial Statements ...................... 28
SCHEDULES:
Report of Independent Certified Public Accountants .............. 49
II-Valuation and Qualifying Accounts and Reserves ............... 50
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto
21
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 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 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, 1998 and 1997
and the results of their operations and their cash flows for the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
/s/DELOITTE & TOUCHE LLP
Miami, Florida
February 16,1999
22
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
23
NEFF CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
-----------------
1998 1997
-------- --------
ASSETS
Cash and cash equivalents ..................................................... $ 4,340 $ 2,885
Accounts receivable, net of allowance for doubtful accounts of
$3,229 in 1998 and $1,092 in 1997.............................................. 59,022 25,007
Inventories .................................................................... 29,164 11,312
Rental equipment, net .......................................................... 321,220 179,547
Property and equipment, net .................................................... 45,114 23,737
Goodwill, net .................................................................. 96,722 29,444
Net deferred tax asset ........................................................ 2,780 663
Intangible assets, net ......................................................... 1,459 622
Prepaid expenses and other assets .............................................. 12,548 6,437
-------- --------
Total assets ...........................................................$572,369 $279,654
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Liabilities
Accounts payable ............................................................$ 24,405 $ 10,871
Accrued expenses ............................................................ 27,090 11,248
Credit facility ............................................................. 191,189 161,825
Term loan payable ........................................................... -- 49,916
Senior subordinated notes ................................................... 198,522 --
Notes payable ............................................................... 17,282 14,462
Capitalized lease obligations ............................................... 1,487 2,320
-------- --------
Total liabilities ...................................................... 459,975 250,642
-------- --------
Redeemable preferred stock
Series A Cumulative Redeemable Preferred Stock, $.01 par value;
520 shares authorized; 341 shares issued and outstanding in 1997 ........... -- 10,649
Series B Cumulative Convertible Redeemable Preferred Stock,
$.01 par value; 800 shares authorized, issued and outstanding in 1997 ...... -- 8,336
Series C Cumulative Convertible Redeemable Preferred Stock,
$.01 par value; 800 shares authorized, issued and outstanding in 1997 ...... -- 31,562
Preferred stock dividend payable--Series B and C ............................ -- 3,200
-------- --------
Total redeemable preferred stock ....................................... -- 53,747
-------- --------
Commitments and contingencies (Note 12) ........................................ -- --
-------- --------
Minority interest .............................................................. 13,034 --
-------- --------
Stockholders' equity (deficit)
Preferred Stock; $.01 par value; 18,350 shares authorized; none issued and
outstanding ................................................................ -- --
Series B Junior Participating Preferred Stock; $.01 par value; 1,000 shares
authorized, none issued and outstanding .................................... -- --
Class A Common Stock; $.01 par value; 100,000 shares authorized; 16,065 and
8,465 shares issued and outstanding in 1998 and 1997, respectively ......... 161 85
Class B special Common Stock; $.01 par value, liquidation preference $11.67;
20,000 shares authorized; 5,100 shares issued and outstanding in 1998 ...... 51 --
Additional paid-in capital .................................................. 127,765 --
Accumulated deficit ......................................................... (28,617) (24,820)
-------- --------
Total stockholders' equity (deficit) ................................... 99,360 (24,735)
-------- --------
Total liabilities and stockholders' equity (deficit) ...................$572,369 $279,654
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
24
NEFF CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
--------- --------- ---------
Revenues
Rental revenue ........................................... $ 179,014 $ 69,512 $ 35,808
Equipment sales .......................................... 108,352 50,578 44,160
Parts and service ........................................ 36,724 22,132 15,045
--------- --------- ---------
Total revenues ....................................... 324,090 142,222 95,013
--------- --------- ---------
Cost of revenues
Cost of equipment sold ................................... 83,783 40,766 33,605
Depreciation and rental equipment ........................ 56,336 24,231 19,853
Maintenance of rental equipment .......................... 49,858 18,752 8,092
Cost of parts and service ................................ 23,690 13,741 8,143
--------- --------- ---------
Total cost of revenues ............................... 213,667 97,490 69,693
--------- --------- ---------
Gross profit ............................................... 110,423 44,732 25,320
--------- --------- ---------
Other operating expenses
Selling, general and administrative expenses ............. 60,347 31,329 18,478
Other depreciation and amortization ...................... 8,833 2,806 1,432
Officer stock option compensation ........................ 3,198 4,400 --
--------- --------- ---------
Total other operating expenses ....................... 72,378 38,535 19,910
--------- --------- ---------
Income from operations ..................................... 38,045 6,197 5,410
--------- --------- ---------
Other expense
Interest expense ......................................... 32,677 11,976 6,012
Amortization of debt issue costs ......................... 3,178 2,362 325
--------- --------- ---------
Total other expense .................................. 35,855 14,338 6,337
--------- --------- ---------
Income (loss) before income taxes, minority interest and
extraordinary item ........................................ 2,190 (8,141) (927)
(Provision for) benefit from income taxes .................. 134 1,748 (461)
--------- --------- ---------
Income (loss) before minority interest and extraordinary item 2,324 (6,393) (1,388)
Minority interest .......................................... (1,111) -- --
--------- --------- ---------
Income (loss) before extraordinary item .................... 1,213 (6,393) (1,388)
Extraordinary loss, net of income taxes .................... (2,675) (451) (809)
--------- --------- ---------
Net loss ................................................... $ (1,462) $ (6,844) $ (2,197)
========= ========= =========
Basic and diluted loss per common share
Loss before extraordinary item ............................. $ (0.23) $ (1.64) $ (0.56)
Extraordinary loss, net .................................... (0.15) (0.05) (0.10)
--------- --------- ---------
Net loss ................................................... $ (0.38) $ (1.69) $ (0.66)
========= ========= =========
Basic and diluted weighted average common shares outstanding 17,213 8,465 8,465
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
25
NEFF CORP.
CONSOLIDATED STATEMENT OF
STOCKHOLDERS' EQUITY (DEFICIT) FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
(in thousands)
Common Stock A Common Stock B Additional
--------------- --------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------- ------- ------- ----------- ----------- -------
Balance, December 31, 1995 ......................... 8,465 $ 85 -- -- -- $ (2,016) $(1,931)
Net loss ........................................... -- -- -- -- -- (2,197) (2,197)
Preferred stock dividend ........................... -- -- -- -- -- (980) (980)
Accretion of Series A Preferred
Stock and Detachable Stock Purchase Warrant ....... -- -- -- -- -- (2,400) (2,400)
------ ------- ------- ------- ----------- ----------- -------
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
====== ======= ======= ======= =========== ========== =======
The accompanying notes are an integral part of these consolidated financial
statements.
26
NEFF CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash Flows from Operating Activities
Net loss .................................................. $(1,462) $(6,844) $ (2,197)
Adjustments to reconcile net loss to net cash provided by
operating activities net of acquisitions
Depreciation and amortization .......................... 68,347 29,399 21,610
Officer stock option compensation ...................... 3,198 4,400 --
Accretion of debt discount ............................. 6 -- --
Gain on sale of equipment .............................. (24,569) (9,812) (10,555)
Minority interest ...................................... 1,111 -- --
Extraordinary loss on debt extinguishment .............. 4,280 722 1,298
Benefit from deferred income taxes ..................... (510) (1,748) (596)
Change in operating assets and liabilities
Accounts receivable .................................. (14,488) (8,341) (3,329)
Other assets ......................................... (403) (2,957) 255
Accounts payable and accrued expenses ................ 7,186 4,104 2,831
Accrued financing costs .............................. -- -- (2,143)
-------- -------- --------
Net cash provided by operating activities ........ 42,696 8,923 7,174
-------- -------- --------
Cash Flows from Investing Activities
Purchases of equipment .................................... (199,198) (143,515) (86,886)
Proceeds from sale of equipment ........................... 108,352 50,578 44,160
Purchases of property and equipment ....................... (15,015) (16,747) (1,972)
Cash paid for acquisitions ................................ (160,646) (63,605) --
-------- -------- --------
Net cash used in investing activities ............ (266,507) (173,289) (44,698)
-------- -------- --------
Cash Flows from Financing Activities
Debt issue costs .......................................... (12,277) (2,425) (3,989)
Net borrowings under Senior Credit Facility ............... 29,364 103,576 --
Advances under revolving credit facility .................. -- -- 58,250
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 (833) 866 (222)
Net repayments under floor plans payable .................. -- -- (31,493)
Borrowings (repayments) under term loan ................... (49,916) 49,916 --
Net borrowings (repayments) under notes payable ........... 1,997 (135) (16,852)
Redemption of Series A preferred stock .................... (13,915) -- --
Issuance of Series C Preferred Stock, net of costs ........ -- -- 31,489
Distribution to stockholders .............................. -- (2,936) --
-------- -------- --------
Net cash provided by financing activities ........ 225,266 162,262 37,183
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...... 1,455 (2,104) (341)
Cash and cash equivalents, beginning of year .............. 2,885 4,989 5,330
-------- -------- --------
Cash and cash equivalents, end of year .................... $ 4,340 $ 2,885 $ 4,989
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
NEFF CORP.
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 and in South America. In addition to its rental business, the Company
acts as a dealer of new equipment on behalf of several nationally recognized
equipment manufacturers. The Company also sells used equipment, spare parts and
merchandise and provides ongoing repair and maintenance services.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company 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. All significant
intercompany balances and transactions have been eliminated.
Stock Split
In May 1998, the Company effected an 84.65 for 1.00 stock split. The
accompanying 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 Senior
Credit Facility (See Note 5). IER has 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
(See Note 5). Richbourgh 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.
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 has an option to
purchase the remaining 35% of outstanding stock of S.A. Argentina (See Note 12).
S.A. Argentina rents and sells industrial and construction equipment throughout
South America. In connection with this purchase, goodwill of approximately $14.0
million was recorded.
28
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also during 1998, the Company acquired the net assets of seven equipment
rental companies 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.
The following pro forma information has been prepared to reflect the
aforementioned acquisitions as if they were consummated on January 1st of the
year preceding the year of acquisition, after giving effect to certain pro forma
adjustments described below (in thousands, except per share data):
For the Years Ended
December 31,
----------------------
1998 1997 1996
------- -------- --------
Revenues ............................................... 358,731 274,500 129,172
======= ======= =======
Income (loss) before income taxes and extraordinary item 4,038 (10,151) (63)
======= ======= =======
Net income (loss) ...................................... 295 (8,248) (1,895)
======= ======= =======
Basic and diluted loss per common share ................ (0.28) (1.85) (0.62)
======= ======= =======
Pro forma adjustments reflect amortization of intangible assets,
depreciation of property and equipment and increased interest on borrowings to
finance the acquisitions. The unaudited pro forma information is based upon
certain assumptions and estimates and does not necessarily represent operating
results that would have occurred had the acquisitions been consummated as of the
beginning of the periods presented, nor is it necessarily indicative of expected
future operating results.
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.
29
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 seven years with an
estimated 10% residual value). For certain equipment, depreciation is matched
against the related rental income earned by computing depreciation on individual
equipment at the rate of 80% 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 1997 and 1996, 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 estimate reduced loss before extraordinary item
and net loss by approximately $3.3 million and $5.3 million or $0.39 and $0.63
per common share for the year ended December 31, 1997 and 1996, respectively.
Rental fleet accumulated depreciation at December 31, 1998 and 1997 was
approximately $63.4 million and $34.8 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.
30
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997 was
approximately $2.9 million and $2.5 million, respectively.
Goodwill arising from acquisitions is being amortized over 40 years using
the straight-line method. Accumulated amortization at December 31, 1998 and 1997
was approximately $2.6 million and $0.5 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.
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 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 and in South America.
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.
31
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4-PROPERTY AND EQUIPMENT
Property and equipment consists of the following (dollars in thousands):
December 31, Estimated
---------------- Useful Lives
1998 1997 (in Years)
------- ------- -------------
Land ...................................... $ 8,343 $ 5,407 --
Buildings and improvements ................ 15,874 6,540 2-30
Office equipment .......................... 7,083 2,768 2-7
Service equipment and vehicles ............ 20,364 9,994 2-5
Shop equipment ............................ 4,227 2,075 7
Capitalized lease equipment ............... 1,401 3,230 3-5
------- -------
57,292 30,014
Less accumulated depreciation ............. (12,178) (6,277)
------- -------
$ 45,114 $23,737
======== =======
The Company has entered into lease arrangements for certain property and
equipment, which are classified as capital leases. As of December 31, 1998,
future minimum lease payments under capitalized lease obligations are as follows
(in thousands):
1999 .............................................. $ 801
2000 .............................................. 495
2001 .............................................. 271
2002 .............................................. 32
------
Total future minimum lease payments ................. 1,599
Less amounts representing interest (6.00% to 13.5%).. (112)
------
Present value of net future minimum lease payments .. $1,487
======
32
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5-NOTES PAYABLE AND DEBT
Notes payable and debt consist of the following (in thousands):
December 31,
------------------
1998 1997
-------- --------
$310 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, 1998, the
Lender's Prime rate was 7.75% and the LIBOR rate was 5.06% ...................... $191,189 $161,825
10.25% Senior Subordinated Notes issued May 1998 due June 2008 .................. 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 $1,478... 98,522 --
S.A. Argentina unsecured loans from various banks with interest rates of
LIBOR plus 1.5% to 3.5% ......................................................... 16,541 --
$50 million Term Loan with an interest rate of LIBOR plus 3.5% ................... -- 49,916
Mortgage note payable with an interest rate of LIBOR plus 2% .................... -- 13,400
Various notes payable assumed through acquisition of IER with interest
rates ranging from 7% to 12% and maturity dates through 2001 ..................... 741 1,062
-------- --------
$406,993 $226,203
======== ========
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.
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.
At December 31, 1998, the Company had approximately $10.5 million of
standby letters of credit outstanding.
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
Series A Cumulative Redeemable Preferred Stock, repay the mortgage notes payable
and reduce the amount outstanding under the New Credit Facility.
33
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Senior Notes bear interest at 10 1/4% per annum payable semiannually
beginning December 1, 1998. The Senior 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.
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 where used to reduce amounts
outstanding under the New Credit Facility. The terms of the December Notes are
substantially the same as the May Notes.
In August 1997, the Company entered into a $50 million term loan in
connection with its acquisition of IER (see Note 1). During January 1998, the
Company repaid all outstanding principal balances due under the Term Loan with
borrowings under its $250 million revolving credit facility.
During 1998, 1997 and 1996 the Company recorded extraordinary losses of
approximately $2.7 million, $0.5 million and $0.8 million, net of related income
taxes, from the write-off of debt issue costs associated with the early
extinguishment of debt.
Borrowing for S.A. Argentina's operation is done through local and
international banks. This debt is not guaranteed by the Company except for S.A.
Argentina and S.A. Argentina is not a guarantor of any other debt of the Company
(see Note 15).
The aggregate annual maturities of the notes payable and debt, based upon
amounts outstanding as of December 31, 1998, are as follows:
1999 .................... $206,015
2000 .................... 2,316
2001 .................... 140
2002 .................... --
Thereafter .............. 198,522
--------
$406,993
========
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.
34
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accreted using the effective interest
method based on its liquidation value at maturity of $12.0 million. The
Redeemable Warrant was being accreted to its fair value on a prospective basis
until the mandatory redemption date in December 2000. Through December 31, 1996,
accretion to the Series A and the Redeemable Warrant amounted to approximately
$0.5 million and $1.9 million, respectively.
During December 1996, in connection with the execution of the Company's
$250 million revolving credit facility, the Company and GE Capital, entered into
certain agreements, including an agreement to exercise the Redeemable Warrant
for approximately 20% of the Company's common stock. Simultaneously with this
exercise, the Company and GE Capital agreed to exchange the shares of common
stock for 800,000 shares of Series B Cumulative Convertible Redeemable Preferred
Stock ("Series B").
The accreted balance of the Redeemable Warrant on the date these agreements
were entered into was approximately $5.3 million, which represented the carrying
value of Series B as of December 31, 1996. For the year ended December 31, 1997,
accretion of Series A and Series B amounted to approximately $0.5 million and
$3.0 million, respectively.
In a separate transaction related to the Senior Credit Facility, the
Company issued 800,000 shares of Series C Cumulative Convertible Redeemable
Preferred Stock ("Series C") to GE Capital in exchange for $32.0 million ($31.5
million net of certain related costs). For the year ended December 31, 1997,
accretion of Series C amounted to approximately $0.1 million. Similarly to
Series A, Series B and Series C were accreted toward their ultimate total
liquidation value of $64 million.
In March 1998, the holders of Series B and Series C exchanged their shares
for Class B Common Stock, which has a liquidation preference $11.67 per share.
In May 1998, the Company completed an initial public offering (the
"Offering") of 6.7 million shares of Class A common stock at a price of $14 per
share. The Company received net proceeds of approximately $85.7 million.
NOTE 7-STOCK OPTION PLANS
In December 1996, the Company granted its chief executive officer options
to purchase shares of Class A Common Stock representing 3% (on a fully diluted
basis) of the issued and outstanding Common Stock of the Company for an
aggregate purchase price of $1.6 million. Upon completion of the Offering (see
Note 6) the number of shares granted under this agreement were fixed at 657,220
shares. No further options can be granted under this agreement. The Company
estimated compensation expense at each reporting date based upon the estimated
market value of shares to be issued until the number of shares was fixed.
Compensation expense of $3.2 million and $4.4 million was recognized in 1998 and
1997, respectively.
35
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
No compensation expense was recognized in 1996 since the exercise price
approximated the market value of the shares to be issued. These options have
been fully vested since December 1996. One-third of the options expire on
December 1, 2005, one-third expire on December 31, 2005 and the remaining
one-third expire on December 31, 2006.
In May 1996, the Company also granted to another key employee an option to
purchase 84,650 shares of the Company's Class A Common Stock at an exercise
price of approximately $0.5 million, determined based upon a multiple of the
Company's adjusted earnings. No compensation expense was recognized at the date
of grant since the exercise price of these options approximated the estimated
market value of the shares to be issued at the date of grant.
In 1998, the Company adopted an Incentive Stock Option plan ("ISO Plan").
Under this plan, designated officers, employees, and consultants of the Company
will be eligible to receive awards in the form of options, stock appreciation
rights, restricted stock grants, performance awards, and dividend equivalent
rights. An aggregate of 1.0 million shares of Class A Common Stock are reserved
for issuance under the ISO Plan. The exercise price of options granted under the
plan may not be less than 100% of the fair market value of the Company's Class A
Common Stock. Generally, options vest over a period of three years and are not
exercisable beyond 10 years from date of grant. There have been no stock
appreciation rights, restricted stock grants, performance awards or dividend
equivalent rights awarded under the ISO Plan.
36
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes stock option activity under the ISO Plan,
for the year ended December 31, 1998 (in thousands, except per share data):
ISO Plan Options
---------------------------------
Shares Available Number of Weighted Average
For Options Shares Exercise Price/Share
---------------- ----------- --------------------
Balance at December 31, 1997 -- --
Authorized .................... 1,000 --
Granted ....................... (945) 945 9.39
---------------- -----------
Forfeited ..................... 6 (6) 14.00
Expired ....................... -- --
---------------- -----------
Balance at December 31, 1998 .. 61 939 9.39
---------------- -----------
Exercisable Options
------------------------------
Number of Weighted Average Weighted Average Weighted Average
Options Exercise Price Per Remaining Life Number of Exercise Price
Outstanding Share (Years) Options Per Share
----------- ------------------ ---------------- ---------- ------------------
Range of Exercise Prices:
$6.00-7.88 .............. 553 6.18 10.0 -- N/A
$9.75-14.00 ............. 386 13.97 9.4 200 14.00
-----------
939 9.39 9.7
===========
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Under APB 25, compensation expense is measured as the
excess of market value of the underlying stock on the date of grant over the
exercise price of the options on the date of grant.
The following table sets forth pro forma information as if stock options
had been accounted for under the fair value method (in thousands, except per
share data):
For the Year Ended
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
Pro forma net loss (in thousands) $(1,397) $(4,094) $(2,439)
======= ======= =======
Pro forma loss per share
Basic ................... $ (0.38) $ (1.36) $ (0.69)
======= ======= =======
Diluted ................. $ (0.38) $ (1.36) $ (0.69)
======= ======= =======
37
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of options granted during 1998 and 1996
estimated on the date of grant using the Black-Scholes option pricing model was
$5.47 and $2.91 per share, respectively. The following weighted average
assumptions were used in applying this model for 1998 and 1996, respectively: a
risk free rate of 5.05% and 6.74%; dividend yields of 0%; volatility factors of
.636 and 0; and an expected life of the options of 5 years and 10 years. There
were no stock options granted in 1997.
Effective January 1, 1997, the Company adopted a phantom stock plan (the
"Phantom Plan"). The Phantom Plan is designed to reward employees for increases
in the Company's performance. The Phantom Plan enables the Company to award
employees individual units representing a hypothetical share of the Company's
stock (the "Phantom Share"). Each Phantom Share is assigned a share value on the
date granted as determined by the administrator of the Phantom Plan. The cash
award the employee is entitled to receive on the redemption date is the
difference between the value assigned on the date of grant and the greater of
the fair market value of the Company's Class A Common Stock or the calculated
phantom plan share value. As of December 31, 1998, the Company had granted 0.2
million Phantom Shares with assigned per share values ranging from of $9 to
$11.25, vesting over three to five years. Approximately $0.1 million of
compensation expense was recorded for the year ended December 31, 1998. No
compensation expense was recorded for the years ended December 31, 1997 and
1996.
The Company had granted to GE Capital an option to acquire common stock of
the Company in an amount that would equal 51% ownership after conversion of the
Series B and Series C preferred stock (see Note 6). In connection with the
conversion of the Series B and Series C preferred stock this option was
canceled.
NOTE 8-RETIREMENT PLAN
In February 1996, the Company adopted a qualified 401(k) profit sharing
plan (the "401(k) Plan"). The 401(k) Plan covers substantially all employees of
the Company. Participating employees may contribute to the 401(k) Plan through
salary deductions. The Company may contribute, at its discretion, matching
contributions equal to 50% of the employee's contribution not to exceed 3% of
the employee's annual salary. The Company contributed approximately $0.6
million, $0.3 million and $0.2 million to the 401(k) Plan for the years ended
December 31, 1998, 1997 and 1996, respectively.
38
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9-INCOME TAXES
The components of the benefit from (provision for) income taxes is as
follows (in thousands):
For the Years Ended
December 31,
------------------------
1998 1997 1996
------ ------- -------
Current .............. $(376) $ -- $(1,057)
Deferred ............. 510 1,748 596
------ ------- -------
Total ................ $ 134 $1,748 $ (461)
===== ====== =======
The following table summarizes the tax effects comprising the Company's net
deferred tax assets and liabilities (in thousands):
December 31,
--------------
1998 1997
------ ------
Deferred Tax Assets
Net operating loss carryforwards ..................... $4,582 $4,347
Alternative minimum tax credits ...................... 874 874
Deferred stock option compensation ................... 2,849 1,672
Intangible assets, allowance for bad debts and other . 2,548 2,836
------ ------
Total deferred tax assets .......................... 10,853 9,729
Valuation allowance .................................. (900) (1,368)
Deferred Tax Liabilities-Depreciation .................. (7,173) (7,698)
------ ------
Net Deferred Tax Asset (Liability) ..................... $2,780 $ 663
====== ======
As of December 31, 1998, and 1997, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $12.3
million and $13.6 million, respectively, expiring through 2012 (includes net
operating loss carryforwards for federal and state income tax purposes of
approximately $4.4 million and $5.6 million, respectively, acquired in
connection with the acquisition of IER described in Note 1). IER's net operating
loss carryforwards may only be utilized by Neff Rental, one of the Company's
subsidiaries. In addition, the Company has reduced the adjustment to
stockholders' equity by $1.8 million related to the tax benefit of the
acquisition of property from a related party (see Note 13).
Current accounting standards require that deferred income taxes reflect the
tax consequences on future years of differences between the tax bases of assets
and liabilities and their bases for financial reporting purposes. In addition,
future tax benefits, such as net operating loss (NOL) carryforwards, are
required to be recognized to the extent that realization of such benefits is
more likely than not. A valuation allowance is established for those benefits
that do not meet the more likely than not criteria.
39
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Even though the Company has incurred tax losses for the past three years,
management believes that it is more likely than not that the Company will
generate taxable income sufficient to realize the majority of the tax benefits
associated with future deductible temporary differences and NOL carryforwards
prior to their expiration. This belief is based upon, among other factors, the
fact that all of the Company's taxable temporary differences will reverse within
the period that the deductible temporary differences will be realized, the
availability of tax planning strategies, and projection of future taxable
income.
The following table summarizes the differences between the statutory
federal income tax rate and the Company's effective income tax rate (dollars in
thousands):
For the Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ----------
(Provision) benefit at statutory federal income tax rate (745) 34.0% 2,768 34.0% 315 34.0%
State income tax, net of federal income tax benefit .... -- -- 171 2.1 33 3.5
Change in valuation allowance .......................... 468 (21.4) (559) (6.9) (809) (87.3)
Non-deductible expenses ................................ (467) 21.3 (716) (8.8) -- --
Foreign subsidiary ..................................... 831 (37.9) -- -- -- --
Other .................................................. 47 (2.1) 84 1.1 -- --
------ ---------- ------ ---------- ------ ----------
$ 134 6.1% $1,748 21.5% $ (461) (49.8)%
====== ========== ====== ========== ======= ==========
NOTE 10-EARNINGS PER SHARE
For the years ended December 31, 1998, 1997 and 1996, the treasury stock
method was used to determine the dilutive effect of options and warrants on
earnings per share data. Net loss from continuing operations per share and
weighted average number of shares outstanding used in the computations are
summarized as follows (in thousands, except per share data):
For the Years Ended December 31,
--------------------------------
1998 1997 1996
--------- --------- ---------
Net loss ............................................... $ (1,462) $ (6,844) $ (2,197)
Deduct:
Preferred stock dividend ............................. (1,010) (3,857) (980)
Accretion of preferred stock ......................... (4,093) (3,590) (2,400)
--------- --------- ---------
Loss (basic and diluted) ............................... $ (6,565) $ (14,291) $ (5,577)
======== ========= ========
Number of shares:
Weighted average common shares outstanding-basic ..... 17,213 8,465 8,465
Employee stock options(1) ............................ -- -- --
--------- --------- ---------
Weighted average shares-diluted ........................ 17,213 8,465 8,465
======== ========= ========
Net loss per common share-basic and diluted ............ $ (0.38) $ (1.69) $ (0.66)
======== ========= ========
- ----------
(1) The incremental shares resulting from the assumed exercise of options for
the year ended 1998 would be antidilutive and are therefore, excluded from
the computation of diluted earnings (loss) per share.
40
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11-FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market value of financial instruments held by the Company at
December 31, 1998 are based on a variety of factors and assumptions and may not
necessarily be representative of the actual gains or losses that will be
realized in the future and do not include expenses that could be incurred in an
actual sale or settlement.
The fair value of the Company's credit facility is assumed to be equal to
its carrying value. At December 31, 1998 and 1997 approximately $191.2 million
and $161.8 million was outstanding under the credit facility, respectively.
The Company's notes payable and capitalized lease obligations are estimated
to approximate fair value as determined based on rates currently available to
the Company from other lenders.
The fair value of the Company's Senior Subordinated Notes was estimated by
obtaining the quoted market price. The carrying amount of the Company's Senior
Subordinated Notes was $198.5 million at December 31, 1998. The fair value of
the Company's Senior Subordinated Notes as of the same date was $195.0 million.
NOTE 12-COMMITMENTS AND CONTINGENCIES
The Company has agreements with certain equipment manufacturers, which
appoint the Company, through its subsidiary, as the manufacturer's authorized
dealer in certain defined geographic areas. These agreements may be terminated
by dealers at any time. There can be no assurance that the Company will be able
to continue its current, or obtain additional, dealership agreements. The
Company's operating results could be materially and adversely impacted if these
dealership agreements were terminated for any reason.
In connection with the acquisition of 65% of the outstanding common stock
of S.A. Argentina (see Note 1), the Company entered into an option to purchase
the remaining 35% of the outstanding common stock of S.A. Argentina. This option
is exercisable from January 1, 2001 until June 30, 2003. In addition, the
stockholders of S.A. Argentina have the option during the same period to require
the Company to purchase the remaining 35% of outstanding stock of S.A.
Argentina. The ability to exercise these options is subject to certain
additional terms and conditions, including restrictions imposed by the terms of
our indebtedness on our ability to make acquisitions and incur additional
indebtedness.
The Company is a party to certain legal actions arising in the normal
course of business. In the opinion of management, the ultimate outcome of such
litigation is not expected to have a material effect on the financial position,
results of operations or cash flows of the Company.
41
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13-RELATED PARTY TRANSACTIONS AND OTHER COMMITMENTS
In May 1997, the Company acquired certain land and buildings used in its
Florida operations for approximately $13.9 million from Atlantic Real Estate
Holdings Corp. ("Atlantic"), an affiliate of the Company through common
ownership ("Atlantic Acquisition"). Prior to the acquisition of these assets,
the Company leased these properties from Atlantic. The Company financed
approximately $13.4 million of the purchase price with a mortgage note payable
(see Note 5). The remaining purchase price consisted of the forgiveness of
approximately $0.5 million in notes receivable from Atlantic. The assets have
been recorded at Atlantic's historical carrying value and approximately $2.9
million, net of income tax benefit of approximately $1.8 million, has been
recorded as a distribution to stockholders in the accompanying statement of
stockholders' equity (deficit).
During 1998, 1997, and 1996 revenues from affiliated companies amounted to
approximately $2.2 million, $0.7 million, and $1.5 million, respectively.
Operating Leases
During 1998, 1997, and 1996 rental expense under operating lease
arrangements amounted to approximately $4.5 million, $3.4 million, and $2.1
million, respectively.
As of December 31, 1998, future minimum rental payments under operating
lease arrangements are as follows for the years ending December 31 (in
thousands):
1999 .................... 4,339
2000 .................... 4,057
2001 .................... 3,558
2002 .................... 2,943
2003 .................... 1,469
Thereafter .............. 3,450
-------
$19,816
=======
NOTE 14-SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the Years Ended
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Supplemental Disclosure of Cash Flow Information
Cash paid for interest ................................... $30,696 $10,367 $ 6,012
======= ======= ========
Cash paid for taxes ...................................... $ 786 $ 711 $ --
======= ======= ========
Supplemental Disclosure of Non-Cash Financing Activities
Purchase of equipment under capitalized lease obligations. $ -- $ -- $ 1,235
======= ======= ========
42
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Neff Corp. ("Parent") issued $100 million of senior subordinated unsecured
notes in May 1998 and an additional $100 million of senior subordinated
unsecured notes in December 1998. On June 30, 1998, Neff Corp. acquired 65% of
S.A. Argentina (See Note 1). S.A. Argentina is not a guarantor of the unsecured
notes of the Parent and financial information for this subsidiary is presented
separately. All of the Parent's subsidiaries other than S.A. Argentina are
wholly owned. Parent and its subsidiaries other than S.A. Argentina have fully
and unconditionally guaranteed the unsecured notes on a joint and several basis.
The subsidiaries' financial information is presented on a combined basis and
Parent is shown separately. Separate financial statements and other disclosures
for the individual guarantor subsidiaries are not presented because, in the
opinion of management, such information is not material to investors. Prior to
June 30, 1998, there were no non-guarantor subsidiaries and therefore, separate
comparative statements are not presented for periods prior to July 1, 1998.
43
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15- CONDENSED CONSOLIDATING FINANCIAL INFORMATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
(in thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiary Parent Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Assets
Cash and cash equivalents .......................... $ 3,649 $ 691 $ -- $ -- $ 4,340
Accounts receivable, net ........................... 44,460 14,562 -- -- 59,022
Inventories ........................................ 16,256 12,908 -- -- 29,164
Rental equipment, net ............................. 292,223 28,997 -- -- 321,220
Property and equipment, net ....................... 23,035 11,189 10,890 -- 45,114
Goodwill, net ..................................... 82,737 -- -- 13,985 96,722
Deferred tax asset, net ........................... (1,440) -- 4,220 -- 2,780
Intangible assets .................................. 1,459 -- -- -- 1,459
Prepaid expenses and other assets .................. 1,586 3,614 79,537 (72,189) 12,548
(Due to) from affiliates ........................... (251,185) -- 251,185 -- --
------------ ------------- -------- ------------ ------------
Total assets .................................. $ 212,780 $ 71,961 $345,832 $ (58,204) $ 572,369
============ ============ ======== ============ ============
Liabilities and Stockholders' Equity (Deficit)
Liabilities
Accounts payable ................................. $ 7,421 $ 16,834 $ 150 $ -- $ 24,405
Accrued expenses ................................. 15,544 1,346 10,200 -- 27,090
Senior credit facility ........................... 153,589 -- 37,600 -- 191,189
10 1/4% senior subordinated notes ................ -- -- 198,522 -- 198,522
Notes payable .................................... 741 16,541 -- -- 17,282
Capitalized lease obligations .................... 1,487 -- -- -- 1,487
------------ ------------- -------- ------------ ------------
178,782 34,721 246,472 -- 459,975
------------ ------------- -------- ------------ ------------
Commitments and contingencies ...................... -- -- -- -- --
------------ ------------- -------- ------------ ------------
Minority interest .................................. -- -- -- 13,034 13,034
------------ ------------- -------- ------------ ------------
Stockholders' equity
Preferred Stock, $.01 par value; 18,350 shares
authorized; none issued and outstanding ......... -- -- -- -- --
Series B Junior Participating Preferred Stock;
$.01 par value; 1,000 shares authorized, none
issued and outstanding ........................... -- -- -- -- --
Class A Common stock; $.01 par value; 100,000
shares authorized; 16,065 shares issued and out-
standing ........................................ -- -- 161 -- 161
Class B special common stock; $.01 par value;
20,000 shares authorized; 5,100 shares issued
and outstanding ................................. -- -- 51 -- 51
Capital stock ...................................... -- 90 -- (90) --
Additional paid-in capital ......................... 37,077 3,009 127,765 (40,086) 127,765
Retained earnings (accumulated deficit) ............ (3,079) 34,141 (28,617) (31,062) (28,617)
------------ ------------- -------- ------------ ------------
Total stockholders' equity .................... 33,998 37,240 99,360 (71,238) 99,360
------------ ------------- -------- ------------ ------------
Total liabilities and stockholders' equity .... $ 212,780 $ 71,961 $345,832 $ (58,204) $ 572,369
============ ============ ======== ============ ============
44
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiary Parent Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Revenues
Rental revenue ................................ $ 168,403 $ 10,611 $ -- $ -- $ 179,014
Equipment sales ............................... 94,264 14,088 -- -- 108,352
Parts and service ............................. 34,285 2,439 -- -- 36,724
------------ ------------- -------- ------------ ------------
Total revenues ............................. 296,952 27,138 -- -- 324,090
------------ ------------- -------- ------------ ------------
Cost of revenues
Cost of equipment sold ........................ 71,995 11,788 -- -- 83,783
Depreciation of rental equipment .............. 53,686 2,650 -- -- 56,336
Maintenance of rental equipment ............... 46,329 3,529 -- -- 49,858
Cost of parts and service ..................... 21,890 1,800 -- -- 23,690
------------ ------------- -------- ------------ ------------
Total cost of revenues ..................... 193,900 19,767 -- -- 213,667
------------ ------------- -------- ------------ ------------
Gross profit ...................................... 103,052 7,371 -- -- 110,423
------------ ------------- -------- ------------ ------------
Other operating expenses
Selling, general and administrative expenses .. 57,102 2,295 950 -- 60,347
Other depreciation and amortization ........... 8,051 432 350 -- 8,833
Officer stock option compensation ............. -- -- 3,198 -- 3,198
------------ ------------- -------- ------------ ------------
Total other operating expenses ............. 65,153 2,727 4,498 -- 72,378
------------ ------------- -------- ------------ ------------
Income from operations ............................ 37,899 4,644 (4,498) -- 38,045
Other expense
Interest expense .............................. 29,817 1,092 1,768 -- 32,677
Amortization of debt issue costs .............. 2,899 -- 279 -- 3,178
------------ ------------- -------- ------------ ------------
Total other expense ........................ 32,716 1,092 2,047 -- 35,855
------------ ------------- -------- ------------ ------------
Income (loss) before income taxes, minority interest
and extraordinary item ........................... 5,183 3,552 (6,545) -- 2,190
(Provision for) benefit from income taxes ......... (1,944) (376) 2,454 -- 134
------------ ------------- -------- ------------ ------------
Income (loss) before minority interest and
Extraordinary item ............................ 3,239 3,176 (4,091) -- 2,324
Minority interest ................................. -- -- -- (1,111) (1,111)
------------ ------------- -------- ------------ ------------
Income (loss) before extraordinary item ........... 3,239 3,176 (4,091) (1,111) 1,213
Extraordinary loss, net .......................... (2,675) -- -- -- (2,675)
------------ ------------- -------- ------------ ------------
Net income (loss) ................................. $ 564 $ 3,176 $ (4,091) $ (1,111) $ (1,462)
============ ============= ======== ============ ============
45
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONDENSED CONSOLIDATING FINANCIAL INFORMATION
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands)
Guarantor Non-Guarantor
Subsidiaries Subsidiary Parent Eliminations Consolidated
------------ ------------- -------- ------------ ------------
Cash Flows from Operating Activities
Net income (loss) .................................... $ 564 $ 3,176 $ (4,091) $ (1,111) $ (1,462)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities net of acquisitions
Depreciation and amortization ...................... 64,636 3,082 629 -- 68,347
Officer stock option compensation .................. -- -- 3,198 -- 3,198
Accretion of debt discount ......................... -- -- 6 -- 6
Gain on sale of equipment .......................... (22,269) (2,300) -- -- (24,569)
Minority interest .................................. -- -- -- 1,111 1,111
Extraordinary loss on debt extinguishment .......... 4,280 -- -- -- 4,280
Provision for (benefit from) deferred income taxes . 1,944 -- (2,454) -- (510)
Change in operating assets and liabilities
Accounts receivable ................................ (13,529) (959) -- -- (14,488)
Other assets ....................................... (652) (674) 923 -- (403)
Accounts payable and accrued expenses .............. (1,131) 5,565 2,752 -- 7,186
------------ ------------- --------- ------------ ------------
Net cash provided by operating activities .......... 33,843 7,890 963 -- 42,696
------------ ------------- --------- ------------ ------------
Cash Flows from Investing Activities
Purchases of equipment ............................... (176,273) (22,925) -- -- (199,198)
Proceeds from sale of equipment ...................... 94,264 14,088 -- -- 108,352
Purchases of property and equipment .................. (12,846) (1,410) (759) -- (15,015)
Cash paid for acquisitions ........................... (125,325) 730 (36,051) -- (160,646)
------------ ------------- -------- ------------ ------------
Net cash used in investing activities ........... (220,180) (9,517) (36,810) -- (266,507)
------------ ------------- -------- ------------ ------------
Cash Flows from Financing Activities
Debt issue costs .................................... (4,778) -- (7,499) -- (12,277)
Net borrowings (repayments) under Senior Credit
Facility ............................................ (8,236) -- 37,600 -- 29,364
Proceeds from issuance of senior subordinated notes .. -- -- 198,516 -- 198,516
Proceeds from common stock offering .................. -- -- 85,730 -- 85,730
Repayments under mortgage note ....................... -- -- (13,400) -- (13,400)
Repayments under capitalized lease obligations ....... (833) -- -- -- (833)
Repayments under term loan ........................... (49,916) -- -- -- (49,916)
Net borrowings (repayments) under notes payable ...... (321) 2,318 -- -- 1,997
Redemption of Series A Preferred Stock ............... -- -- (13,915) -- (13,915)
Due to (from) affiliates ............................. 251,185 -- (251,185) -- --
------------ ------------- --------- ----------- ------------
Net cash provided by financing activities ....... 187,101 2,318 35,847 -- 225,266
------------ ------------- --------- ----------- ------------
Net increase in cash and cash equivalents ............ 764 691 -- -- 1,455
Cash and cash equivalents, beginning of period ....... 2,885 -- -- -- 2,885
------------ ------------- --------- ----------- ------------
Cash and cash equivalents, end of period ............. $ 3,649 $ 691 $ -- $ -- $ 4,340
========== ============ ========= =========== ============
46
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of the quarterly operating results during 1998 and 1997 were as
follows (in thousands except per share data):
1998
----------------------------------------------
1st 2nd 3rd 4th
---------- ---------- ---------- ----------
Revenues .............................. $ 61,846 $ 73,800 $ 89,905 $ 98,539
Gross Profit .......................... 19,970 25,082 31,309 34,062
Income (loss) before extraordinary item (1,946) (1,189) 1,671 2,677
Extraordinary item .................... -- (2,675) -- --
Net income (loss) ..................... $ (1,946) $ (3,864) $ 1,671 $ 2,677
Earnings per share data - Basic:
Income (loss) before extraordinary item $ (0.46) $ (0.24) $ 0.08 $ 0.13
Extraordinary item .................... -- (0.15) -- --
---------- ---------- ---------- ----------
Net income (loss) ..................... $ (0.46) $ (0.39) $ 0.08 $ 0.13
========== ========== ========== ==========
Earnings per share data - Diluted:
Income (loss) before extraordinary item $ (0.46) $ (0.24) $ 0.08 $ 0.12
Extraordinary item .................... -- (0.15) -- --
---------- ---------- ---------- ----------
Net income (loss) ..................... $ (0.46) $ (0.39) $ 0.08 $ 0.12
========== ========== ========== ==========
1997
----------------------------------------------
1st 2nd 3rd 4th
---------- ---------- ---------- ----------
Revenues .............................. $ 23,924 $ 26,542 $ 44,938 $ 46,818
Gross Profit .......................... 6,163 9,810 13,981 14,778
Income (loss) before extraordinary item 250 137 (1,502) (5,277)
Extraordinary item .................... -- -- -- (451)
Net income (loss) ..................... $ -- $ 137 $ (1,502) $ (5,728)
Earnings per share data - Basic:
Loss before extraordinary item ........ $ (0.19) $ (0.20) $ (0.40) $ (0.90)
Extraordinary item .................... -- -- -- --
---------- ---------- ---------- ----------
Net loss .............................. $ (0.19) $ (0.20) $ (0.40) $ (0.90)
========== ========== ========== ==========
Earnings per share data - Diluted:
Loss before extraordinary item ........ $ (0.19) $ (0.20) $ (0.40) $ (0.90)
Extraordinary item .................... -- -- -- --
---------- ---------- ---------- ----------
Net loss .............................. $ (0.19) $ (0.20) $ (0.40) $ (0.90)
========== ========== ========== ==========
Certain amounts have been reclassified for comparative purposes.
47
NEFF CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17-SEGMENT INFORMATION
The Company has three segments: Neff Rental, Inc. ("Rental"), Neff
Machinery, Inc. ("Machinery") and S.A. Argentina. These segments are a result of
the historical organization of the Company and the management of its
subsidiaries. All of these segments rent and sell industrial and construction
equipment, sell spare parts and merchandise and provide ongoing repair and
maintenance services and have therefore been aggregated for disclosure purposes.
Rental and Machinery's operations are conducted in the United States and S.A.
Argentina's operations are conducted in South America. The information contained
in Note 15 under Non-Guarantor Subsidiary represents S.A. Argentina operations.
All other information in Note 15 represents operations conducted in the United
States.
48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Neff Corp.
We have audited the consolidated financial statements of Neff Corp. and
Subsidiaries (the "Company") as of December 31, 1998 and 1997 and for each of
the three years in the period ended December 31, 1998, and have issued our
report thereon dated February 16, 1999; such financial statements and report are
included elsewhere in your 1998 Annual Report to Stockholders on Form 10-K. Our
audits also included the financial statement schedule of Neff Corp. listed in
Item 14(a)2. The financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Miami, Florida
February 16, 1999
49
SCHEDULE II
NEFF CORP.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance Charged to Balance
at Beginning Costs and at End
of Period Expenses Other Deductions(1) of Period
------------- ---------- -------- ------------- ----------
Classification
Year ended December 31, 1998:
Allowance for doubtful accounts .......... $ 1,092 $ 3,487 $ -- $ (1,350) $ 3,229
============ ========= ======== ============ =========
Deferred tax valuation allowance ......... $ 1,368 $ -- $ -- $ (468) $ 900
============ ========= ======== ============ =========
Year ended December 31, 1997:
Allowance for doubtful accounts .......... $ 375 $ 957 $ -- $ (240) $ 1,092
============ ========= ======== ============ =========
Deferred tax valuation allowance ......... $ 809 $ 559 $ -- $ -- $ 1,368
============ ========= ======== ============ =========
Year ended December 31, 1996:
Allowance for doubtful accounts .......... $ 297 $ 520 $ -- $ (442) $ 375
============ ========= ======== ============ =========
Deferred tax valuation allowance ......... $ -- $ 809 $ -- $ -- $ 809
============ ========= ======== ============ =========
- ----------
1) Deductions represent bad debt write-offs and adjustments to reflect future
tax benefits based on their realization being more likely than not.
50
PART III
--------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
51
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as part of, this Annual Report
on Form 10-K.
1. Financial Statements.
For a complete list of the Financial Statements filed with this
Annual Report on Form 10-K, see the Index to Financial Statements and
Schedules in Item 8 on Page 21.
2. Financial Statements Schedules.
The following Supplementary Schedules are filed with this Annual
Report on Form 10-K:
See Index to Financial Statements and Schedules on Page 21.
3. Exhibits
Information with respect to this item is contained in Item 14(c)
hereof and is incorporated herein by reference.
(b) Reports on Form 8-K.
(1) A Current Report on Form 8-K dated December 31, 1998 reported the sale
of $100 million aggregate principal amount 10.25% Senior Subordinated Notes due
2008.
(c) Exhibits
27.1 Consolidated Financial Data Schedule
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NEFF CORP.
Date: March 22, 1999 /s/ Kevin P. Fitzgerald
-----------------------
KEVIN P. FITZGERALD
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ------ ------
/s/ Kevin P. Fitzgerald
- ----------------------- President,
Kevin P. Fitzgerald Chief Executive Officer, Director March 22, 1999
/s/ Bonnie S. Biumi
- -----------------------
Bonnie S. Biumi Chief Financial Officer March 22, 1999
/s/ Jorge Mas
- -----------------------
Jorge Mas Director March 22, 1999
/s/ Arthur B. Laffer
- -----------------------
Arthur B. Laffer Director March 22, 1999
/s/ Joel-Tomas Citron
- -----------------------
Joel-Tomas Citron Director March 22, 1999
/s/ Juan Carlos Mas
- -----------------------
Juan Carlos Mas Director March 22, 1999
/s/ Jose Ramon Mas
- -----------------------
Jose Ramon Mas Director March 22, 1999
53