UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31,June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number-------------
COMMISSION FILE NUMBER 1-14387
UNITED RENTALS, INC.
COMMISSION FILE NUMBER 1-13663
UNITED RENTALS (NORTH AMERICA), INC.
(Exact namenames of RegistrantRegistrants' as specified in its charter)their charters)
Delaware 06-1522496
Delaware 06-1493538
- --------------------------- -------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.Nos.)
Four Greenwich Office Park, Greenwich, Connecticut 06830
- ----------------------------------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant'sRegistrants' telephone number, including area code (203) 622-3131
--------------
Indicate by check mark whether the registrantregistrants (1) hashave 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 wasregistrants were required to file such reports), and (2) hashave been subject to
such filing requirements for the past 90 days.
X Yes No
----- -----
As of May 11,August 10, 1998 there were 33,623,71534,584,123 shares of the registrant's CommonUnited Rentals, Inc.
common stock, $.01 par value outstanding.
There is no market for the common stock of United Rentals (North America), Inc.,
all outstanding shares of which are owned by United Rentals, Inc.
This combined Form 10-Q is separately filed by (i) United Rentals, Inc. and (ii)
United Rentals (North America), Inc. (which is a wholly owned subsidiary of
United Rentals, Inc.). United Rentals (North America), Inc. meets the
conditions set forth in general instruction H(1)(A)and(B)of Form 10-Q and is
therefore filing this form with the reduced disclosure format permitted by such
instruction.
UNITED RENTALS, INC.
UNITED RENTALS (NORTH AMERICA), INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31,JUNE 30, 1998
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements
United Rentals, Inc. Consolidated Balance Sheets
as of March 31, 1998June 30,1998 and December 31, 1997
(unaudited)............................................................................ 3
United Rentals, Inc. Consolidated StatementStatements of
Operations for the Six and Three Months
Ended March 31,June 30, 1998 (unaudited).................................................. 4
United Rentals, Inc. Consolidated StatementStatements of
Stockholders' Equity for the ThreeSix Months Ended
March 31, 1998,
(unaudited).......................................................June 30, 1998(unaudited).............................. 5
United Rentals, Inc. Consolidated Statement of
Cash Flows for the ThreeSix Months Ended
March 31,June 30, 1998 (unaudited)........................................................ 6
Notes to Unaudited Consolidated Financial Statements..............Statements.. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 12Operations................... 16
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds......................... 20Securities................................. 31
Item 6 Exhibits and Reports on Form 8-K.................................. 21
Signatures........................................................ 228-K...................... 32
Signatures............................................ 35
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $ 54,785,007 $ 68,607,528
Accounts receivable, net of
allowance for doubtful accounts
of $3,813,000 in 1998 and
$1,161,000 in 1997 31,443,000 7,494,636
Inventory 14,933,813 3,827,446
Prepaid expenses and other assets 10,006,519 2,966,822
Rental equipment, net 140,743,703 33,407,561
Property and equipment, net 11,900,686 2,272,683
Intangible assets, net of
accumulated amortization
of $1,235,000 in 1998 and
$241,000 in 1997 186,314,455 50,533,736
------------ ------------
$450,127,183JUNE 30 DECEMBER 31
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 5,486,092 $ 68,607,528
Accounts receivable, net of
allowance for doubtful accounts
of $7,778,000 in 1998 and
$1,161,000 in 1997 67,202,625 7,494,636
Inventory 33,255,606 3,827,446
Prepaid expenses and other assets 22,887,178 2,966,822
Rental equipment, net 298,956,195 33,407,561
Property and equipment, net 32,349,116 2,272,683
Intangible assets, net of
accumulated amortization
of $3,198,000 in 1998 and
$241,000 in 1997 429,027,657 50,533,736
------------ ------------
$889,164,469 $169,110,412
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 55,855,965 $ 5,697,830
Debt 389,181,344 1,074,474
Deferred income taxes 2,375,648 198,249
Accrued expenses and other
liabilities 23,357,346 4,409,828
------------ ------------
Total liabilities 470,770,303 11,380,381
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock--$.01 par value,
75,000,000 shares authorized in
1998 and 1997,34,192,085 in 1998
and 23,899,119 in 1997 shares
issued and outstanding 341,921 238,991
Additional paid-in capital 409,817,333 157,457,418
Retained earnings 8,253,698 33,622
Cumulative translation adjustments (18,786) --
------------ ------------
Total stockholders' equity 418,394,166 157,730,031
------------ ------------
$889,164,469 $169,110,412
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 28,149,318 $ 5,697,830
Debt 26,494,068 1,074,474
Deferred income taxes 544,820 198,249
Accrued expenses and other
liabilities 10,305,699 4,409,828
------------ ------------
Total liabilities 65,493,905 11,380,381
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock--$.01 par value,
75,000,000 shares authorized in
1998 and 1997,33,313,708 in 1998
and 23,899,119 in 1997 shares
issued and outstanding 333,137 238,991
Additional paid-in capital 381,629,839 157,457,418
Retained earnings 2,671,973 33,622
Accumulated translation adjustments (1,671) --
------------ ------------
Total stockholders' equity 384,633,278 157,730,031
------------ ------------
$450,127,183 $169,110,412
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS THREE MONTHS
ENDED MARCH 31,ENDED
JUNE 30, 1998 (UNAUDITED)
Revenues:
Equipment rentals $26,779,850
Sales of rental equipment 2,983,191
Sales of new equipment, merchandise and other
revenues 9,427,125
-----------
Total revenues 39,190,166
Cost of revenues:
Cost of equipment rentals, excluding depreciation 11,221,504
Depreciation of rental equipment 4,583,832
Cost of rental equipment sales 1,639,431
Cost of new equipment and merchandise sales
and other operating costs 7,591,891
-----------
Total cost of revenues 25,036,658
-----------
Gross profit 14,153,508
Selling, general and administrative expenses 7,806,931
Non-rental depreciation and amortization 1,086,424
-----------
Operating income 5,260,153
Interest expense 1,172,718
Other (income) expense (380,703)
-----------
Income before provision for income taxes 4,468,138
Provision for income taxes 1,829,787
-----------
Net income $ 2,638,351JUNE 30, 1998
-------------- --------------
Revenues:
Equipment rentals $ 86,104,719 $59,324,869
Sales of rental equipment 10,464,642 7,481,451
Sales of new equipment,
merchandise and other
revenues 30,781,919 21,354,794
------------ -----------
Total revenues 127,351,280 88,161,114
Cost of revenues:
Cost of equipment rentals,
excluding depreciation 35,608,405 24,386,901
Depreciation of rental equipment 14,565,250 9,981,418
Cost of rental equipment sales 5,828,280 4,188,849
Cost of new equipment and
merchandise sales and other
operating costs 24,110,542 16,518,651
------------ -----------
Total cost of revenues 80,112,477 55,075,819
------------ -----------
Gross profit 47,238,803 33,085,295
Selling, general and
administrative expenses 25,101,187 17,294,256
Non-rental depreciation
and amortization 3,815,236 2,728,812
------------ -----------
Operating income 18,322,380 13,062,227
Interest expense 4,936,708 3,763,990
Other (income) expense (527,547) (146,844)
------------ -----------
Income before provision for
income taxes 13,913,219 9,445,081
Provision for income taxes 5,693,143 3,863,356
------------ -----------
Net income $ 8,220,076 $ 5,581,725
============ ===========
Basic earnings per share $ 0.27 $ 0.17
============ ===========
Diluted earnings per share $ 0.23 $ 0.14
============ ===========
Basic earnings per share $0.10
===========
Diluted earnings per share $0.09
===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
COMMON STOCK
------------------------
NUMBER ADDITIONAL ACCUMULATEDCUMULATIVE
OF PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS
---------- ----------- ------------------- ------------ ----------- ------------
Balance,
December 31, 1997 23,899,119 $238,991 $157,457,418 $ 33,622 --
Issuance of
common stock 9,537,375 95,374 223,971,19310,415,752 104,158 252,158,687
Translation
adjustments $ (1,671)(18,786)
Conversion of
convertible note 14,814 148 199,852
Cancellation of
common stock (137,600) (1,376) 1,376
Net income 2,638,3518,220,076
----------- -------- ------------ ----------- -----------
------------ ----------- ------------
Balance,
March 31, 1998 33,313,708June 30,1998 34,192,085 $341,921 $409,817,333 $8,253,698 $ 333,137 $381,629,839 $2,671,973 $ (1,671)(18,786)
=========== ======== ============ =========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 1998
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,638,351
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 5,670,256
Gain on sale of rental equipment (1,343,760)
Deferred taxes 1,422,898
Changes in operating assets and
liabilities:
Accounts receivable (474,469)
Inventory (2,918,253)
Prepaid expenses and other assets (4,917,023)
Accounts payable 9,560,512
Accrued expenses and
other liabilities (2,064,894)
-------------
Net cash provided by operating
activities 7,573,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental equipment (12,860,888)
Purchases of property and equipment (5,315,132)
Proceeds from sales of rental
equipment 2,983,191
In-process acquisition costs (758,771)
Purchases of other companies (138,170,090)
-------------
Net cash used in investing
activities (154,121,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs 206,456,306
Proceeds from debt 149,576,408
Repayments of debt (222,652,100)
Payment of debt financing costs (655,063)
-------------
Net cash provided by financing
activities 132,725,551
-------------
Net decrease in cash and
cash equivalents (13,822,521)
Cash and cash equivalents at
beginning of period 68,607,528
-------------
Cash and cash equivalents at
end of period $ 54,785,007CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,220,076
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 18,380,486
Gain on sale of rental equipment (4,636,362)
Deferred taxes 3,623,614
Changes in operating assets and
liabilities:
Accounts receivable (7,175,089)
Inventory (1,842,775)
Prepaid expenses and other assets (6,694,037)
Accounts payable 21,489,836
Accrued expenses and
other liabilities (2,543,195)
------------
Net cash provided by operating
activities 28,822,554
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental equipment (62,722,443)
Purchases of property and equipment (11,519,846)
Proceeds from sales of rental
equipment 10,464,642
In-process acquisition costs (3,495,002)
Payment of contingent purchase price (2,255,433)
Purchases of other companies (369,534,206)
------------
Net cash used in investing activities (439,062,288)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs 206,456,306
Proceeds from debt 623,776,408
Repayments of debt (474,999,342)
Payment of debt financing costs (8,115,074)
-------------
Net cash provided by financing
activities 347,118,298
-------------
Net decrease in cash and
cash equivalents (63,121,436)
Cash and cash equivalents at
beginning of period 68,607,528
-------------
Cash and cash equivalents at
end of period $ 5,486,092
=============
The accompanying notes are an integral part of these consolidated financial
statements.
6
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CON'T
THREESIX MONTHS ENDED MARCH 31,JUNE 30, 1998
(UNAUDITED)
Supplemental disclosure of cash flow
information:
Cash paid during the period:
Interest $ 1,111,819
=============2,290,550
===========
Income taxes $ 106,500
=============2,946,000
===========
Supplemental disclosure of non cash
investing and financing activities:
During the six month period ended
March 31,June 30, 1998 a convertible note in the
principal amount of $200,000 was converted
into 14,814 shares of common stock.
The Company acquired the net assets
and assumed certain liabilities of
other companies as follows:
Assets, net of cash acquired 279,808,752681,724,845
Liabilities assumed (123,821,390)(264,655,908)
Less:
Amounts paid in common stock and
warrants (17,817,272)
-------------(47,534,731)
-----------
Net cash paid $ 138,170,090
=============$369,534,206
============
The accompanying notes are an integral part of these consolidated financial
statements.
7
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,JUNE 30, 1998
1. BASIS OF PRESENTATION
United Rentals, Inc. is principally a holding company ("Holdings") and
conducts its operations principally through its wholly owned subsidiary United
Rentals (North America), Inc. ("URI") and subsidiaries of URI. URI was
incorporated in August 1997, initially capitalized in September 1997 and
commenced equipment rental operations in October 1997. Holdings was incorporated
in July 1998 and became the parent of URI on August 5, 1998, pursuant to the
reorganization of the legal structure of URI described in Note 7. Prior to such
reorganization, the name of URI was United Rentals, Inc. References herein to
the "Company" refer to Holdings and its subsidiaries, with respect to periods
following the reorganization, and to URI and its subsidiaries, with respect to
periods prior to the reorganization. Separate consolidated financial statements
of URI and its subsidiaries have not been presented as they are the same as
those of the Company as of June 30, 1998 and for period then ended.
The Consolidated Financial Statements of United Rentals, Inc. and its
subsidiaries (the "Company")the Company included herein are
unaudited and, in the opinion of management, such financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary to a
fair statement of the results of the interim periodperiods presented. Interim
financial statements do not require all disclosures normally presented in year-endyear-
end financial statements, and, accordingly, certain disclosures have been
omitted. Results of operations for the six and three month periodperiods ended March 31,June
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. The Consolidated Financial Statments
included herein should be read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS NO.Statement of
Financial Accounting Standards ("SFAS")No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a primary financial
statement. The Company adopted SFAS No. 130 during the period ended March 31,
1998. The adoption of SFAS No. 130 did not have a material effect on the
consolidated financial position, results of operations or cash flows of the
Company.
8
SFAS No. 131 establishes a new method by which companies will report operating
segment information. This method is based on the manner in which management
organizes the segments within a company for making operating decisions and
assessing performance. The Company continues to evaluate the provisions of SFAS
No. 131 and, upon adoption, the Company may report operating segments. The
Company is required to adopt SFAS No. 131 by December 31, 1998.
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits."
SFAS No. 132 revises employers' disclosures about pension and other post
retirement benefit plans but does not change the measurement or recognition of
those plans. The Company is required to adopt SFAS No. 132 by December 31,
1998. The adoption of SFAS No. 132 is not expected to have a material effect on
the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
2. COMMON STOCK
On March 11, 1998, the Company completed a public offering of 8,625,000
shares of Common Stock (the "Offering"). The net proceeds to the Company from
the Offering were approximately $207.4 million (after deducting the underwriting
discountdiscounts and
estimated9
offering expenses). The Company used $132.7 million of 8
the net proceeds from the
Offering to repay all of the then outstanding indebtedness under the Company's
credit facility and used the balance of such net proceeds for acquisitions.
The purchase agreement relating to the acquisition of one company acquired
provides that the stock consideration paid by the Company in connection with
such acquisition is subject to adjustment based upon the trading prices of the
common stock during the 60-day period which commenced December 18, 1997. In
accordance with such provisions, the Company canceled 137,600 shares of common
stock issued by the Company in connection with such acquisition.
3. 9 1/2% SENIOR SUBORDINATED NOTES
In May 1998, the Company issued $200 million aggregate principal amount of
9 1/2 % Senior Subordinated Notes which are due June 1, 2008. The Company used
$102.8 million of the net proceeds from the sale of such notes to repay all of
the then outstanding indebtedness under the Company's credit facility and used
the balance of such net proceeds from this offering for acquisitions, capital
expenditures and general corporate purposes.
4. ACQUISITIONS
During the threesix months ended March 31,June 30, 1998, the Company completed the
acquisition of 1945 equipment rental companies having an aggregate of 66160 rental
locations in 1624 states and Ontario, Canada.
The aggregate consideration paid by the Company for the acquisitions
completed during the threesix months ended March 31,June 30, 1998 was $165.0$429.7 million and
consisted of approximately $147.2$382.2 million in cash, 912,3751,779,351 shares of Common
Stock and warrants to purchase an aggregate of 30,000 shares of Common Stock.
In addition, the Company repaid or assumed outstanding indebtedness of the
companies acquired during the threesix months ended March 31,June 30, 1998 in the aggregate
amount of $98.5$216.4 million. The Company also agreed in connection with twoeight of
the acquisitions completed during the six months ended June 30, 1998, to pay
additional amounts to the former owners additional amounts based upon specified future revenues
(such amounts being limited to (i) Cdn$4.0$10.0 million, $2.0 million, $0.8 million,
$0.5 million, $0.5 million, $0.4 million and Cdn. $4.0 million, respectively,
with respect to one acquisitionseven of such acquisitions and (ii) an amount based on the
resultsrevenues of a single store with respect to the other acquisition).
These acquisitions have been accounted for as purchases and, accordingly,
the results of their operations have been included in the Company's results of
operations from their respective
10
acquisition dates. The purchase prices have been allocated to the assets
acquired and liabilities assumed based on their respective fair values at their
respective acquisition dates.
The Company has not completed its valuation on all of its purchases and the
purchase price allocations are subject to change when additional information
concerning asset and liability valuations are completed.
The following table summarizes, on an unaudited pro forma basis, the
combined results of operations of the Company for the threesix months ended March 31,June 30,
1998 as though each acquisition described above was made on January 1, 1998.
9
THREE MONTHS ENDED
MARCH 31, 1998
------------------Six Months Ended
June 30,1998
------------
Revenues $ 46,616,686$160,026,542
Net income 2,279,6579,493,852
Basic earnings per share 0.090.32
Diluted earnings per share 0.070.27
The unaudited pro forma results are based upon certain assumptions and
estimates which are subject to change. These results are not necessarily
indicative of the actual results of operations that might have occurred, nor are
they necessarily indicative of expected results in the future.
4.11
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
SIX MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
-------------- --------------
Numerator:
Net income $ 2,638,351
==================8,220,076 $ 5,581,725
=========== ===========
Denominator:
Denominator for basic
earnings per share--weighted-averageshare
weighted-average shares 26,278,46229,970,357 33,702,126
Effect of dilutive securities:
Employee stock options 434,402903,311 1,705,898
Warrants 3,731,044
------------------4,218,749 4,554,411
----------- -----------
Dilutive potential common
shares
Denominator for diluted
earnings per share--adjusted weighted-
averageshare--
adjusted weighted-average
shares 30,443,908
==================35,092,417 39,962,435
=========== ===========
Basic earnings per share $ 0.10
==================0.27 $ 0.17
=========== ===========
Diluted earnings per share $ 0.09
==================
100.23 $ 0.14
=========== ===========
6. AGREEMENT AND PLAN OF MERGER
On June 15, 1998, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with U.S. Rentals, Inc., a Delaware corporation ("U.S.
Rentals"). The Merger Agreement provides, subject to the terms and conditions
set forth therein, for a subsidiary of the Company to be merged with and into
U.S. Rentals (the "Merger"). Following the Merger, U.S. Rentals will become a
wholly owned subsidiary of URI. At the effective time of the Merger, (i) each
outstanding share of U.S. Rentals common stock will be converted into 0.9625
shares of Common Stock of the Company (the "Exchange Ratio") and (ii) all
outstanding options to purchase shares of U.S. Rentals common stock will be
assumed by the Company and converted into options to purchase Common Stock of
United Rentals, Inc. subject to adjustment for the Exchange Ratio. The Merger
is expected to be accounted for as a "pooling of interests" for financial
accounting purposes. The Merger, which is subject to shareholder approvals and
other customary conditions, is expected to close before the end of September
1998.
12
5.7. SUBSEQUENT EVENTS
Completed Acquisitions
Subsequent to March 31,June 30, 1998, the Company completed the acquisition of 1419
equipment rental companies consisting of 3566 rental sites. The aggregate
consideration paid by the Company for these acquisitions was $92.5$344.1 million and
consisted of approximately $85.9$331.4 million in cash, and 307,906390,549 shares of Common
Stock. The Company also agreed in connection with onetwo of the acquisitions to pay
additional amounts to the former owner additional amountsowners based upon specified future revenues not
to exceed $500,000.$0.5 million in each case. The Company funded a portion of the cash
consideration for these acquisitions with cash on hand (including cash proceeds
from debt and equity offerings) and the balance with borrowings under the
Company's revolving credit facility.
11Potential Acquisitions
The Company has entered into definitive agreements with respect to the
acquisition (the "Pending Acquisitions") of the following companies (the
"Pending Acquisition Companies"): Rental Tools and Equipment Co. International
Inc.; and McClinch, Inc., McClinch Equipment Services, Inc. and Grey Fox
Equipment, Inc. The Pending Acquisition Companies have an aggregate of 32
rental locations in nine states. Completion of the Pending Acquisitions is
subject to various conditions, and no assurance can be given that the Pending
Acquisitions will be consummated or that the Pending Acquisitions will be
consummated on the terms contemplated by the definitive agreements.
The Company expects that the aggregate consideration for the Pending
Acquisition Companies will consist of (i) up to 2,090,240 shares of Common Stock
(subject to adjustment), (ii) cash of $103.2 million (subject to adjustment) and
(iii) warrants to purchase an aggregate of $0.6 million worth of Common Stock at
an exercise price per share based on the price of the Common Stock at the time
the acquisition is completed. In addition, the Company will assume approximately
$77.8 million of indebtedness. The consideration for the Pending Acquisition
Companies includes reimbursement to the shareholders of the Pending Acquisition
Companies for certain expenditures to acquire equipment and businesses and
payment for certain real estate used in the business.
Term Loan
In July 1998, URI obtained a $250 million term loan from a group of
financial institutions (the "Term Loan"). The Term Loan matures on June 30,
2005. URI used the net proceeds from the loan for acquisitions.
13
Holding Company Reorganization
URI was formerly named United Rentals, Inc. On August 5, 1998 a
reorganization was effected pursuant to which (i) URI became a wholly owned
subsidiary of Holdings, a newly formed holding company, (ii) the name of URI was
changed from United Rentals, Inc. to United Rentals (North America), Inc., (iii)
the name of Holdings became United Rentals, Inc., (iv) the outstanding common
stock of URI was automatically converted, on a share-for-share basis, into
Common Stock of Holdings and (v) the Common Stock of Holdings commenced trading
on the New York Stock Exchange under the symbol "URI" instead of the common
stock of URI. The purpose of the reorganization was to facilitate certain
financings. The business operations of the Company will not change as a result
of the new legal structure.
The stockholders of Holdings have the same rights, privileges and interests
with respect to Holdings as they had with respect to URI immediately prior to
the reorganization. Holdings has the same board of directors as URI and the
certificate of incorporation and by-laws of Holdings is the same in all material
respects as the certificate of incorporation and by-laws of URI in effect
immediately prior to the reorganization.
Issuance of 6 1/2% Convertible Quarterly Income Preferred Securities
On August 5, 1998, a subsidiary trust (the "Trust") of Holdings issued and
sold in a private offering (the "Preferred Securities Offering")$300 million of
6 1/2% Convertible Quarterly Income Preferred Securities (the "Preferred
Securities"). In addition, the Trust may sell up to an additional $50 million
of Preferred Securities pursuant to an over-allotment option granted to the
initial purchasers of the Preferred Securities. The Preferred Securities have
not been registered under the Securities Act of 1933 (the "Act") and,
accordingly, may not be offered or sold in the United States absent registration
or an applicable exemption from the registration requirements under the Act.
The net proceeds from the Preferred Securities Offering were approximately
$290.0 million. The Trust used the proceeds from the Preferred Securities
Offering to purchase convertible subordinated debentures from Holdings which
resulted in Holdings receiving all of the net proceeds of the Preferred
Securities Offering. Holdings in turn contributed the net proceeds of the
Preferred Securities Offering to URI. URI used approximately $281 million
of such net proceeds to repay the then outstanding indebtedness under the
Company's credit facility and used the balance of such net proceeds for
acquisitions.
14
8.80% Senior Subordinated Notes
In August 1998, URI issued $205 million aggregate principal amount of 8.80%
Senior Subordinated Notes which are due August 15, 2008. URI used $90.3 million
of the net proceeds from the sale of such notes to repay outstanding
indebtedness under the Company's credit facility and expects to use the balance
of such net proceeds to repay borrowings under the credit facility and expects
to use the remaining net proceeds for future acquisitions, capital expenditures
and general corporate purposes.
15
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.OPERATIONS
The following discussion reviews the Company's operations for the six and
three months ended March 31,June 30, 1998 and should be read in conjunction with the
unaudited Consolidated Financial Statements and related Notes thereto of the
Company included herein and the Consolidated Financial Statements and related
Notes thereto included in the Company's 1997 Annual Report on Form 10-K.
The following discussion includes statements that are forward-looking in
nature. These statements are generally identified by the inclusion of phrases
such as "the Company expects," "the Company anticipates," "the Company
believes," "the Company estimates," and other phrases of similar meaning.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect the business and operations of the Company. Certain
of these factors are discussed under the caption Item 1 - "Business-Factors that
May Influence Results and Accuracy of Forward-Looking Statements" included in
the Company's 1997 Annual Report of Form 10-K. The information in such Annual
Report under such caption is incorporated by reference herein.
General
- -------Unless otherwise indicated, (i) the term "Holdings" refers to United
Rentals, Inc., (ii) the term "URI" refers to United Rentals (North America),
Inc., a wholly owned subsidiary of Holdings, and (iii) the term "the Company"
refers to Holdings and its subsidiaries. (URI and its subsidiaries with respect
to periods prior to the reorganization described in Note 7 to the Unaudited
Consolidated Financial Statements included elsewhere in this Report)
GENERAL
The Company commenced equipment rental operations in October 1997 by
acquiring six established equipment rental companies and acquired 3364 additional
companies in the first fiveeight months of 1998 (through MayAugust 14, 1998). Of such
acquisitions, 19 were completed in the first quarter of 1998.1998, 26 were completed
in the second quarter of 1998 and 19 thereafter. Each of the acquisitions
completed by the Company to date has been accounted for as a purchase.
16
The Company primarily derives revenues from the following sources: (i)
equipment rental (including additional fees that may be charged for equipment
delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale
of rental equipment, (iii) the sale of new equipment, and (iv) the sale of
related merchandise and parts.
Cost of operations consists primarily of depreciation costs associated with
rental equipment, the cost of repairing and maintaining rental equipment, the
cost of rental and new equipment sold, personnel costs, occupancy costs,
supplies, and expenses related to information systems. The Company records
rental equipment expenditures at cost and depreciates equipment using the
straight-line method over the estimated useful life (which ranges from 2 to 10
years), after giving effect to an estimated salvage value of 0% to 10% of cost.
Selling, general and administrative expense includes 12
advertising and
marketing expenses, management salaries, and clerical and administrative
overhead.
Non-rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements and (ii) the amortization of intangible assets. The
Company's intangible assets include goodwill, which represents the excess of the
purchase price of acquired companies over the estimated fair market value of the
assets acquired.
Consideration Paid For Acquisitions in First Quarter ofCONSIDERATION PAID FOR ACQUISITIONS DURING FIRST SIX MONTHS
OF 1998
- ------------------------------------------------------------
The aggregate consideration paid by the Company for the acquisitions
completed during the threesix months ended March 31, 1998June 30,1998 was $165.0$429.7 million and
consisted of approximately $147.2$382.2 million in cash, 912,3751,779,351 shares of Common
Stock and warrants to purchase an aggregate of 30,000 shares of Common Stock.
In addition, the Company repaid or assumed outstanding indebtedness of the
companies acquired during the threesix months ended March 31,June 30, 1998 in the aggregate
amount of $98.5$216.4 million. The Company also agreed in connection with twoeight of
the acquisitions completed during the six months ended June 30, 1998, to pay
additional amounts to the former owners additional amounts based upon specified future revenues
(such amounts being limited to (i) Cdn$4.0$10.0 million, $2.0 million, $0.8 million,
$0.5 million, $0.5 million, $0.4 million and Cdn. $4.0 million, respectively,
with respect to one acquisitionseven of such acquisitions and (ii) an amount based on the
resultsrevenues of a single store with respect to the other acquisition).
Results of Operations
- ---------------------
Three17
RESULTS OF OPERATIONS
Six months ended March 31,June 30, 1998
Revenues. Total revenues were $39.2$127.4 million for the six months ended June
30, 1998. Equipment rental revenues accounted for 67.6% of such revenues.
Gross Profits. For the six months ended June 30, 1998 the gross profit
margin was (i)41.7% from equipment rentals, (ii) 44.3% from sales of rental
equipment and (iii) 21.7% from sales of new equipment, merchandise and other
revenues.
Selling, General and Administrative Expense. For the six months ended June
30, 1998, selling, general and administrative expense was $25.1 million or 19.7%
of total revenues.
Non-rental Depreciation and Amortization. For the six months ended June
30, 1998, non-rental depreciation and amortization was $3.8 million or 3.0% of
total revenues.
Interest Expense. For the six months ended June 30, 1998 interest expense
was $4.9 million.
Income Taxes. The Company's effective income tax rate for the six months
ended June 30, 1998 was 40.9%.
Three months ended June 30, 1998
Revenues. Total revenues were $88.2 million for the three months ended
March 31,June 30, 1998. Equipment rental revenues accounted for 68.3%67.3% of such revenues.
Gross Profits. For the three months ended March 31,June 30, 1998, the gross profit
margin was (i) 41.0%42.1% from equipment rentals, (ii) 45.0%44.0% from sales of rental
equipment and (iii) 19.5%22.6% from sales of new equipment, merchandise and other
revenues.
Selling, General and Administrative Expense. For the three months ended
March 31,June 30, 1998, selling, general and administrative expense was $7.8$17.3 million or
19.9%19.6% of total revenues.
Non-rental Depreciation and Amortization. For the three months ended March
31,June
30, 1998 non-rental depreciation and amortization was $1.1$2.7 million or 2.8%3.1% of
total revenues.
Interest Expense. For the three months ended March 31,June 30, 1998
13
interest expense
was $1.2$3.8 million. Interest expense principally related to
borrowings made under the Company's credit facility in order to fund a portion
of the purchase price of the acquisitions completed in 1998.
Income Taxes. The Company's effective income tax rate for
18
the three months ended March 31,June 30, 1998 was 41.0%40.9%.
Liquidity and Capital Resources
- -------------------------------LIQUIDITY AND CAPITAL RESOURCES
General
The Company completed anhas funded its cash requirements to date from (i) the sale of
Common Stock and warrants in private placements to the officers and directors of
the Company for aggregate consideration of $46.8 million, (ii) other sales of
Common Stock in private placements for aggregate consideration of $7.9 million,
(iii) the sale of Common Stock in the Company's initial public offering ("IPO") of 8,050,000
shares of its Common Stock ("Common Stock") in
December 1997 and completed a
secondin an additional public offering of 8,625,000 shares of Common Stock (the "March
Offering") in March 1998. The estimated1998 for aggregate
net proceeds to the Companyconsideration of $307.0 million (after deducting the underwriting discounts and
estimated offering expenses)
from such offerings were approximately $307.0 million ($ 99.6 million from the
IPO and $207.4 million from the March Offering). The Company used (i)
approximately $132.7 million of such net proceeds to repay indebtedness, (iv) borrowings under the Company's $300 million
revolving credit facility (the "Credit Facility"),(v) the sale of $200 million
aggregate principal amount of 9 1/2% senior subordinated notes (the "9 1/2%
Notes")in May 1998 for aggregate consideration of $194.5 million (after
deducting the initial purchasers' discount), (vi) the proceeds of a $250 million
term Loan that the Company received in July 1998,(vii) the sale by a subsidiary
trust of 6 1/2% convertible quarterly income preferred securities in August 1998
for aggregate consideration of $290.0 million (after deducting the initial
purchasers' discount), (viii) the sale of $205 million aggregate principal
amount of 8.80% senior subordinated notes (the "8.8% Notes") in August 1998 for
aggregate consideration of $197.5 million (after deducting the initial
purchaser's discount) and (ix) cash generated from operations and from the sale
of equipment. For additional information concerning certain of the financings
described above, see "Certain Information Concerning Preferred Securities" and
"Certain Information Concerning the Credit Facility and Other Indebtedness."
The Company's principal existing sources of cash are (i) borrowings
available under the Credit Facility, (ii) approximately $90.3 million of such net
proceeds to fund the cash consideration paid for acquisitions completed in the
first quarter of 1998 and (iii) the balance of such net proceeds to fund a portion of the cash consideration paid for acquisitions completed afternet proceeds from
the first quarter of 1998. The increase in stockholders' equity at March 31, 1998
compared with December 31, 1997, primarily reflects the March Offering and the
issuance of an aggregate of 912,375 shares of Common Stock during the first
quarter of 1998 as partsale of the consideration8.8% Notes that was not used for acquisitions.repayment of indebtedness
(approximately $105.7 million) and (iii) cash generated from operations. The
Company will require additional financing in connection with the pending merger
with U.S. Rentals as described below under "Cash Requirements Relating to the
Merger."
The Company had cash-on-hand at the beginning of 1998 of approximately
$68.6 million, representing the net proceeds of the IPOCompany's initial public
offering not used to repay indebtedness. During the first threesix months of 1998,
the Company (i) generated cash from operations of approximately $7.6$28.8 million,
(ii)
19
generated cash from the sales of rental equipment of approximately $3.0$10.5 million
and (iii) had net cash from financing activities of approximately $132.7 million (principally
reflecting the March Offering).$347.1
million. The Company used cash during the first threesix months of 1998 principally
for acquisitions (approximately 138.2$369.5 million), to purchase rental equipment
(approximately $12.9$62.7 million) and to purchase property and equipment related tofor the
Company's information technology system and other purposes (approximately $5.3$11.5
million). These acquisitions and purchases accounted(and the financing thereof) were the
principal reasons for (a) the increase in accounts receivable, inventory, rental
equipment, property and equipment, and intangible assets at March 31,June 30, 1998
compared with December 31, 1997, (b) the increase in accounts payable, debt and
accrued expenses and other liabilities at March 31,June 30, 1998 compared with December
31, 1997 and (c) the decrease in cash at March 31,June 30, 1998 compared with December
31, 1997.
14
The increase in prepaid expenses and other assets at March 31,June 30, 1998 compared
with December 31, 1997 primarily reflected (i) andan increase in prepaid expenses
relating to the Company's operations, (ii) deferred tax assets recorded in
connection with acquisitions and (iii) certain direct costs relating to
potential or pending acquisitions that were capitalized.
20
The increase in stockholders' equity at June 30, 1998 compared with
December 31, 1997, primarily reflects (i)the public offering of Common Stock
completed by the Company in March 1998 and (ii) the issuance of an aggregate of
1,779,351 shares of Common Stock during the six months ended June 30, 1998 as
part of the consideration for acquisitions.
CASH REQUIREMENTS RELATING TO THE MERGER
On June 15, 1998, the Company entered into an Agreement and Plan of Merger
with U.S. Rentals, Inc., a Delaware corporation ("U.S. Rentals"). The Merger
Agreement provides, subject to the terms and conditions set forth therein, for a
subsidiary of the Company to be merged with and into U.S. Rentals (the
"Merger"). Following the Merger, U.S. Rentals will become a wholly owned
subsidiary of URI. For additional information concerning the Merger, see Note
6 to the Unaudited Consolidated Financial Statements included elsewhere in this
Report.
The Company estimates that it will require additional financing, in the
range of $500 million to $600 million, in order to fund the cash outlays that
will be required in connection with the Merger (as described below) and to
support the Company's operations following the Merger. Accordingly, the Company
will seek to obtain a new revolving credit facility that will provide the
requisite additional financing. In addition, the Company may pursue other
financing alternatives.
The principal cash outlays that will be required in connection with the
Merger are discussed below.
Repayment of U.S. Rentals' Credit Facility. Upon completion of the Merger,
U.S. Rentals' $300 million credit facility will terminate and U.S. Rentals will
be required to immediately repay all outstanding indebtedness thereunder. As of
August 14, 1998, there was approximately $120.0 million of indebtedness
outstanding under such credit facility.
Prepayment of U.S. Rentals' Senior Notes. There is currently outstanding
$252 million of senior unsecured notes that were issued by U.S. Rentals.
Pursuant to the terms of such notes, U.S. Rentals may not consummate the Merger
unless it first offers to prepay such notes and, to the extent that such offer
is accepted, prepays such notes concurrently with the closing of the Merger. The
Company and U.S. Rentals are seeking to obtain waivers, which would relieve U.S.
Rentals of its obligation to make such prepayment offer and enable the Company
to assume such notes. There can be no assurance, however, that such waivers
21
will be obtained.
Other Cash Expenditures. The Company estimates that other cash
expenditures in connection with the Merger will be in the range of $50 million
to $70 million (excluding non-cash charges of $10 million to $20 million). These
include expenditures for (i) accelerated deferred compensation for certain
employees of U.S. Rentals, (ii) severance for certain employees of U.S. Rentals
and (iii) professional fees and investment banking fees.
CASH REQUIREMENTS RELATING TO PENDING ACQUISITIONS
The Company has entered into definitive agreements with respect to the
acquisition (the "Pending Acquisitions") of the following companies (the
"Pending Acquisition Companies"): Rental Tools and Equipment Co. International
Inc.; and McClinch, Inc., McClinch Equipment Services, Inc. and Grey Fox
Equipment, Inc. For additional information concerning the Pending Acquisitions,
see Note 7 to the Unaudited Consolidated Financial Statements included elsewhere
in this Report.
The Company estimates that the cash expenditures that will be required in
order to complete the Pending Acquisitions will be approximately $177.9 million.
The Company expects to fund such expenditures through borrowings under the
Credit Facility.
GENERAL CASH REQUIREMENTS RELATED TO OPERATIONS
The Company is seeking to obtain a new credit facility (as described
above) that will provide the additional financing that the Company will require
as a result of the Merger. Assuming that the Company obtains this new credit
facility, the Company estimates that its available sources of cash (consisting
of borrowings available under such credit facility, the proceeds from the sale
of the 8.80% Notes that were not used for repayment of indebtedness and cash
generated from operations) will be sufficient for at least 12 months to fund the
cash required for (i) the existing operations of the Company (ii) the existing
operations of U.S. Rentals to be acquired in the Merger and (iii) the operations
to be acquired upon completion of the Pending Acquisitions. However, new
acquisitions (other than the Pending Acquisitions) and start-up locations that
are not currently under development may require additional financing as
discussed below.
The Company expects its principal needs for cash relating to its operations
will be to fund (i) operating activities and
22
working capital, (ii) the purchase of rental equipment on an ongoing basis to
maintain the quality and competitiveness of its existing rental equipment, (iii)
the purchase of equipment required to expand and modernize the rental equipment
at certain locations, (iv) the purchase of equipment and other items required to
maintain sufficient inventory of the new equipment and related merchandise and
parts that the Company offers for sale and (v) interest expense.
The Company estimates that equipment expenditures over the next 12 months
will be in the range of $365 million to $415 million for (i) the existing
operations of the Company, (ii) the existing operations of U.S. Rentals to be
acquired in the Merger and (iii) the operations to be acquired upon completion
of the Pending Acquisitions. In addition, the Company expects that it will be
required to make equipment expenditures in connection with new acquisitions.
The Company cannot quantify at this time the amount of equipment expenditures
that will be required in connection with new acquisitions.
Principal elements of the Company's strategy include continued expansion
through a disciplined acquisition program and the opening of new rental
locations. The Company expects to pay for future acquisitions using cash,
capital stock, notes and/or assumption of indebtedness. The Company expects
that it will require additional financing for future acquisitions and,
consequently, the Company's indebtedness may increase as the Company implements
its growth strategy. There can be no assurance, however, that any additional
financing will be available or, if available, will be on terms satisfactory to
the Company.
The Company is in the process of developing four start-up locations. In
addition, U.S. Rentals is in the process of developing two start-up locations.
The Company estimates that the aggregate costs associated with such start-up
locations will be in the range of $5 million to $9 million (including
expenditures of approximately $0.5 million incurred to date).
The Company has recently installed a new integrated information technology
system. The cost of installing such system was approximately $7.4 million. The
Company estimates that the cost of extending the system to the locations to be
acquired
23
through the Merger with U.S. Rentals and completion of the Pending Acquisitions
will be approximately $4.8 million. The Company's software vendors have advised
the Company that the system is year 2000 compliant.
Based upon the terms of the Company's currently outstanding indebtedness
(including currently outstanding indebtedness of U.S. Rentals that will be
assumed in the Merger), the Company is scheduled to repay approximately $1.2
million of indebtedness during the balance of 1998 and $3.7 million during 1999.
(Such amounts are in addition to the amounts that the Company will be required
to repay in connection with the Merger). In addition, the Company may be
required at any time to repay a $21 million demand note that the Company will
assume in connection with the Merger.
CERTAIN INFORMATION CONCERNING PREFERRED SECURITIES
On August 5, 1998, a subsidiary trust (the "Trust") of Holdings sold in a
private offering (the "Preferred Securities Offering") $300 million of 6 1/2%
Convertible Quarterly Income Preferred Securities (the "Preferred Securities").
In addition, the Trust may sell up to an additional $50 million of Preferred
Securities pursuant to an over-allotment option granted to the initial
purchasers of the Preferred Securities. The Preferred Securities have not been
registered under the Act and, accordingly, may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements under the Act.
The net proceeds from the Preferred Securities Offering were approximately
$290.0 million. The Trust used the proceeds from the Preferred Securities
Offering to purchase convertible subordinated debentures from Holdings which
resulted in Holdings receiving all of the proceeds of the Preferred Securities
Offering. Holdings in turn contributed the net proceeds of the Preferred
Securities Offering to its wholly owned subsidiary URI. URI has used
approximately $281 million of such net proceeds to repay outstanding
indebtedness under the Credit Facility and has used the balance of such net
proceeds for acquisitions.
The preferred securities are convertible into Common Stock of the Company
at a conversion price equivalent to $43.63 per share.
24
CERTAIN INFORMATION CONCERNING CREDIT FACILITY AND OTHER INDEBTEDNESS
Set forth below is certain information concerning the Credit Facility and
certain other indebtedness of URI. The Credit Facility contains certain
covenants that require URI to, among other things, satisfy certain financial
tests relating to: (a) maintenance of minimum net worth, (b) the ratio of funded
debt to net worth, (c) interest coverage ratio (d) funded debt to cash flow, (e)
the ratio of funded debt to cash flow, and (f) the ratio of senior debt to
tangible assets. The agreements governing the Credit Facility and such other
indebtedness contain various other covenants (which vary from agreement to
agreement) that restrict URI's ability to, among other things, (i) incur
additional indebtedness, (ii) permit liens to attach to its assets, (iii) pay
dividends or make other restricted payments on its common stock and certain
other securities and (iv) make acquisitions unless certain financial conditions
are satisfied. In addition, the agreement governing the Credit Facility and the
agreement governing the Term Loan described below (a) require URI to maintain
certain financial ratios and (b) provide that failure by any two of Messrs.
Jacobs, Milne, Nolan and Miner to continue to hold executive positions with URI
for a period of 30 consecutive days constitutes an event of default unless
replacement officers satisfactory to the lenders are appointed.
Existing Credit Facility. The Credit Facility is with a group of financial
institutions, for which enablesBank of America National Trust and Savings Association
acts as U.S. agent and Bank of America Canada acts as Canadian agent. Set forth
below is certain information concerning the terms of the Credit Facility. As
described above, the Company is seeking to obtain a new credit facility that
will increase the Company's borrowing capacity. The terms of such new credit
facility may be different than the terms of the existing Credit Facility.
25
The Credit Facility enables URI to borrow up to $300 million on a revolving
credit
basis and permits athe Canadian subsidiary of the Company (the "Canadian
Subsidiary")Subsidiary to directly borrow up to $40 million
under the Credit Facility (provided that the aggregate borrowings of the Company
and the Canadian Subsidiary do not exceed $300 million). Up to $10 million of
the Credit Facility is available in the form of letters of credit. The Credit
Facility terminates on March 30, 2001, at which time all outstanding
indebtedness is due. The amount of indebtedness outstanding under the Credit
Facility was $16.9$173.0 million at March 31,June 30, 1998, and $99.4 millionthere was no outstanding
indebtedness at MayAugust 14, 1998.1998(not including undrawn outstanding letters of
credit in the amount of $1.4 million).
Borrowings by the CompanyURI under the Credit Facility accrue interest at the
Company'sURI's
option, at either (a) the Base Rate (which is equal to the greater of (i) the
Federal Funds Rate plus 0.5% and (ii) Bank of America's reference rate) plus a margin ranging from 0% to 0.25% per annum or (b)
the Eurodollar Rate (which for borrowings by the CompanyURI is equal to Bank of America's
reserve adjusted eurodollar rate) plus a margin ranging from 1.125%0.950% to 2.125%1.625%
per annum. Borrowings by the Canadian Subsidiary under the Credit Facility
accrue interest, at such subsidiary's option, at either (x) the Prime Rate
(which is equal to Bank of America Canada's prime rate) plus a margin ranging from 0% to 0.25% per
annum,, (y) the BA Rate (which
is equal to Bank of America Canada's BA Rate) plus a margin ranging from 1.125%0.950%
to 2.125%1.625% per annum or (z) the Eurodollar Rate (which for borrowing by the
Canadian Subsidiary is equal to Bank of America Canada's reserve adjusted
eurodollar rate)Eurodollar Rate) plus a margin ranging from 1.125%0.95% to 2.125%1.625% per annum. If at
any time an event of default (as defined in the agreement governing the Credit
Facility) exists, the interest rate applicable to each loan will increase by 2%
per annum. The Company is also required to pay the banks an annual facility fee
equal to 0.375% of the banks' $300 million aggregate lending commitment under
the Credit Facility.
The Credit Facility contains certain covenants that require(which fee may be reduced to 0.300% for periods during which
the Company to,
among other things, satisfy certain financial tests relating to: (a)
maintenance of minimum net worth, (b) the ratio of debt to net worth, (c)
interest coverage ratio, (d) the ratio ofmaintains a specified funded debt to cash flow and (e) the
ratio of senior debt to tangible assets. The Credit Facility also contains
certain covenants that restrict the Company's ability to, among
15
other things, (i) incur additional indebtedness, (ii) permit liens to attach to
its assets, (iii) enter into operating leases requiring payments in excess of
specified amounts, (iv) declare or pay dividends or make other restricted
payments with respect to its equity securities (including the Common Stock) or
subordinated debt, (v) sell assets, (vi) make acquisitions unless certain
financial conditions are satisfied, (vii) invest more than a specified amount in
foreign subsidiaries or have more than a specified amount of its consolidated
assets owned by foreign subsidiaries, and (viii) engage in any line of business
other than the equipment rental industry. The Credit Facility provides that the
failure by any two of Messrs. Jacobs, Milne, Nolan and Miner to continue to hold
executive positions with the Company for a period of 30 consecutive days
constitutes an event of default under the Credit Facility unless replacement
officers satisfactory to the lenders are appointed. The Credit Facility is also
subject to other customary events of default.ratio).
The obligations of United
Rentals, Inc.URI under the Credit Facility are secured by
substantially all of its assets, the stock of its United States subsidiaries and
a portion of the stock of athe Company's Canadian subsidiary.subsidiaries. The obligations
of the Canadian
26
Subsidiary under the Credit Facility are guaranteed by United Rentals, Inc.URI and secured by
substantially all of the assets of the Canadian Subsidiary and the stock forof the
subsidiaries of the Canadian Subsidiary.
Term Loan. In July 1998, URI obtained a $250 million term loan from a
group of financial institutions. The Company'sTerm Loan matures on June 30, 2005. Prior
to maturity, quarterly installments of principal existing sourcein the amount of cash$625,000 are
(i) borrowings underdue on the last day of each calendar quarter, commencing September 30, 1999. The
amount due at maturity is $235,625,000. The Term Loan accrues interest, at
URI's option, at either (a) the Base Rate (as defined above with respect to the
Credit Facility) plus a margin ranging from 0% to 0.5% per annum, or (b) the
Eurodollar Rate (as defined above with respect to the Credit Facility and (ii) cash generatedfor
borrowings by URI) plus a margin ranging from operations.1.875% to 2.375% per annum. The
Company
estimates that such sources will be sufficientTerm Loan is secured pari passu with the Credit Facility. The agreement
governing the Term Loan contains restrictive covenants substantially similar to
fundthose provided by the cash required for the
Company's existing operations (not including new acquisitions or start-up
locations that are not currently under development, which may require additional
financing as discussed below) for at least the next 12 months.
The Company expects that over the next 12 months its principal needs for
cash relating to its operations will be to fund (i) operating activities and
working capital, (ii) the purchase of equipment on an ongoing basis to maintain
the quality and competitiveness of its existing rental equipment, (iii) the
purchase of equipment required to expand and modernize the rental equipment at
certain locations, and (iv) the purchase of equipment and other items required
to maintain sufficient inventory of the new equipment and related merchandise
and parts thatCredit Facility.
9 1/2% Senior Subordinated Notes. In May 1998, the Company offers for sale.
The Company estimates that equipment expenditures for its existing
locations will be in the range of $65issued $200
million to $70 million over the next 12
months. In addition, the Company expects that it will be required to make
equipment expenditures in connection with new acquisitions. The Company cannot
quantify at this time theaggregate principal amount of such equipment expenditures.
16
Principal elements9 1/2% Notes which are due June 1, 2008.
8.80% Senior Subordinated Notes. In August 1998, URI issued $205 million
aggregate principal amount of the Company's strategy include expansion through a
disciplined acquisition program and the opening of new rental locations. The
Company8.80% Notes which are due August 15, 2008. URI
expects to payuse the net proceeds for future acquisitions, using cash, capital stock, notes
and/or assumptionexpenditures
and general corporate purposes. The agreement governing the 8.80% Senior
Subordinated Notes contain restrictions substantially similar to those of indebtedness. The Company is seeking to acquire companies
of varying size,including the acquisition of smaller companies to complement
existing or anticipated locations and combinations with relatively large
companies that have an established presence in one or more regions. The Company
expects that cash required for future acquisitions and start-up locations will
be provided by a combination of borrowings under the Credit Facility, cash
generated from operations, and future debt or equity financings. There can be no
assurance that any such future debt or equity financings will be available or,
if available, will be on terms satisfactory to the Company.
The Company is in the process of developing three start-up locations. The
Company estimates that the aggregate costs associated with such start-up
locations will be in the range of $2.5 million to $3.5 million (including
expenditures of approximately $250,000 incurred to date). The Company believes
that cash generated from operations and borrowings under the Credit Facility
will be sufficient to fund these costs without additional debt or equity
financings.
The Company has commenced an offering of $250 million of9
1/2% Senior Subordinated Notes.
These securitiesThe 9 1/2% Notes and 8.80% Notes have not been registered under the Securities Act of 1933 (the "Act")
and, accordingly, may not be offered or sold in the United States absent
registration or an applicable exemption from the registration requirements of
the Act.
The Company expects to use the net
proceeds from this offering, if completed, to repay the outstanding indebtedness
under the Credit Facility and for future acquisitions, capital expenditures and
general corporate purposes. There can be no assurance, however, that the
Company will complete this offering in the near term, if at all, or that the
size of the offering will not change.
The Company has recently installed a new integrated information technology
system. The new system is currently operational at 83 of the Company's existing
locations, and the Company expects that the system will be operational at the
remaining existing locations by June 1998. The cost of installing such system
was approximately $7.4 million. The Company's software vendors have advised the
Company that the system is year 2000 compliant.
Fluctuations in Operating Results
- ---------------------------------FLUCTUATIONS IN OPERATING RESULTS
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter due to a number of factors,
27
including: seasonal rental patterns of the Company's customers
17
(with rental
activity tending to be lower in the winter); changes in general economic
conditions in the Company's markets; the timing of acquisitions and the opening
of start-up locations and related costs; the effect of the integration of
acquired businesses and start-up locations; the timing of expenditures for new
equipment and the disposition of used equipment; and price changes in response
to competitive factors.
The Company is continually involved in the investigation and evaluation of
potential acquisitions. In accordance with generally accepted accounting
principles, the Company capitalizes certain direct out-of-pocket expenditures
(such as legal and accounting fees)relating to potential or pending
acquisitions. Indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, are expensed as
incurred. The Company's policy is to charge against earnings any capitalized
expenditures relating to any potential or pending acquisition that the Company
determines will not be consummated. There can be no assurance that the Company
in future periods will not be required to incur a charge against earnings in
accordance with such policy, which charge, depending upon the magnitude thereof,
could adversely affect the Company's results of operations.
The Company will be required to incur significant start-up expenses in
connection with establishing each start-up location. Such expenses may include,
among others, pre-opening expenses related to setting up the facility, training
employees, installing information systems and marketing. The Company expects
that in general start-up locations will initially operate at a loss or at less
than normalized profit levels. Consequently, the opening of a start-up location
may negatively impact the Company's margins until the location achieves
normalized profitability.
There may be a lag between the time that the Company purchases new
equipment and begins to incur the related depreciation and interest expenses and
the time that the equipment begins to generate revenues at normalized rates. As
a result, the purchase of new equipment, particularly equipment purchased in
connection with expanding and diversifying the Company's rental equipment, may
periodically reduce margins.
General Economic Conditions And Inflation
- -----------------------------------------28
GENERAL ECONOMIC CONDITIONS AND INFLATION
The Company's operating results may be adversely affected by (i) changes in
general economic conditions, including national, regional and local changes in
construction and industrial activity, (ii) increases in interest rates that may
result in a higher cost of capital to the Company, or (iii) adverse weather
conditions that may decrease construction and other industrial activity.
Although the Company cannot accurately anticipate the 18
effect of inflation on its
operations, the Company believes that inflation has not had, and is not likely
in the foreseeable future to have, a material impact on its results of
operations.
Recently Issued Accounting Standards
- ------------------------------------RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS Issued Statement of
Financial Accounting Standards ("SFAS")No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a primary financial
statement. The Company adopted SFAS No. 130 during the period ended March 31,
1998. The adoption of SFAS No. 130 did not have a material effect on the
consolidated financial position results of operations or cash flows of the
Company. SFAS No. 131 establishes a new method by which companies will report
operating segment information. This method is based on the manner in which
management organizes the segments within a company for making operating
decisions and assessing performance. The Company continues to evaluate the
provisions of SFAS No. 131 and, upon adoption, the Company may report operating
segments. The Company is required to adopt SFAS No. 131 by December 31, 1998.
19In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits."
SFAS No. 132 revises employers' disclosures about pension and other post
retirement benefit plans but does not change the measurement or recognition of
those plans. The Company is required to adopt SFAS No. 132 by December 31,
1998. The adoption of SFAS No. 132 is not expected to have a material effect on
the Company's consolidated financial position or results of operations.
29
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities.
The Company will adopt SFAS No. 133 beginning January 1, 2000. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
consolidated financial position or results of operations.
30
PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
Set forth below is certain information concerning sales by the Company of
unregistered securities during the firstsecond quarter of 1998. The issuances by the
Company of the securities sold in the transaction referenced below were not
registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
SHARES
MONTH ISSUED
- ----- ----------------------
January 804,875
March 122,314
-----------------------------
April 322,721
May 49,916
June 505,740
-------
Total 927,189
======================878,377
=======
Of the shares indicated above, (i) 912,375866,976 shares were issued as partial
consideration in connection with sixnine acquisitions, and (ii) 14,8149,299 shares were
issued upon conversion ofpursuant to a convertible note.
Use of Proceeds From IPO
At Decemberconsulting agreement with a former owner and (iii) 2,102
shares were issued pursuant to an employment agreement with an executive
officer.
31 1997, the remaining net proceed from the Company' initial
public offering was $65.8 million. During the first quarter of 1998, the
Company used approximately $557,000 of such net proceeds to pay expenses of the
offering and used the balance for acquisitions. See Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Consideration Paid for Acquisitions in First Quarter of 1998". None of the
payments described in this paragraph represented a direct or indirect payment
to (i) directors, officers or general partners of the Company or to their
associates, (ii) persons owning 10% or more of any class of equity securities of
the Company or (iii) affiliates of the Company.
20
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1)1.1 Agreement and Plan of Merger dated as of June 15, 1998, among the
Company, UL Acquisition Corporation and U.S. Rentals, Inc. (incorporated
by reference to exhibit 2(a) to the Company's Registration Statement on
Form S-4, Registration No. 333-60467).
2.2 Amendment No. 1, dated as of July 31, 1998, to the Agreement and Plan of
Merger filed as Exhibit 1.1 hereto.
2.3 Agreement and Plan of Merger, dated as of August 5, 1998, among United
Rentals, Inc., United Rentals Holdings, Inc. and United Rentals Merger
Co., Inc.
3.1 Amended and Restated Certificate of Incorporation of United Rentals,
Inc., in effect as of the date hereof.
3.2 By-laws of United Rentals, Inc., in effect as of the date hereof.
3.3 Amended and Restated Certificate of Incorporation of United Rentals
(North America), Inc., in effect as of the date hereof.
3.4 By-laws of United Rentals (North America), Inc., in effect as of the
date hereof.
4.1 Indenture dated May 22, 1998, among the Company, the Guarantors named
therein and State Street Bank and Trust Company, as trustee
(incorporated by reference to exhibit 4(b) to the Company's Registration
Statement on Form S-4, Registration No. 333-60467).
4.2 Notes Registration Rights Agreement dated as of May 22, 1998, among the
Company, Merrill Lynch & Co. and the other initial purchasers named
therein (incorporated by reference to exhibit 4(c) to the Company's
Registration Statement on
32
Form S-4, Registration No. 333-60467).
10.1 - SecondStock Purchase Agreement, dated as of June 9, 1998, among the Company
and Shareholders of Power Rental Co., Inc. (incorporated by reference to
exhibit 10 to the Company's Report on Form 8-K dated June 18, 1998).
10.2 The following agreements, (i) Third Amended and Restated Credit
Agreement dated as of March 30,May 12, 1998, between the Company, various
financial institutions, Bank of America Canada, as Canadian agent, and
Bank of America National Trust and Savings Association, as U.S. agent.
(2) Exhibit 10.2 -agent
and (ii) First Amendment to Third Amended and Restated Credit Agreement
dated as of July 10, 1998 (incorporated by reference to exhibit 10(a) to
the Company's Registration Statement on Form of AmendmentS-4, Registration No. 1 to Private Placement333-
60467).
10.3 Purchase Agreement (1)dated May 19, 1998 relating to the initial sale of 9
1/2% Notes (incorporated by reference to exhibit 10(bb) to the Company's
Registration Statement on Form S-4, Registration No. 333-60467).
(3) Exhibit10.4 Term Loan Agreement dated as of July 10, 1998 among the Company, various
financial institutions and Bank of America National Trust and Savings
Association, as Agent(incorporated by reference to exhibit 10(cc) to the
Company's Registration Statement on Form S-4, Registration No. 333-
60467).
10.5 Agreement among the Company, United Rentals of New Jersey, Inc., HR
Merger Corp., SMSV Acquisition Corp., Equipment Supply Company, Inc.,
High Reach Co., Inc., Space Maker of Va., Inc. and the Stockholders of
Rylan, Inc., High Reach Co., Inc. and Space Maker Systems of Va., Inc.,
dated as of June 30, 1998 (incorporated by reference to exhibit 10(dd)
to the Company's Registration Statement on Form S-4, Registration No.
333-60467)
27 - Financial Data Schedule
(4) Exhibit 99.1 - Information that appears in the Company's Report on Form 10-K for the
year ended December 31, 1997 under Item 1 -"Business - Factors"Business -Factors that May
Influence Future Results and
33
Accuracy of Forward - LookingForward-Looking Statements."
__________________
(1) The Company entered into an agreement in this form with each of Mr. Milne,
Mr. Nolan and Mr. Miner. This agreement amends the agreement filed as
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
(b) Reports on Form 8-K:
(1) Form 8-K dated June 18, 1998 (earliest event reported June 9, 1998) as
amended by a Form 8K/A dated July 21,1998; Items 2 and Form 8-K/A - Dated January 13, 1998, Items 5 and
7.7 were reported.
The Form 8-K/A includes (a) The financial statements for the
following acquired companies (i) Access Rentals,of Power Rental
Co., Inc. and
subsidiary and affiliate, (ii) BNR Group of Companies, and
(iii) Mission Valley Rentals, Inc.;, and (b) pro formaPro Forma consolidated financial statements of the
Company.
21(2) Form 8-K Dated June 19, 1998 (earliest event reported June 15, 1998);
Item 5 was reported.
34
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED RENTALS, INC.
Dated: MayAugust 14, 1998 By: Michael J. Nolan
------------ ----------------------------------- ----------------
Michael J. Nolan
Chief Financial Officer
(Principal Financial Officer)
Dated: MayAugust 14, 1998 By: Sandra E. Welwood
------------ ----------------------------------- -----------------
Sandra E. Welwood
Vice President,
Corporate Controller
(Chief Accounting Officer)
2235