SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 1-13663
UNITED RENTALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1493538
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State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
Four Greenwich Office Park, Greenwich, Connecticut 06830
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(Address of Principal Executive Offices) (Zip code)
Registrant's telephone number, including area code (203) 622-3131
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has 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. [ ] Yes [X] No*
*The registrant has filed all such
required reports; but has been subject
to such filing requirements for less
than 90 days
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
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 11, 1998, there were 33,343,808 shares of the registrant's Common
stock outstanding. The aggregate market value of the Common Stock held by non-
affiliates of the registrant at March 11, 1998 was approximately $504,545,000.
Such aggregate market value was calculated by using the closing price of the
Common Stock as of such date on the New York Stock Exchange ($25.125).
Documents incorporated by reference: None (except certain exhibits)
FORM 10K REPORT INDEX
10-K PART PAGE NO.
AND ITEM NO. --------
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PART I
Item 1 Business.............................................. 1
Item 2 Properties............................................ 14
Item 3 Legal Proceedings..................................... 14
Item 4 Submission of Matters to a Vote of Security Holders... 15
PART II
Item 5 Market for the Company's Common Equity and Related
Stockholder Matters................................... 15
Item 6 Selected Financial Data............................... 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 21
Item 8 Financial Statements and Supplementary Data........... 27
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 40
PART III
Item 10 Directors and Executive Officers of the Company....... 41
Item 11 Executive Compensation................................ 47
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................ 51
Item 13 Certain Relationships and Related Transactions........ 53
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................... 54
Unless otherwise indicated, (i) the terms "United Rentals" and "the
Company" refer collectively to United Rentals, Inc. and its subsidiaries and
(ii) the term the "Acquired Companies" refers collectively to the 21 companies
acquired by the Company since its formation in September 1997.
Certain statements contained in this report 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 Item 1--"Business--Factors that May Influence Future
Results and Accuracy of Forward-Looking Statements."
PART I
ITEM 1. BUSINESS
All operating and financial data for the Company contained under this Item
with respect to the year ended December 31, 1997 is on a pro forma basis giving
effect to the acquisition of the Acquired Companies and the financing thereof as
of January 1, 1997.
GENERAL
United Rentals was formed in September 1997 for the purpose of creating a
large, geographically diversified equipment rental company in the United States
and Canada. The Company commenced equipment rental operations in October 1997 by
acquiring six established companies and acquired 15 additional companies in the
first two months of 1998. The Company rents a broad array of equipment to a
diverse customer base that includes construction industry participants,
industrial companies, homeowners and other individuals. The Company also engages
in related activities such as selling used rental equipment, acting as a
distributor for certain new equipment, and selling related merchandise and
parts. The Company's growth strategy is to expand through a disciplined
acquisition program, the opening of new rental locations and internal growth and
to further diversify its equipment categories and customer markets. The Company
believes that as it expands it should gain competitive advantages relative to
smaller operators, including greater purchasing power, a lower cost of capital,
the ability to provide customers with a broader range of equipment and services
and with newer and better maintained equipment, and greater flexibility to
transfer equipment among locations in response to customer demand.
United Rentals currently operates 68 rental locations in 16 states and
Canada. The Company's locations are managed by experienced professionals who
have extensive industry experience and substantial knowledge of the local
markets served. These managers generally are former owners or employees of the
businesses acquired by the Company. The types of rental equipment offered by
the Company include a broad range of light to heavy construction and
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industrial equipment (such as pumps, generators, forklifts, backhoes, cranes,
bulldozers, aerial lifts and compressors), general tools and equipment (such as
hand tools and garden and landscaping equipment) and special event equipment
(such as tents, tables and chairs). The equipment mix varies at each of the
Company's locations, with some locations offering a general mix and some
specializing in specific equipment categories. As of February 13, 1998, the
Company's rental equipment included approximately 34,500 units (excluding
special event equipment), had an original purchase price of approximately $225
million and had a weighted average age (based on original purchase price) of
approximately 3.6 years.
INDUSTRY OVERVIEW
The Company estimates that the U.S. equipment rental industry (including
used and new equipment sales by rental companies) generates annual revenues in
excess of $20 billion. The combined equipment rental revenues of the 100
largest equipment rental companies have increased at an estimated compound
annual rate of approximately 21% from 1992 through 1996 (based upon revenues
reported for such period, the latest period for which data is available, by the
Rental Equipment Register, an industry trade publication). The Company believes
that this growth primarily reflects the following trends:
Recognition of Advantages of Renting. There is increasing recognition of
the many advantages that equipment rental may offer compared with ownership,
including the ability to: (i) avoid the large capital investment required for
equipment purchases, (ii) reduce storage and maintenance costs, (iii) supplement
owned equipment thereby increasing the range and number of jobs that can be
worked on, (iv) access a broad selection of equipment and select the equipment
best suited for each particular job, (v) obtain equipment as needed and minimize
the costs associated with idle equipment, and (vi) access the latest technology
without investing in new equipment.
Increase in Contractor Rentals. There has been a fundamental shift in the
way contractors meet their equipment needs. While contractors have historically
used rental equipment on a temporary basis--to provide for peak period capacity,
meet specific job requirements or replace broken equipment--many contractors are
now also using rental equipment on an ongoing basis to meet their long-term
equipment requirements. A survey of contractors conducted by Merrill Lynch &
Co. in September 1996 (the last time such survey was conducted) found that, on
average, the percentage of contractor fleets that was rented increased from 7%
in 1994 to 15% at the time of the survey.
Outsourcing Trend. The general trend toward the corporate outsourcing of
non-core competencies is leading large industrial companies increasingly to
rent, rather than purchase, equipment that they require for repairing,
maintaining and upgrading their facilities.
The equipment rental industry is highly fragmented, consisting of a small
number of multi-location regional or national operators and a large number of
relatively small, independent businesses serving discrete local markets. Based
upon rental revenues reported by the Rental Equipment
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Register for 1996 (the latest year for which such revenues have been reported):
(i) there were only five equipment rental companies that had 1996 equipment
rental revenues in excess of $100 million (with the largest company having had
1996 equipment rental revenues of approximately $400 million), (ii) the largest
100 equipment rental companies combined had less than a 20% share of the market
based on 1996 equipment rental revenues and the Company's estimate of the size
of the market (with the largest company having had a market share of less than
3%), and (iii) there were approximately 100 equipment rental companies that had
1996 equipment rental revenues between $5 million and $100 million. In addition,
the Company estimates that there are more than 20,000 companies with annual
equipment rental revenues of less than $5 million. The Company believes that the
fragmented nature of the industry presents substantial consolidation and growth
opportunities for companies with access to capital and the ability to implement
a disciplined acquisition program. The Company also believes that the extensive
experience of its management team in acquiring and effectively integrating
acquisition targets should enable the Company to capitalize on these
opportunities.
STRATEGY
The Company's objective is to expand its operations and build a large
geographically diversified equipment rental company in the United States and
Canada. The Company believes that as it expands it should gain competitive
advantages relative to smaller operators, including greater purchasing power, a
lower cost of capital, the ability to provide customers with a broader range of
equipment and services and with newer and better maintained equipment, and
greater flexibility to transfer equipment among locations in response to
customer demand. The Company's plan for achieving this objective includes the
following key elements:
Execute Disciplined Acquisition Program. The Company intends to expand
through a disciplined acquisition program. The Company will seek to acquire
companies of varying size, including relatively large companies to serve as
platforms for regional development and smaller companies to complement existing
or anticipated locations. In evaluating potential acquisition targets, the
Company considers a number of factors, including the quality of the target's
rental equipment and management, the opportunities to improve operating margins
and increase internal growth at the target, the economic prospects of the region
in which the target is located, the potential for additional acquisitions in the
region, and the competitive landscape in the target's markets.
Improve Operating Margins. The Company plans to focus significant efforts
on improving operating margins at acquired companies through the efficient
integration of new and existing operations, the elimination of duplicative
costs, reduction in overhead, and centralization of functions such as purchasing
and information technology.
Increase Internal Growth. The Company believes that a lack of capital has
constrained expansion and modernization at many small and mid-sized equipment
rental companies and that as a result there is significant potential to increase
internal growth at many acquired companies through capital investment. The
Company will seek to increase internal growth by investing in additional
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and more modern equipment, using advanced information technology systems to
improve asset utilization and tracking, increasing sales and marketing efforts,
expanding and diversifying the customer segments served, expanding the
geographic areas served, and opening complementary locations.
Open New Rental Locations. The Company also intends to grow by selectively
opening new rental locations in attractive markets where there are no suitable
acquisition targets available or where the cost of a start-up location would be
less than the cost of acquiring an existing business.
Diversify Locations, Equipment Categories and Customers. The Company plans
to diversify geographically and to focus on a broad range of equipment
categories and customer markets within the equipment rental industry. The
Company believes that this will allow it to participate in the overall growth of
the equipment rental industry and reduce the Company's sensitivity to
fluctuations in regional economic conditions or changes that affect particular
market segments. In order to achieve this diversification, the Company will
consider expansion opportunities in the United States and Canada and will pursue
acquisition candidates with varying equipment mixes and customer
specializations.
ACQUISITIONS
The Company believes that there will continue to be a large number of
attractive acquisition opportunities in the equipment rental industry due to the
highly fragmented nature of the industry, the inability of many small and mid-
sized equipment rental companies to expand and modernize due to capital
constraints, and the desire of many long-time owners for liquidity. The Company
has an experienced acquisition team, comprised of senior level executives with
extensive acquisition, operating and financial experience, that is engaged in
identifying and evaluating acquisition candidates and executing the Company's
acquisition program. The Company estimates that, since the formation of the
Company in September 1997, it has preliminarily reviewed more than 150 potential
acquisition candidates and has conducted preliminary market studies or initiated
due diligence on more than 50 of these candidates.
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The table below provides certain information concerning the 21 acquisitions
completed by the Company to date (through March 11, 1998):
NUMBER OF YEARS IN 1997
COMPANY LOCATIONS RENTAL SITES BUSINESS REVENUES
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(IN MILLIONS)
1997 ACQUISITIONS:
Mercer Equipment Company North Carolina 3 9 $18.5
A&A Tool Rentals and Sales, Inc. California 2 35 13.8
Coran Enterprises, Inc. (dba A-1 Rents) and affiliate California 4 33 9.5
J&J Rental Services Texas 1 19 8.7
Bronco Hi-Lift, Inc. Colorado 1 16 6.5
Rent-It Center, Inc. Utah 1 45 2.9
1998 ACQUISITIONS:
Access Rentals, Inc. and affiliates Connecticut; Florida; 19 23 52.3
Indiana; Minnesota;
New Jersey; New
York; Pennsylvania;
South Carolina;
Tennessee; Washington;
Ontario, Canada
BNR Equipment Limited and affiliates New York; Ontario, 8 23 24.0
Canada
Channel Equipment Holdings, Inc. and affiliates Texas 4 20 11.5
Mission Valley Rentals, Inc. California 4 22 8.6
Pro-Rentals, Inc. Washington 6 12 5.9
ASC Equipment Co., Inc. North Carolina 3 21 5.4
Nevada High Reach Equipment, Inc. and affiliate Nevada 3 13 4.5
Gene's Village Rental & Sales, Inc. South Carolina 2 24 3.6
Manchester Equipment Rental & Sales, Inc. Connecticut 1 11 3.3
San Leandro Equipment Rentals Service, Inc. California 1 36 3.2
Darien Rental Services, Inc. Connecticut 1 31 1.7
Rents Et. Al., Inc. California 1 10 1.4
Salisbury Rental Center, Inc. North Carolina 1 10 1.3
Anchor Rental, Inc. Connecticut 1 15 1.0
A-1 Rents of Galveston, Inc. Texas 1 16 0.6
The aggregate consideration paid by the Company for the Acquired Companies
was $176.0 million and consisted of approximately $156.4 million in cash,
1,123,587 shares of Common Stock (including 137,600 shares which are expected to
be cancelled as described under Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Consideration Paid for the
Acquired Companies"), a convertible note in the principal amount of $300,000,
and warrants to purchase an aggregate of 30,000 shares of Common Stock. In
addition, the Company repaid or assumed outstanding indebtedness of the Acquired
Companies in
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the aggregate amount of approximately $121.0 million. The Company also agreed in
connection with two of the acquisitions to pay additional amounts to the former
owners based upon specified future revenues. Such amounts are limited to a
maximum of $2.8 million in one case and Cdn$4.0 million in the other case.
START-UP LOCATIONS
The Company is in the process of developing three start-up locations (one
in Florida and two in Texas). These projects were commenced by certain of the
Acquired Companies, prior to their having been acquired by the Company, and are
being continued by the Company. The Company expects that the Florida location
will open in the first quarter of 1998 and that the two Texas locations will
open in the second quarter of 1998.
OPERATIONS
The Company currently operates 68 rental locations in 16 states and Canada.
The Company offers for rent a broad array of equipment including light to heavy
construction and industrial equipment, general tools and equipment, and special
event equipment. The Company also engages in related activities such as selling
used rental equipment, acting as a distributor for certain new equipment, and
selling related merchandise and parts. The Company's customer base is diverse
and includes construction industry participants, industrial companies, and
homeowners and other individuals.
EQUIPMENT RENTAL
The Company offers for rent a broad array of equipment on a daily, weekly,
monthly and multi-month basis. The following are examples of the types of
equipment that the Company offers for rent:
Construction and Industrial: aerial lifts, air compressors, backhoes,
boom lifts, bulldozers, cranes, ditching equipment, forklifts,
generators, high reach equipment, pumps, scissor lifts, tractors.
General Tools and Equipment: garden and landscaping equipment, hand
tools, high-pressure washers, paint sprayers, power tools, roto
tillers.
Special Event: barbecue grills, china and flatware, fountains,
lighting, staging and dance floors, tables and chairs, tents and
canopies.
As of February 13, 1998, the Company's rental equipment included
approximately 34,500 units (excluding special event equipment) and had an
original purchase price of approximately $225 million and a weighted average age
(based on original purchase price) of approximately 3.6 years. The Company
estimates that (based on original purchase price) construction and industrial
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equipment represents approximately 94% of the Company's rental equipment,
general tools and equipment represents approximately 5%, and special event
equipment represents approximately 1%. The Company also estimates that four
categories of construction and industrial equipment (aerial lifts, boom lifts,
scissor lifts and high reach equipment) represent approximately 47% of the
Company's rental equipment and accounted for approximately 34% of the Company's
pro forma revenues in 1997.
The equipment mix varies at each of the Company's locations, with some
locations offering a general mix and some specializing in specific equipment
categories. The Company expects that as it integrates the Acquired Companies it
will further expand and modernize its rental equipment and expand and diversify
the customer markets served by certain locations.
RELATED OPERATIONS
In addition to renting equipment, the Company is engaged in a variety of
related or complementary activities.
Sales of Used Equipment. The Company routinely sells used rental equipment
to adjust the age and composition of its rental fleet. The Company sells such
equipment through a variety of means including sales to the Company's existing
rental customers and local customer base, sales to used equipment dealers, and
sales through public auctions. The Company also participates in trade-in
programs in connection with purchasing new equipment.
Sales of New Equipment. The Company, at several locations, is a
distributor for various tool and equipment manufacturers, including American
Honda Motor Co. Inc. (generators and pumps), Edco Manufacturing (surfacing
equipment), Genie Industries, Inc. (aerial lifts), Grove Worldwide (aerial
platforms), Kubota (earthmoving equipment), Multiquip, Inc. (compaction
equipment and compressors), Milwaukee Electric Tool Corporation (power tools),
Trak International (loaders and forklifts), Stihl, Inc. (surface preparation
equipment) and Wacker (compaction equipment). In general, such manufacturers
may terminate the Company's distribution rights at any time.
Sales of Related Merchandise and Parts. The Company, at most locations,
sells a variety of merchandise that may be used in conjunction with rental
equipment (such as saw blades, fasteners, drill bits, hard hats, gloves and
other safety equipment) and also sells parts.
Other. The Company at certain locations offers equipment maintenance
services to customers for equipment that is owned by the customer. This service
is primarily provided with respect to equipment purchased from the Company.
CUSTOMERS AND SALES AND MARKETING
The Company on a pro forma basis rented equipment to over 157,000 customers
in 1997. No single customer accounted for more than 1% of the Company's pro
forma revenues in 1997, and
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the Company's top 10 customers accounted for less than 2.5% of the Company's pro
forma revenues in 1997.
The composition of the Company's customer base varies widely by location
and is determined by several factors, including the equipment mix and marketing
focus of the particular location and the business composition of the local
economy. The Company's customer base consists of the following general
categories: (i) construction industry participants (such as construction
companies, contractors and subcontractors), (ii) industrial companies (such as
manufacturers, chemical companies, paper mills and utilities), and (iii)
homeowners and other individuals. The Company estimates that in 1997 (a) sales
to construction industry participants accounted for approximately 75% of the
Company's pro forma revenues, (b) sales to industrial companies accounted for
approximately 17% of the Company's pro forma revenues, and (c) sales to
homeowners and others accounted for approximately 8% of the Company's pro forma
revenues.
The Company markets its products and services through a sales force, which
as of February 13, 1998, consisted of approximately 138 store-based salespeople
and 115 field-based salespeople. The Company supplements the activities of its
sales force through participation in industry trade shows and conferences,
direct mailings, and advertising in local industry publications and the yellow
pages in the markets it serves.
PURCHASING
The Company is in the process of centralizing the purchasing of certain
equipment items, particularly large items with a significant cost and items that
are purchased in volume. The Company believes that such centralization will
give it greater purchasing power with its suppliers and enable it to obtain
discounts.
INFORMATION TECHNOLOGY SYSTEM
The Company has recently installed a new integrated information technology
system. The Company believes that this system should enable the Company to more
effectively monitor and manage operations, improve equipment utilization, and
facilitate the redeployment of underutilized equipment to other locations. The
new system is currently operational at 58 of the Company's existing locations,
and the Company expects that the system will be operational at the remaining
existing locations by mid-April 1998. The new system replaces the separate
systems heretofore used by the Acquired Companies.
Each of the Company's locations at which the new system is operational is
equipped with a workstation that is electronically linked to each of the
Company's other locations and to the Company's centralized databases. All
rental transactions are entered at these workstations and processed on a real-
time basis through a centralized AS400 system located at corporate headquarters.
Authorized personnel at each location are able to access the system 24 hours a
day in order to determine equipment availability, monitor business activity on a
real-time basis, and obtain a wide
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range of operating and financial data. The data available through the system
includes: (i) inventory reports, (ii) accounts receivable information, (iii)
customer and vendor information, (iv) price and sales trends by store, region,
salesperson, equipment category, or customer, (v) fleet utilization by
individual asset or asset class and (vi) financial results by store or region.
The system also allows an employee at any location to locate a specific item of
equipment throughout a region, determine when it will be available for rental,
reserve it for a specific customer, and schedule delivery to the customer's job
site or one of the Company's locations.
COMPETITION
The equipment rental industry is highly fragmented and competitive. The
Company's competitors include: public companies or divisions of public companies
(such as Hertz Equipment Rental Corporation, Prime Service, Inc., U.S. Rentals,
Inc. and Rental Service Corporation); regional competitors which operate in one
or more states; small, independent businesses with one or two rental locations;
and equipment vendors and dealers who both sell and rent equipment directly to
customers. The Company believes that, in general, large companies enjoy
significant competitive advantages compared to smaller operators, including
greater purchasing power, a lower cost of capital, the ability to provide
customers with a broader range of equipment and services and with newer and
better maintained equipment, and greater flexibility to transfer equipment among
locations in response to customer demand. Certain of the Company's competitors
are larger and have greater financial resources than the Company.
ENVIRONMENTAL REGULATION
The Company uses hazardous materials, such as solvents, to clean and
maintain its rental equipment and generates and disposes of wastes such as used
motor oil, radiator fluid, solvents and batteries. In addition, the Company
currently dispenses, or may in the future dispense, petroleum products from
underground and above-ground storage tanks located at certain rental locations.
These and other activities of the Company are subject to various federal, state
and local laws and regulations governing the generation, handling, storage,
transportation, treatment and disposal of hazardous substances and wastes.
Under such laws, an owner or lessee of real estate may be liable for, among
other things, (i) the costs of removal or remediation of certain hazardous or
toxic substances located on, in, or emanating from, such property, as well as
related costs of investigation and property damage and substantial penalties for
violations of such laws, and (ii) environmental contamination at facilities
where its waste is or has been disposed. Such laws often impose such liability
without regard to whether the owner or lessee knew of, or was responsible for,
the presence of such hazardous or toxic substances. Although the Company
investigates each business or property that it acquires or leases and believes
there are no existing material liabilities relating to non-compliance with
environmental laws and regulations, there can be no assurance that there are no
undiscovered potential liabilities relating to non-compliance with environmental
laws and regulations, that historic or current operations have not resulted in
undiscovered conditions that will require investigation and/or remediation under
environmental laws, or that future uses or conditions will not result in the
imposition of environmental liability upon the Company or expose the
9
Company to third-party actions such as tort suits. Furthermore, there can be no
assurance that changes in environmental regulations in the future will not
require the Company to make significant capital expenditures to change methods
of disposal of hazardous materials or otherwise alter aspects of its operations.
EMPLOYEES
At February 13, 1998, the Company employed 1,197 persons, including 31
corporate and regional management employees, 913 operational employees and 253
sales people. Of these employees, 346 are salaried personnel and 851 are hourly
personnel. Collective bargaining agreements relating to nine separate locations
cover approximately 83 of the Company's employees. The Company considers its
labor relations to be good.
FACTORS THAT MAY INFLUENCE FUTURE RESULTS AND ACCURACY OF
FORWARD-LOOKING STATEMENTS
The Company, in an effort to help keep its stockholders and the public
informed about the Company's operations, may from time to time issue certain
statements, either in writing or orally, that contain or may contain forward-
looking information. However, actual results may materially differ from the
Company's expectations, statements or projections. Factors that could cause
actual results to differ from the Company's expectations, statements or
projections include the risks and uncertainties relating to the Company's
business described below.
RISKS RELATING TO GROWTH STRATEGY
Principal components of the Company's growth strategy include continued
expansion through an ongoing acquisition program, the opening of start-up
locations, and internal growth. However, there can be no assurance that the
Company will successfully implement its growth strategy or that, if implemented,
such strategy will result in continued profitability. The Company's growth
strategy involves a number of risks and uncertainties, including:
Availability of Acquisition Targets and Sites for Start-up Locations. The
Company may encounter substantial competition in its efforts to identify and
acquire appropriate acquisition candidates and sites for start-up locations,
which could have the effect of increasing prices for acquisitions or such sites.
There can be no assurance that the Company will succeed in identifying
appropriate acquisition candidates or sites for start-up locations or that the
Company will be able to acquire any acquisition candidate or site that it does
identify on terms that are acceptable to the Company.
Need to Integrate New Operations. As the Company grows, the Company
intends to focus substantial efforts on the efficient integration of new
operations, the elimination of duplicative costs and the reduction of overhead.
There can be no assurance, however, that the Company will be
10
successful in these efforts or that these efforts may not in certain
circumstances adversely affect existing operations.
Need to Recruit Additional Personnel. The Company will require additional
personnel in order to implement its growth strategy and support expanded
operations. Accordingly, the Company is in the process of recruiting additional
operating, acquisition, finance and other personnel from the equipment rental
industry and from other industries. There can be no assurance, however, that
the Company will succeed in recruiting the requisite qualified personnel as and
when needed.
Certain Risks Related to Start-up Locations. The Company expects that
start-up locations may initially have a negative impact on results of operations
and margins due to several factors, including: (i) the Company will incur
significant start-up expenses in connection with establishing each start-up
location and (ii) it will generally take some time following the commencement of
operations at a start-up location before profitability can be achieved. There
can be no assurance that any start-up location will become profitable within the
first several years of operations, if at all.
DEPENDENCE ON ADDITIONAL CAPITAL TO FINANCE GROWTH
The Company's growth strategy will require substantial capital investment.
Capital will be required by the Company for, among other purposes, completing
acquisitions, establishing new rental locations, integrating completed
acquisitions, acquiring rental equipment and maintaining the condition of its
rental equipment. The Company intends to pay for future acquisitions using
cash, capital stock, notes and/or assumption of indebtedness. To the extent
that cash generated internally and cash available under the Company's existing
credit facility is not sufficient to provide the capital required for such
purposes and future operations, the Company will require additional debt and/or
equity financing in order to provide for such capital. There can be no
assurance, however, that such financing will be available or, if available, will
be available on terms satisfactory to the Company. Failure by the Company to
obtain sufficient additional capital in the future could limit the Company's
ability to implement its business strategy. Future debt financings, if
available, may result in increased interest and amortization expense, increased
leverage and decreased income available to fund further acquisitions and
expansion, and may limit the Company's ability to withstand competitive
pressures and render the Company more vulnerable to economic downturns. Future
equity financings may dilute the equity interest of existing stockholders.
POSSIBLE UNDISCOVERED LIABILITIES OF ACQUIRED COMPANIES
Although the Company performs a due diligence investigation of each
business that it acquires, there may nevertheless be liabilities of the Acquired
Companies or future acquired companies that the Company fails or is unable to
discover during its due diligence investigation and for which the Company, as a
successor owner, may be responsible. The Company seeks to minimize the impact
of these liabilities by obtaining indemnities and warranties from the seller
which may be supported by deferring payment of a portion of the purchase price.
However, these indemnities and
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warranties, if obtained, may not fully cover the liabilities due to their
limited scope, amount, or duration, the financial limitations of the indemnitor
or warrantor, or other reasons.
DEPENDENCE ON MANAGEMENT
The Company is highly dependent upon its senior management team. The loss
of the services of any member of senior management may have a material adverse
effect on the Company. The Company's credit facility provides that the failure
of certain members of the Company's current senior management 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. See Item 7-- "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company does not presently maintain "key
man" life insurance with respect to members of senior management.
RECENTLY INSTALLED INTEGRATED INFORMATION TECHNOLOGY SYSTEM
The Company has recently installed a new integrated information technology
system as described under "--Information Technology System." The new system is
currently operational at 58 of the Company's existing locations, and the Company
expects that the system will be operational at the remaining existing locations
by mid-April 1998. However, there can be no assurance that the Company will
not encounter unexpected delays. Furthermore, in view of the recent
installation of the system, there can be no assurance that the system will
function in accordance with the Company's expectations. Failure of the system
to function as expected could negatively impact the Company's ability to
implement its growth strategy.
COMPETITION
The equipment rental industry is highly fragmented and competitive.
Certain of the Company's competitors are larger and have greater financial
resources than the Company. There can be no assurance that the Company will not
encounter increased competition from existing competitors or new market entrants
or that equipment manufacturers will not commence, or increase their efforts, to
rent or sell equipment directly to the Company's customers. In addition, to the
extent that competitors seek to gain or retain market share by reducing prices,
the Company may be required to lower its prices, thereby affecting operating
results.
SENSITIVITY TO GENERAL ECONOMIC AND WEATHER CONDITIONS
The Company believes that the equipment rental business is sensitive to
changes in economic conditions and that demand for rental equipment can be
reduced significantly by adverse weather conditions. There can be no assurance
that the Company's business and financial condition will not 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
12
a higher cost of capital to the Company, or (iii) adverse weather conditions
that may decrease construction and industrial activity.
QUARTERLY FLUCTUATIONS OF OPERATING RESULTS
The Company expects that its revenues and operating results may fluctuate
from quarter to quarter due to a number of factors, including: seasonal rental
patterns of the Company's customers (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 (which
generally will require a period of time to become profitable) 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. These factors, among
others, may result in the Company's results of operations in some future periods
not meeting expectations, which could have a material adverse impact on the
market price of the Common Stock.
LIABILITY AND INSURANCE
The Company is subject to various possible claims, including claims for
personal injury or death caused by equipment rented or sold by the Company or
motor vehicle accidents involving Company delivery and service personnel and
compensation and other employment related claims. The Company carries a broad
range of insurance for the protection of its assets and operations. However,
such coverage is subject to a deductible of $250,000 and limited to a maximum of
$25 million per occurrence. In addition, the Company does not maintain
insurance coverage for environmental liability, since the Company believes that
the cost for such coverage is high relative to the benefit that it provides.
Furthermore, certain types of claims, such as claims for punitive damages or for
damages arising from intentional misconduct, which are often alleged in third
party lawsuits, might not be covered by the Company's insurance. There can be
no assurance that insurance will continue to be available to the Company on
economically reasonable terms, if at all, that existing or future claims will
not exceed the level of the Company's insurance or relate to matters not covered
by the Company's insurance (such as environmental liability), or that the
Company will have sufficient capital available to pay any uninsured claims.
ENVIRONMENTAL REGULATION
As described under "--Environmental Regulation," certain activities of the
Company are subject to various federal, state and local laws and regulations
governing the generation, handling, storage, transportation, treatment and
disposal of hazardous substances and wastes. Under such laws, an owner or
lessee of real estate may be liable for, among other things, (i) the costs of
removal or remediation of certain hazardous or toxic substances located on, in,
or emanating from, such property, as well as related costs of investigation and
property damage and substantial penalties for violations of such laws, and (ii)
environmental contamination at facilities where its waste is or has been
disposed. Such laws often impose such liability without regard to whether the
owner or lessee
13
knew of, or was responsible for, the presence of such hazardous or toxic
substances. Although the Company investigates each business or property that it
acquires or leases and believes there are no existing material liabilities
relating to non-compliance with environmental laws and regulations, there can be
no assurance that there are no undiscovered potential liabilities relating to
non-compliance with environmental laws and regulations, that historic or current
operations have not resulted in undiscovered conditions that will require
investigation and/or remediation under environmental laws, or that future uses
or conditions will not result in the imposition of environmental liability upon
the Company or expose the Company to third-party actions such as tort suits.
Furthermore, there can be no assurance that changes in environmental regulations
in the future will not require the Company to make significant capital
expenditures to change methods of disposal of hazardous materials or otherwise
alter aspects of its operations.
ITEM 2. PROPERTIES
The Company currently operates 68 rental locations (60 in the United States
and 8 in Canada). The rental locations in the United States are in the
following 16 states: California (12), Colorado (1), Connecticut (4), Florida
(2), Indiana (1), Minnesota (2), New York (7), New Jersey (1), Nevada (3), North
Carolina (7), Pennsylvania (1), South Carolina (3), Tennessee (2), Texas (6),
Utah (1), and Washington (7). The rental locations in Canada are all in
Ontario. The Company's rental locations generally include facilities for
displaying equipment and, depending on the location, may include separate
equipment service areas and storage areas.
The Company leases each of its rental locations under leases providing for
various terms, including (i) 33 leases that provide for a remaining term of more
than five years (of which 30 provide for a renewal option), (ii) 19 leases that
provide for a remaining term of between one and five years (of which 10 provide
for a renewal option), (iii) eight leases that provide for a remaining term of
less than one year (of which five provide for a renewal option) and (iv) eight
leases that are on a month-to-month basis. These leases were entered into (or
assumed) in connection with the acquisitions of the Acquired Companies and most
of the lessors are the former owners of these companies. The Company believes
that its leases generally reflect market terms.
The Company maintains a fleet of vehicles that is used for delivery,
maintenance and sales functions. A portion of this fleet is owned and a portion
leased and, as of February 13, 1998, this fleet included 615 vehicles.
The Company's corporate headquarters are located in Greenwich, Connecticut,
where it leases approximately 15,000 square feet under a lease that extends
until 2001 (subject to extension rights).
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various litigation matters,
in most cases involving ordinary and routine claims incidental to the business
of the Company. The ultimate legal
14
and financial liability of the Company with respect to such pending litigation
cannot be estimated with certainty but the Company believes, based on its
examination of such matters, that such ultimate liability will not have a
material adverse effect on the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote of
the security holders of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the New York Stock Exchange
on December 18, 1997 under the symbol "URI." The following table sets forth,
for the periods indicated, the high and low sales prices for the Common Stock,
as reported by the New York Stock Exchange.
PRICE RANGE
-----------
1997 HIGH LOW
- ---- ---- ---
Fourth Quarter (from December 18, 1997) $19 5/16 $14 3/8
1998
- ----
First Quarter (through March 11, 1998)... 27 3/8 17 1/4
As of March 5, 1998, there were approximately 151 holders of record of the
Common Stock. The Company believes that 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."
DIVIDENDS
The Company intends to retain all earnings for the foreseeable future for
use in the operation and expansion of its business and, accordingly, the Company
currently has no plans to pay dividends on its Common Stock. The payment of any
future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition
and capital requirements, restrictions in financing agreements, business
conditions and other factors. Under the terms of the Company's credit facility,
the Company is prohibited from paying dividends
15
on its Common Stock. In addition, under Delaware law, the Company is prohibited
from paying any dividends unless it has capital surplus or net profits available
for this purpose. See Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
SALES OF UNREGISTERED SECURITIES IN 1997
Set forth below is a listing of all sales by the Company of unregistered
securities during the period from August 14, 1997 (the date the Company was
incorporated) through December 31, 1997. All such sales were exempt from
registration under the Securities Act of 1933, as amended (the "Act"), pursuant
to Section 4(2) of the Act (and, in the case of the private placement described
in paragraph 3 below, Regulation D thereunder), as they were transactions not
involving a public offering. The consideration paid to the Company in respect
of each issuance was cash, unless otherwise indicated. All sales described
below were made by the Company without the assistance of any underwriters.
1. In September, October, November and December 1997, the Company issued
an aggregate of 12,910,714 shares of Common Stock and 6,342,858 warrants to
certain officers of the Company (including, in certain cases, one or more
entities controlled by the officer) for an aggregate amount of $46.01 million
(not including 240,000 shares that were issued in the private placement
described in paragraph 3 below to a person who subsequently became a director).
Such warrants provide for an exercise price of $10.00 per share. See Item 10--
"Directors and Executive Officers of the Registrant--Capital Contributions by
Officers and Directors."
2. In October 1997, the Company sold an aggregate of 118,572 shares of
Common Stock to five employees of the Company and one consultant at a price of
$3.50 per share.
3. In September 1997, the Company in a private placement sold an
aggregate of 2,496,121 shares of Common Stock, at a price of $3.50 per share, to
51 accredited investors. Such sale was made in accordance with Regulation D
promulgated under the Act.
4. In October 1997, the Company issued 318,712 shares of Common Stock as
part of the consideration for an acquisition. The Company expects that 137,600
shares of such shares will be cancelled as described under Item 7--"Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Consideration Paid for the Acquired Companies."
5. In October 1997, the Company issued, in connection with certain
acquisitions, (i) a convertible note in the principal amount of $300,000 which
provides for a conversion price of $16.20 per share and (ii) a convertible note
in the principal of $200,000 which provides for a conversion price of $13.50 per
share.
16
6. In 1997, the Company granted to employees options with respect to
904,583 shares of Common Stock. Such options have exercise prices ranging from
$10.00 per share to $30.00 per share and a weighted average exercise price of
$12.76 per share.
7. In November 1997, the Company issued (i) 5,000 shares of Common Stock
as compensation for certain recruiting services and (ii) a warrant to purchase
1,200 shares of Common Stock (at a $10.00 per share exercise price) as
compensation for certain consulting services.
CERTAIN INFORMATION CONCERNING THE COMPANY'S INITIAL PUBLIC OFFERING
Set forth below is certain information concerning the Company's initial
public offering (the "Offering").
1. Prior to commencing the Offering, the Company filed a registration
statement (the "Registration Statement") with the Securities and Exchange
Commission (the "Commission"), pursuant to the Act, in order to register the
shares of the Common Stock that the Company proposed to offer. The Commission
file number assigned to the Registration Statement is 333-39117. The
Registration Statement was declared effective by the Commission on December 18,
1997.
2. The Offering commenced on December 3, 1997 and was completed on
December 23, 1997.
3. The underwriters for the Offering were Merrill Lynch & Co.; Donaldson,
Lufkin & Jenrette Securities Corporation; and Deutsche Morgan Grenfell (together
with their respective international affiliates).
4. The Registration Statement set forth a "Proposed Maximum Aggregate
Offering Price" of $112,700,000.
5. The Company sold in the Offering an aggregate of 8,050,000 shares of
Common Stock at an initial public offering price of $13.50 per share. The
aggregate public offering price of the shares sold in the Offering was
$108,675,000.
6. During the period from December 18, 1997 (the effective date of the
Registration Statement) through December 31, 1997, the total expenses paid by
the Company related to the Offering (determined on a cash basis) was $7,864,250
and consisted of the following:
a. $7,607,250 paid to the underwriters in respect of the underwriting
discount;
b. $257,000 of other expenses.
7. None of the payments described in paragraph 6 above represented a
direct or indirect payment to (i) directors, officers or general partners of the
Company or to their associates, (ii)
17
persons owning 10% or more of any class of equity securities of the Company or
(iii) affiliates of the Company.
8. After deducting the payments described in paragraph 6 above, the
amount of Offering proceeds that remained was $100,810,750. The Company used
$35.0 million of such proceeds to repay outstanding indebtedness under the
Company's revolving credit facility. As of December 31, 1997, the balance of
such proceeds was invested in temporary investments consisting of short-term,
tax-exempt securities.
18
ITEM 6. SELECTED FINANCIAL DATA
The Company commenced rental operations in October 1997 by acquiring six
established rental companies (the "Initial Acquired Companies") and acquired 15
additional companies in the first two months of 1998. The following table
presents selected financial data for the Company and the Initial Acquired
Companies. The data with respect to the Initial Acquired Companies is on a
combined basis. The data presented below with respect to the Company should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto of the Company included elsewhere in this Report and Item 7--
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMBINED INITIAL ACQUIRED COMPANIES COMPANY
------------------------------------------------------------ -----------------
PERIOD FROM
PERIOD FROM AUGUST 14, 1997
YEAR ENDED DECEMBER 31, JANUARY 1, (INCEPTION)
--------------------------------------------- 1997 THROUGH THROUGH
ACQUISITION DECEMBER 31,
1993 1994 1995 1996 DATE(1) 1997
------------- ---------- ---------- --------- --------------- -----------------
INCOME STATEMENT DATA:
Total revenues $32,549 $38,179 $44,159 $51,889 $49,200 $10,633
Total cost of operations 22,961 24,829 28,563 34,737 32,677 6,822
--------- --------- --------- --------- --------- ---------
Gross profit 9,588 13,350 15,596 17,152 16,523 3,811
Selling general and administrative expense 7,772 9,898 11,537 12,435 12,021 3,311
Non-rental depreciation
and amortization 300 427 502 527 472 262
--------- --------- --------- --------- --------- ---------
Operating income 1,516 3,025 3,557 4,190 4,030 238
Interest expense 770 846 1,416 2,123 2,288 454
Other income (336) (412) (306) (412) (382) (270)
--------- --------- --------- --------- --------- ---------
Income before taxes 1,082 2,591 2,447 2,479 2,124 54
Pro forma income taxes(2) 433 1,036 979 992 850 20
--------- --------- --------- --------- --------- ---------
Pro forma net income(2) $ 649 $ 1,555 $ 1,468 $ 1,487 $ 1,274 $ 34
========= ========= ========= ========= ========= =========
Basic earnings per share $0.00
=========
Diluted earnings per share $0.00
=========
Depreciation and
amortization $ 4,207 $ 5,340 $ 6,630 $ 8,579 $ 7,344 $ 1,301
EBITDA(3) $ 5,723 $ 8,365 $10,187 $12,769 $11,374 $ 1,539
Dividends on Common -- --
Stock
19
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COMBINED INITIAL ACQUIRED COMPANIES COMPANY
-------------------------------------------- --------------
AS OF DECEMBER 31, AS OF
-------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997
---------- ---------- ---------- -------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,374 $ 2,349 $ 4,193 $ 3,227 $ 68,608
Rental equipment, net 10,730 14,270 20,244 27,145 33,408
Total assets 20,380 25,254 37,022 43,681 169,110
Debt 10,104 12,608 21,267 25,959 1,074
Stockholders' equity 9,003 9,638 10,941 12,308 157,730
- ---------------------------------
(1) Acquisition Date represents with respect to each Initial Acquired Company
the date in October 1997 on which such Initial Acquired Company was acquired
by the Company.
(2) Certain of the Acquired Companies had elected to be treated as Subchapter S
Corporations prior to being acquired by the Company. In general, the income
or loss of a Subchapter S Corporation is passed through to its owners rather
than being subjected to taxes at the entity level. Pro forma net income or
loss for the Initial Acquired Companies reflects a provision for income
taxes as if all such companies were liable for federal and state income
taxes as taxable corporate entities for all periods presented.
(3) As used herein, "EBITDA" means net income less non-operating income plus
interest, non-operating expenses, income taxes, depreciation, amortization
and other non-cash items. Management believes that EBITDA, as presented,
represents a useful measure of assessing the performance of the Company's
ongoing operating activities as it reflects the earnings trends of the
Company without the impact of interest, income taxes, non-operating income
and expenses and certain non-cash charges. EBITDA is not intended as an
alternative to cash flow from operating activities as a measure of liquidity
or as an alternative to net income as an indicator of the Company's
operating performance.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Report. Certain of the statements contained in such discussion 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 Item 1--"Business--Factors that May
Influence Future Results and Accuracy of Forward-Looking Statements."
GENERAL
The Company was organized in August 1997 and commenced equipment rental
operations in October 1997 by acquiring six established rental companies. The
Company acquired 15 additional companies in the first two months of 1998. Each
of the acquisitions completed by the Company to date has been accounted for as a
purchase.
The Acquired Companies primarily derived 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 used 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 used 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 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 depreciation 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.
The Company's acquisition of the Acquired Companies changed the cost
structures of these companies due to changes relating to depreciation and
amortization, interest expense, compensation
21
to former owners and lease expense for real estate. In view of these changes,
the Company believes that the pre-acquisition historical results of the Acquired
Companies are not indicative of future results.
CONSIDERATION PAID FOR THE ACQUIRED COMPANIES
The aggregate consideration paid by the Company for the Acquired Companies
was $176.0 million and consisted of approximately $156.4 million in cash,
1,123,587 shares of Common Stock (including 137,600 shares which are expected to
be cancelled as described below), a convertible note in the principal amount of
$300,000, and warrants to purchase an aggregate of 30,000 shares of Common
Stock. In addition, the Company repaid or assumed outstanding indebtedness of
the Acquired Companies in the aggregate amount of $121.0 million. The Company
also agreed in connection with two of the acquisitions to pay the former owners
additional amounts based upon specified future revenues. Such amounts are
limited to a maximum of $2.8 million in one case and Cdn$4.0 million in the
other case.
The purchase agreement relating to the acquisition of one of the Acquired
Companies provides that the stock consideration paid by the Company in
connection with such acquisition is subject to adjustment based upon the trading
price of the Common Stock during the 60-day period commencing December 18, 1997.
In accordance with such provision, the Company expects that 137,600 shares of
Common Stock issued by the Company in connection with such acquisition will be
cancelled.
HISTORICAL RESULTS OF OPERATIONS
The Company's historical financial statements included herein cover the
period from August 14, 1997 (inception) through December 31, 1997. The Company
believes that its historical results for such period do not fully reflect its
current operations in view of the fact that (i) the results of the six companies
acquired in October 1997 are reflected in such financial statements for only a
portion of the period covered thereby and (ii) the results of the 15 companies
acquired in the first two months of 1998 are not reflected in such financial
statements.
Revenues. Total revenues were $10.6 million for the period from August 14,
1997 through December 31, 1997. Equipment rental revenues accounted for 66.0%
of such revenues.
Gross Profit. For the period from August 14, 1997 through December 31,
1997, the gross profit margin was (i) 39.6% from equipment rentals, (ii) 47.8%
from sales of rental equipment and (iii) 21.2% from sales of new equipment,
merchandise and other revenues.
Selling, General and Administrative Expense. For the period from August
14, 1997 through December 31, 1997, selling, general and administrative expense
was $3.3 million or 31.1% of total revenues.
22
Non-rental Depreciation and Amortization. For the period from August 14,
1997 through December 31, 1997, non-rental depreciation and amortization was
$262,000 or 2.5% of total revenues.
Interest Expense. For the period from August 14, 1997 through December 31,
1997, interest expense was $454,000. 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 six acquisitions completed in 1997.
Income Taxes. The Company's effective income tax rate for the period from
August 14, 1997 through December 31, 1997 was 37.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has 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 shares of Common Stock in the Company's initial public
offering in December 1997 for aggregate consideration of $101.1 million (after
deducting the underwriting discount) and (iv) borrowings under the Company's
Credit Facility.
On March 11, 1998, the Company completed a public offering of 8,625,000
shares of Common Stock (the "Offering"). The estimated net proceeds to the
Company from the Offering were approximately $207.4 million (after deducting the
underwriting discount and estimated offering expenses). The Company used $132.7
million of the net proceeds from the Offering to repay all outstanding
indebtedness under the Company's credit facility (which is described below) and
expects to use the balance of such net proceeds for future acquisitions, capital
expenditures and general corporate purposes.
The Company has a credit facility (the "Credit Facility") which enables the
Company to borrow up to $155 million on a revolving basis. The facility
terminates on October 8, 2000, at which time all outstanding indebtedness is
due. Up to $10 million of the Credit Facility is available in the form of
letters of credit. Borrowings under the Credit Facility accrue interest, at the
Company's option, at either (a) the Floating Rate (which is equal to the greater
of (i) the Federal Funds Rate plus 0.5% and (ii) Bank of America's reference
rate, in each case, plus a margin ranging from 0% to 0.25% per annum) or (b) the
Eurodollar Rate (which is equal to Bank of America's reserve adjusted eurodollar
rate plus a margin ranging from 1.5% to 2.5% per annum). As described above,
the Company used a portion of the net proceeds from the Offering to repay the
outstanding indebtedness under the Credit Facility and, consequently, there was
no outstanding indebtedness under the Credit Facility as of March 11, 1998.
The Company is currently in negotiations to increase the size of the Credit
Facility to approximately $300 million. The Company expects such increase to
become effective in March
23
1998. There can be no assurance, however, that such increase will become
effective within such time frame, if at all.
The Credit Facility contains certain covenants that require 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 of 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 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, and (vii) 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. The Credit Facility is secured by
substantially all of the assets of United Rentals, Inc. and by the stock and
assets of its subsidiaries.
The Company's principal existing source of cash are (i) the portion of the
net proceeds of the Offering that has not been used to repay indebtedness, (ii)
borrowings under the Credit Facility and (iii) cash generated from operations.
The Company estimates that such sources will be sufficient to fund 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, (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) the installation of an
integrated information technology system.
The Company estimates that equipment expenditures for its existing
locations will be in the range of $25 million to $30 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 the amount of such equipment expenditures.
Principal elements of the Company's strategy include 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 cash required for
future acquisitions and start-up locations will be provided by a
24
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. See
Item 1--"Business--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 $1.1
million 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 recently installed a new integrated information technology
system as described under Item 1--"Business--Information Technology System."
The new system is currently operational at 58 of the Company's existing
locations, and the Company expects that the system will be operational at the
remaining existing locations by mid-April 1998. The Company estimates that the
cost of installing such system at the Company's existing 68 locations and up to
22 additional locations will be approximately $6.5 million (including
approximately $5.2 million expended to date). The Company believes that the
system is year 2000 compliant.
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, including: seasonal rental
patterns of the Company's customers (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.
25
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
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 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
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The Company is required to adopt the
provisions of these Statements in fiscal year 1998. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a primary financial statement. The Company is currently evaluating the
reporting formats recommended under this Statement. 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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
(1) Consolidated Financial Statements:
Report of Independent Auditors 28
Consolidated Balance Sheet--December 31, 1997 29
Consolidated Statement of Operations for the period from August
14, 1997 (Inception) to December 31, 1997 30
Consolidated Statement of Stockholders' Equity for the period from
August 14, 1997 (Inception) to December 31, 1997 31
Consolidated Statement of Cash Flows for the period from August
14, 1997 (Inception) to December 31, 1997 32
Notes to Consolidated Financial Statements 33
(2) Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts 40
27
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Rentals, Inc.
We have audited the accompanying consolidated balance sheet of United
Rentals, Inc. and subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows
from August 14, 1997 (Inception) to December 31, 1997. Our audit also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the management of
United Rentals, Inc. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of United Rentals, Inc. and subsidiaries at December 31, 1997, and the
consolidated results of its operations and its cash flows from August 14, 1997
(Inception) to December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
MetroPark, New Jersey
January 30, 1998,
except for Note 11, as
to which the date is
March 11, 1998
28
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents......................................... $ 68,607,528
Accounts receivable, net of allowance for doubtful accounts of
$1,161,000....................................................... 7,494,636
Inventory......................................................... 3,827,446
Prepaid expenses and other assets................................. 2,966,822
Rental equipment, net............................................. 33,407,561
Property and equipment, net....................................... 2,272,683
Intangible assets, net of accumulated amortization of $241,000.... 50,533,736
------------
$169,110,412
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable................................................ $ 5,697,830
Debt............................................................ 1,074,474
Deferred taxes.................................................. 198,249
Accrued expenses and other liabilities.......................... 4,409,828
------------
Total liabilities............................................. 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,
23,899,119 shares issued and outstanding....................... 238,991
Additional paid-in capital...................................... 157,457,418
Retained earnings............................................... 33,622
------------
Total stockholders' equity.................................... 157,730,031
------------
$169,110,412
============
See accompanying notes.
29
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
AUGUST 14, 1997 (INCEPTION) TO DECEMBER 31, 1997
Revenues:
Equipment rentals............................................... $ 7,018,564
Sales of rental equipment....................................... 1,011,071
Sales of new equipment, merchandise and other revenues.......... 2,603,763
-----------
Total revenues.................................................... 10,633,398
Cost of revenues:
Cost of equipment rentals, excluding depreciation............... 3,203,209
Depreciation of rental equipment................................ 1,038,747
Cost of rental equipment sales.................................. 527,523
Cost of new equipment and merchandise sales and other operating
costs.......................................................... 2,052,639
-----------
Total cost of revenues............................................ 6,822,118
-----------
Gross profit...................................................... 3,811,280
Selling, general and administrative expenses...................... 3,311,669
Non-rental depreciation and amortization.......................... 262,102
-----------
Operating income.................................................. 237,509
Interest expense.................................................. 454,072
Other (income) expense............................................ (270,701)
-----------
Income before provision for income taxes.......................... 54,138
Provision for income taxes........................................ 20,516
-----------
Net income........................................................ $ 33,622
===========
Basic earnings per share.......................................... $ 0.00
===========
Diluted earnings per share........................................ $ 0.00
===========
See accompanying notes.
30
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AUGUST 14, 1997 (INCEPTION) TO DECEMBER 31 , 1997
COMMON STOCK
------------------- ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES AMOUNT CAPITAL EARNINGS
---------- -------- ------------ --------
Balance, August 14, 1997 (Incep-
tion)............................... -- $ -- $ -- $ --
Issuance of common stock and war-
rants............................. 23,899,119 238,991 157,457,418
Net income......................... 33,622
---------- -------- ------------ -------
Balance, December 31, 1997........... 23,899,119 $238,991 $157,457,418 $33,622
========== ======== ============ =======
See accompanying notes.
31
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
AUGUST 14, 1997 (INCEPTION) TO DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 33,622
Adjustments to reconcile net income to net cash provided by oper-
ating activities:
Depreciation and amortization.................................. 1,300,849
Gain on sale of rental equipment............................... (483,548)
Deferred taxes................................................. (2,204)
Changes in operating assets and liabilities:
Accounts receivable.......................................... 609,529
Inventory.................................................... 631,484
Prepaid expenses and other assets............................ (755,545)
Accounts payable............................................. 281,056
Accrued expenses and other liabilities....................... (512,507)
------------
Net cash provided by operating activities.................. 1,102,736
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of rental equipment.................................... (1,886,533)
Purchases of property and equipment.............................. (819,557)
Proceeds from sales of rental equipment.......................... 1,011,071
In-process acquisition costs..................................... (128,523)
Purchase of other companies...................................... (51,451,634)
------------
Net cash used in investing activities...................... (53,275,176)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants, net of
issuance costs.................................................. 154,788,110
Proceeds from debt............................................... 35,000,000
Repayment of debt................................................ (68,222,252)
Payment of debt financing costs.................................. (785,890)
------------
Net cash provided by financing activities.................. 120,779,968
------------
Net increase in cash and cash equivalents........................ 68,607,528
Cash and cash equivalents at beginning of period................. --
------------
Cash and cash equivalents at end of period................. $ 68,607,528
============
Supplemental disclosure of cash flow information:
Cash paid for interest......................................... $ 446,559
============
Supplemental schedule of non cash investing and financing
activities:
The Company acquired the net assets and assumed certain
liabilities of other companies as follows:
Assets, net of cash acquired................................. $ 98,876,932
Liabilities assumed.......................................... (43,300,749)
Less:
Amounts paid in common stock............................... (3,824,549)
Amount paid through issuance of convertible note........... (300,000)
------------
Net cash paid.................................................. $ 51,451,634
============
See accompanying notes.
32
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
United Rentals, Inc. (together with its subsidiaries the "Company") was
incorporated in August 1997 for the purpose of creating a large,
geographically diversified equipment rental company in the United States and
Canada. The Company rents a broad array of equipment to a diverse customer
base that includes construction industry participants, industrial companies,
homeowners and others. The Company also engages in related activities such as
selling used rental equipment, acting as a distributor for certain new
equipment and selling related merchandise and parts. The nature of the
Company's business is such that short-term obligations are typically met by
cash flow generated from long-term assets. Consequently, consistent with
industry practice, the accompanying balance sheet is presented on an
unclassified basis.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three
months or less when purchased to be cash equivalents.
Inventory
Inventory consists of equipment, tools, parts, fuel and related supply
items. Inventory is stated at the lower of average weighted cost or market.
Rental Equipment
Rental equipment is recorded at cost and depreciated over the estimated
useful lives of the equipment using the straight-line method. The range of
useful lives estimated by management for rental equipment is two to ten years.
Rental equipment is depreciated to a salvage value of zero to ten percent of
cost. Rental equipment having a cost of $500 or less is expensed at the time
of purchase. Ordinary maintenance and repair costs are charged to operations
as incurred.
Revenue Recognition
Revenue related to the sale of equipment is recognized at the point of sale.
Revenue related to rental equipment is recognized over the contract term.
Property and Equipment
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. The range of useful
lives estimated by management for property and equipment is two to ten years.
Ordinary maintenance and repair costs are charged to operations as incurred.
Intangible Assets
Intangible assets consist of the excess of cost over the value of
identifiable net assets of businesses acquired and are being amortized on a
straight line basis over their estimated useful lives of forty years.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable, accrued expenses and other liabilities approximate fair
value due to the immediate to short-term maturity of these financial
instruments. The fair value of notes payable is determined using current
interest rates for similar instruments as of December 31, 1997 and
approximates the carrying value of these notes due to the fact that the
underlying instruments include provisions to adjust note balances and interest
rates to approximate fair market value.
Advertising Expense
The Company expenses the cost of advertising as incurred. The Company
incurred $146,000 in advertising costs for the period August 14, 1997
(Inception) to December 31, 1997.
33
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on the
differences between financial statement and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Recognition of deferred tax assets is limited to amounts considered by
management to be more likely than not of realization in future periods.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and
accounts receivable. The Company maintains cash and cash equivalents with high
quality financial institutions. Concentrations of credit risk with respect to
accounts receivable are limited because a large number of geographically
diverse customers make up the Company's customer base. No single customer
represents greater than 10% of total accounts receivable. The Company controls
credit risk through credit approvals, credit limits, and monitoring
procedures.
Stock-Based Compensation
The Company accounts for its stock based compensation arrangements under the
provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Since stock options will be granted by the Company with exercise prices at or
greater than the fair value of the shares at the date of grant, no
compensation expense will be recognized.
Computation of Earnings Per Share
Earnings per share is calculated under the provisions of recently issued
Statement 128, Earnings Per Share. Common Stock issued for consideration below
the initial public offering price ("IPO price") of $13.50 per share at which
shares were sold in the Company's initial public offering (the "IPO"), and
stock options and warrants granted with exercise prices below the IPO price
per share during the twelve months preceding the date of the initial filing of
the registration statement for the IPO are included in the calculation of
common equivalent shares at the IPO price per share.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company is required to
adopt the provisions of these Statements in fiscal year 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components in a primary financial statement. The Company is currently
evaluating the reporting formats recommended under this Statement. 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.
34
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS
During October 1997, the Company purchased all of the outstanding stock of
the following six equipment rental companies for the indicated consideration:
COMPANY CONSIDERATION
------- -------------
A & A Tool Rentals and Sales, Inc........................... $ 8,593,520
Bronco High-Lift, Inc....................................... 7,949,568
Coran Enterprises, Inc...................................... 15,264,337
J & J Rental Services, Inc.................................. 3,824,549
Mercer Equipment Company.................................... 14,933,242
Rent-It Center, Inc......................................... 6,400,000
All of the consideration paid for the acquisitions was in cash, with the
exception of Rent-It Center, Inc. which included a $300,000 convertible note
and J & J Rental Services, Inc. where all of the consideration was paid
through the issuance of 318,712 shares of the Company's Common Stock. These
shares are subject to adjustment so that their value will equal $3.8 million
based upon the average daily closing price of the Company's Common Stock
during the 60 day period beginning December 18, 1997 (see Note 11). Contingent
consideration is due on the J & J Rental Services, Inc. acquisition based upon
a percentage of revenues up to a maximum of $2.8 million.
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 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. Contingent
purchase price is capitalized when earned and amortized over the remaining
life of the related asset.
The Company has not completed its valuation of the 1997 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 years ended December 31,
1997 and 1996 as though each acquisition described above was made on January
1, for each of the periods.
1997 1996
----------- -----------
Revenues............................................ $59,832,952 $51,889,258
Net income.......................................... 2,607,127 3,462,371
Basic earnings per share............................ $ 0.16 $ 0.22
Diluted earnings per share.......................... $ 0.14 $ 0.20
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. RENTAL EQUIPMENT
Rental equipment and related accumulated depreciation consists of the
following:
Rental equipment................................................ $34,444,129
Less accumulated depreciation................................... (1,036,568)
-----------
Rental equipment, net........................................... $33,407,561
===========
35
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
Furniture, fixtures and office equipment........................ $2,294,277
Less accumulated depreciation................................... (21,594)
----------
Property and equipment, net..................................... $2,272,683
==========
6. DEBT
Debt consists of the following:
Subordinated convertible notes.................................. $ 500,000
Equipment notes, interest at 7.0% to 10.6%, payable in various
monthly installments through 2001, secured by equipment........ 574,474
----------
Total debt...................................................... $1,074,474
==========
The Company's credit facility with a group of financial institutions, for
which Bank of America National Trust and Savings Association acts as agent,
enables the Company to borrow up to $155 million on a revolving basis (the
"Credit Facility"). The facility terminates on October 8, 2000, at which time
all outstanding indebtedness is due. Up to $10 million of the Credit Facility
is available in the form of letters of credit. Borrowings under the Credit
Facility accrue interest, at the Company's option, at either (a) the Floating
Rate (which is equal to the greater of (i) the Federal Funds Rate plus 0.5%
and (ii) Bank of America's reference rate, in each case, plus a margin ranging
from 0% to 0.25% per annum) or (b) the Eurodollar Rate (which is equal to Bank
of America's reserve adjusted eurodollar rate plus a margin ranging from 1.5%
to 2.5% per annum). As of December 31, 1997, there was no outstanding
indebtedness under the Credit Facility. The Credit Facility contains certain
covenants that require 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 of
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 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, and
(vii) engage in any line of business other than the equipment rental industry.
The Credit Facility provides that the failure by any two of certain of the
Company's executive officers 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. The Credit Facility is secured by substantially all of the
assets of United Rentals, Inc. and by the stock and assets of its
subsidiaries.
The subordinated convertible notes consists of two notes; $300,000 in
principal bearing interest at 7% per annum and $200,000 in principal bearing
interest at 7 1/2% per annum. The $200,000 note was converted into 14,814
shares of Common Stock during January 1998. The $300,000 note is repayable in
equal quarterly installments of principal and interest through October, 2002,
is convertible into the Company's Common Stock at a conversion rate of $16.20
per share and is subordinated to the Company's Credit Facility.
36
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of the Company's debt for each of the next five years at December
31, 1997 are as follows:
1998.............................................................. $ 244,260
1999.............................................................. 340,916
2000.............................................................. 239,020
2001.............................................................. 181,676
2002.............................................................. 68,602
----------
$1,074,474
==========
7. INCOME TAXES
The provision for federal and state income taxes is as follows:
Current State....................................................... $22,720
Deferred State...................................................... 3,041
Deferred Federal.................................................... (5,245)
-------
$20,516
=======
A reconciliation of the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before
provision for income taxes is as follows:
Computed tax benefit at statutory tax rate.......................... $18,407
Increase in tax benefit:
Tax-exempt interest income........................................ (91,971)
Non-deductible expense............................................ 77,078
State income taxes, net of Federal benefit........................ 17,002
-------
$20,516
=======
The components of deferred income tax assets are as follows:
Accrual liabilities.............................................. $ 957,619
Net operating loss carryforward.................................. 313,719
Property & equipment............................................. 43,908
----------
$1,315,246
==========
The components of deferred income tax liabilities are as follows:
Intangibles and other............................................... $633,132
========
The Company has net short-term deferred tax assets in the amount of
$880,363, which are reported in the balance sheet in prepaid expenses and
other assets.
The Company has net operating loss carryforwards ("NOLs") of $845,681 for
income tax purposes that expire in 2012.
37
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL STOCK
Preferred Stock: The Company's board of directors has the authority to
designate 5,000,000 shares of $.01 par value preferred stock in series, to
establish as to each series the designation and number of shares to be issued
and the rights, preferences, privileges and restrictions of the shares of each
series, and to determine the voting powers, if any, of such shares. At
December 31, 1997, the Company's Board of Directors had not designated any
shares.
As of December 31, 1997 there are outstanding warrants to purchase an
aggregate of 6,344,058 shares of Common Stock. Each warrant provides for an
exercise price of $10.00 per share and may be exercised at any time until
September 12, 2007.
The Board of Directors has adopted the Company's 1997 Stock Option Plan (the
"Stock Option Plan") which provides for the granting of options to purchase
not more than an aggregate of 5,000,000 shares of Common Stock. All officers,
employees and others who render services to the Company are eligible to
participate in the Stock Option Plan. Each option granted pursuant to the
Stock Option Plan must provide for an exercise price per share that is at
least equal to the fair market value per share of Common Stock on the date of
grant. No options may be granted under the Stock Option Plan after August 21,
2007. The exercise price of each option, the period during which each option
may be exercised and the other terms and conditions of each option are
determined by the Board of Directors (or by a committee appointed by the
Board).
During 1997, 904,583 options to purchase shares of the Company's Common
Stock were granted and remain outstanding at December 31, 1997. The weighted
average exercise price per share of such options was $12.76. Such options had
exercise prices ranging from $10 to $30 per share. Of such options, 818,583
provided for an exercise price per share in the range of $10.00 to $19.99 (the
weighted average exercise price and weighted average remaining life of the
options in this range being $11.84 and 9.9 years, respectively) and 86,000
provided for an exercise price per share in the range of $20.01 to $30.00 (the
weighted average exercise price and weighted average remaining life of the
options in this range being $21.51 and 9.9 years, respectively).
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based employee
compensation arrangements whereby no compensation cost related to stock
options is deducted in determining net income. Had compensation cost for the
Company's stock option plans been determined pursuant to Financial Accounting
Standards Board Statement No. 123 ("SFAS No. 123"), "Accounting for Stock-
Based Compensation," the Company's net income and earnings per share would
have differed. The Black-Scholes option pricing model estimates fair value of
options using subjective assumptions which can materially affect fair value
estimates and, therefore, do not necessarily provide a single measure of fair
value of options. Using the Black-Scholes option pricing model and a risk-free
interest rate of 5.8%, a volatility factor for the market price of the
Company's Common Stock of .315 and a weighted-average expected life of options
of approximately three years, the Company's net loss, basic earnings per share
and diluted earnings per share would have been $(43,731), $0.00 and $0.00,
respectively. For purposes of these pro forma disclosures, the estimated fair
value of options is amortized over the options' vesting period. Since the
number of options granted and their fair value may vary significantly from
year to year, the pro forma compensation expense in future years may be
materially different.
At December 31, 1997 there are 6,344,058 shares of Common Stock reserved for
the exercise of warrants, 5,000,000 shares of Common Stock reserved for
issuance pursuant to options granted, and that may be granted in the future,
under the Company's 1997 Stock Option Plan and 33,332 shares of Common Stock
reserved for the future conversion of convertible debt.
38
UNITED RENTALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
Numerator:
Net income....................................................... $ 33,622
===========
Denominator:
Denominator for basic earnings per share--weighted-average
shares.......................................................... 16,319,193
Effect of dilutive securities:
Employee stock options.......................................... 116,061
Warrants........................................................ 1,736,899
-----------
Dilutive potential common shares
Denominator for diluted earnings per share--adjusted weighted-
average shares................................................. 18,172,153
===========
Basic earnings per share........................................... $ 0.00
===========
Diluted earnings per share......................................... $ 0.00
===========
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases rental equipment, real estate and certain office
equipment under operating leases. Certain real estate leases require the
Company to pay maintenance, insurance, taxes and certain other expenses in
addition to the stated rentals. Future minimum lease payments, by year and in
the aggregate, for noncancellable operating leases with initial or remaining
terms of one year or more are as follows at December 31, 1997:
1998.............................................................. $2,676,494
1999.............................................................. 1,860,615
2000.............................................................. 1,213,003
2001.............................................................. 1,155,995
2002.............................................................. 816,400
Thereafter........................................................ 1,929,430
----------
$9,651,937
==========
Rent expense under non-cancellable operating leases for the period August
14, 1997 (Inception) to December 31, 1997 was $524,752.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company completed the acquisition of 15
equipment rental companies (the "Acquisitions") and the aggregate
consideration paid by the Company for the Acquisitions was $118.3 million and
consisted of approximately $102.8 million in cash, 804,875 shares of Common
Stock and warrants to purchase 30,000 shares of Common Stock. The Company
funded a portion of the cash consideration for these acquisitions with cash on
hand and the balance with borrowings under the Credit Facility.
On March 11, 1998, the Company completed a public offering of 8,625,000
shares of its Common Stock. Net proceeds of the offering were approximately
$207.4 million.
The purchase agreement relating to one of the acquisitions provides that the
stock consideration paid by the Company in connection with such acquisition is
subject to adjustment based upon the trading price of the Common Stock during
the 60-day period commencing December 18, 1997. In accordance with such
provision, the Company expects that 137,600 shares of Common Stock issued by
the Company in connection with such acquisition will be cancelled.
39
SCHEDULE II
UNITED RENTALS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
Year ended December 31,
1997:
Allowance for doubtful
accounts............. $ -- $19,000 $1,226,000(A) $84,000 $1,161,000
- --------
(A) Represents allowance for doubtful accounts assumed through acquisitions.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BACKGROUND
The Company was founded in September 1997 by the following officers of the
Company: Bradley Jacobs, John Milne, Michael Nolan, Robert Miner, Sandra
Welwood, Joseph Kondrup, Jr., Kai Nyby and Richard Volonino. Each of these
officers was formerly a senior executive of United Waste Systems, Inc. ("United
Waste") or a senior member of United Waste's acquisition team. United Waste, a
solid waste management company, was formed in 1989 and sold in August 1997 to
USA Waste Services, Inc. for stock consideration valued at over $2.2 billion.
United Waste executed a growth strategy that combined a disciplined acquisition
program (including over 200 acquisitions completed from January 1995 through
August 1997), the integration and optimization of acquired facilities, and
internal growth. At the time it was sold, United Waste was the sixth largest
provider of integrated, non-hazardous solid waste management services in the
United States, as measured by 1996 revenues.
OFFICERS, DIRECTORS AND KEY MANAGERS
The table below identifies, and provides certain information concerning,
the officers, directors and certain key managers of the Company. The Company
expects that an additional independent director will be appointed prior to May
1998. The Company also expects that Mr. Hicks, the Company's President and Chief
Operating Officer, will be appointed a director concurrently with the
appointment of such additional independent director.
NAME AGE POSITIONS(1)(2)
---- --- ---------------
OFFICERS AND DIRECTORS
Bradley S. Jacobs......... 41 Chairman, Chief Executive Officer and Director
Wayland R. Hicks.......... 55 President and Chief Operating Officer
John N. Milne............. 38 Vice Chairman, Chief Acquisition Officer, Secretary and Director
Michael J. Nolan.......... 37 Chief Financial Officer
Robert P. Miner........... 48 Vice President, Finance
Sandra E. Welwood......... 42 Vice President, Corporate Controller
Kurtis T. Barker.......... 37 Regional Vice President, Operations
Daniel E. Imig............ 51 Regional Vice President, Operations
Joseph J. Kondrup, Jr..... 39 Vice President, Acquisitions
Kai E. Nyby............... 45 Vice President, Acquisitions
Richard A. Volonino....... 55 Vice President, Acquisitions
Ronald M. DeFeo........... 45 Director
Richard J. Heckmann....... 54 Director
Gerald Tsai, Jr........... 69 Director
KEY MANAGERS
Joseph E. Bloodworth...... 46 Manager, District Operations
Joseph A. DiFrancesco..... 38 Manager, District Operations
42
Joseph E. Doran............. 57 Manager, District Operations
William M. Rigsbee.......... 41 Manager, District Operations
- ------------------------------
(1) Each officer and director in the table has served in the position(s)
indicated since either September 1997 (in the case of the eight founders),
October 1997 (in the case of Messrs. Barker, Imig, DeFeo and Heckmann),
November 1997 (in the case of Mr. Hicks) or December 1997 (in the case of
Mr. Tsai). The Company's officers are elected by the Board of Directors
and, subject to the employment agreements described under Item 11, serve at
the discretion of the Board.
(2) For information concerning the term served by directors, see "--
Classification of Board of Directors."
Bradley S. Jacobs founded United Waste Systems, Inc. in 1989 and served as
its Chairman and Chief Executive Officer from inception until the sale of the
company in August 1997. From 1984 to July 1989, Mr. Jacobs was Chairman and
Chief Operating Officer of Hamilton Resources Ltd., an international trading
company, and from 1979 to 1983, he was Chief Executive Officer of Amerex Oil
Associates, Inc., an oil brokerage firm that he co-founded.
Wayland R. Hicks served in various senior executive positions at Xerox
Corporation where he worked for 28 years (1966-1994). His positions at Xerox
Corporation included Executive Vice President, Corporate Operations (1993-1994),
Executive Vice President, Corporate Marketing and Customer Support Operations
(1989-1993) and Executive Vice President, Engineering and Manufacturing--Xerox
Business Products and Systems Group (1987-1989). Mr. Hicks served as Vice
Chairman and Chief Executive Officer of Nextel Communications Corp. (1994-1995)
and as Chief Executive Officer and President of Indigo N.V. (1996-1997). He is
also a director of Maytag Corporation.
John N. Milne was Vice Chairman and Chief Acquisition Officer of United
Waste Systems, Inc. from 1993 until August 1997 and held other senior executive
positions at United Waste from 1990 until 1993. Mr. Milne had primary
responsibility for implementing United Waste's acquisition program. From
September 1987 to March 1990, Mr. Milne was employed in the Corporate Finance
Department of Drexel Burnham Lambert Incorporated.
Michael J. Nolan served as the Chief Financial Officer of United Waste
Systems, Inc. from February 1994 until August 1997. He served in other finance
positions at United Waste from November 1991 until February 1994, including Vice
President, Finance, from October 1992 to February 1994. From 1985 until November
1991, Mr. Nolan held various positions at the accounting firm of Ernst & Young,
including senior audit manager, and is a Certified Public Accountant.
Robert P. Miner was an executive officer of United Waste Systems, Inc. from
November 1994 until August 1997, serving first as Vice President, Finance and
then Vice President, Acquisitions. Prior to joining United Waste, he was a
research analyst with PaineWebber
43
Incorporated (November 1988 to October 1994) and Needham & Co. (January 1987 to
October 1988) and held various executive positions at General Electric
Environmental Services, Inc., Stauffer Chemical Company, and OHM Corporation.
Sandra E. Welwood served as Vice President, Controller of United Waste
Systems, Inc. from March 1996 until August 1997. From October 1994 to February
1996, she was Assistant Controller of OSi Specialty, Inc., and from October 1993
to September 1994, was Director of Internal Audit of the Gartner Group, Inc.
Prior to this, Ms. Welwood was a senior audit manager at Ernst & Young from
September 1987 to September 1993, and held various positions (including senior
audit manager) at KPMG Peat Marwick from January 1980 to August 1987, and is a
Certified Public Accountant.
Kurtis T. Barker served as Vice President-Operations-Great Lakes Region of
United Waste Systems, Inc. from 1993 until August 1997. From 1991 to 1993, he
was an operations manager at Chambers Development Company, Inc. From 1990 to
1991, Mr. Barker was a project engineer at South Dakota Disposal Systems. From
1986 to 1990, he was a project engineer and then a general manager at Silver
King Mines, Inc.
Daniel E. Imig served as President-Mid-Central Region of Waste Management,
Inc. from 1996 to August 1997. From 1978 to 1996, Mr. Imig served in a number of
operating positions at Waste Management, Inc., including District Manager and
Division President.
Joseph J. Kondrup, Jr. was a senior member of United Waste's acquisition
team from March 1996 until August 1997, with responsibility for the company's
entry into and subsequent development of its Rocky Mountain Region. From July
1987 until March 1996, he was Division President of a subsidiary of Waste
Management, Inc.
Kai E. Nyby was a senior member of United Waste's acquisition team from
1995 until August 1997, with responsibility for acquisitions and business
development in the company's Midwest Region. From 1981 to 1995, Mr. Nyby was the
Regional Manager, Midwest Group for Waste Management, Inc. From 1973 to 1980,
Mr. Nyby was General Manager, Operations for a subsidiary of Waste Management,
Inc.
Richard A. Volonino was a senior executive officer of United Waste from
November 1991 until August 1997, serving as Chief Operating Officer from 1991 to
1992 and thereafter as Executive Vice President--Acquisitions. From May 1988 to
October 1991, Mr. Volonino held various positions, including Vice President,
Operations, with Chambers Development Company, Inc., and from 1986 to December
1987, was District Manager at Laidlaw, Inc.
Ronald M. DeFeo is the Chief Executive Officer, President, Chief Operating
Officer and a director of Terex Corporation, a leading global provider of
equipment for the manufacturing, mining and construction industries. Mr. DeFeo
joined Terex in 1992 as President of the Terex heavy equipment group and was
appointed President and Chief Operating Officer in 1993 and
44
Chief Executive Officer in 1995. From 1984 to 1992, Mr. DeFeo held various
management positions at Tenneco, Inc., including Senior Vice President and
Managing Director.
Richard J. Heckmann has served since 1990 as Chairman, President and Chief
Executive Officer of United States Filter Corporation, a leading global provider
of industrial and commercial water and wastewater treatment systems and
services. Mr. Heckmann is also a director of USA Waste Services, Inc. and K2
Inc.
Gerald Tsai, Jr. served as Chairman, Chief Executive Officer and President
of Delta Life Corporation, an insurance company, from 1993 until the sale of the
company in October 1997. Mr. Tsai was Chairman of the Executive Committee of the
Board of Directors of Primerica Corporation, a diversified financial services
company, from December 1988 until April 1991, and served as Chief Executive
Officer of Primerica Corporation from April 1986 until December 1988. Mr. Tsai
is currently a private investor and serves as a director of Meditrust Companies,
Proffitt's, Inc., Rite Aid Corporation, Sequa Corporation, Triarc Companies,
Inc. and Zenith National Insurance Corp. He also serves as a trustee of Boston
University and New York University Medical Center.
Joseph E. Bloodworth founded J&J Rental Services, Inc. (and its
predecessors) and served as Chief Executive Officer and President from 1975
until October 1997 when J&J Rental Services, Inc. was acquired by United
Rentals.
Joseph A. DiFrancesco served as General Manager of Access Rentals, Inc.
from 1989 until the acquisition of the company by United Rentals in January 1998
and as Controller of Access Rentals from 1985 until 1989. Mr. DiFrancesco is a
Certified Public Accountant.
Joseph E. Doran served as President of A&A Tool Rentals and Sales, Inc.
from 1972 until the acquisition of the company by United Rentals in October
1997. Mr. Doran served on the Board of Directors of the California Rental
Association for 12 years and was its President from 1985 to 1986.
William M. Rigsbee served as President of Mercer Equipment Company from
1990 until the acquisition of the company by United Rentals in October 1997. He
has been employed in the equipment rental industry since 1978. Mr. Rigsbee is a
former President of both the Carolina Rental Association and the North Carolina
Associated Equipment Distributors.
CAPITAL CONTRIBUTIONS BY OFFICERS AND DIRECTORS
The officers and directors of the Company listed below have made capital
contributions to the Company in the aggregate amount of $46.8 million (excluding
amounts paid by certain officers and directors in respect of shares of Common
Stock purchased by them in the Company's initial public offering in December
1997). Such capital contributions were made in connection with the sale to such
officers and directors in private placements of an aggregate of 13,150,714
shares of
45
Common Stock and 6,342,858 warrants ("Warrants"). Each such Warrant entitles the
holder to purchase one share of Common Stock at an exercise price of $10.00 per
share at any time prior to September 12, 2007. Such shares and Warrants were
sold at a price of $3.50 per unit consisting of one share of Common Stock and
one-half of a Warrant (except that Messrs. Barker and Tsai purchased only Common
Stock at a price of $3.50 per share and Messrs. Hicks, Imig and Heckmann
purchased only Common Stock at a price of $10.00 per share). The table below
indicates (i) the number of shares of Common Stock and the number of Warrants
purchased by such officers and directors (excluding shares purchased in the
Company's initial public offering) and (ii) the aggregate amount paid by such
officers and directors for such securities:
SECURITIES
PURCHASED(1)
---------------------
COMMON PURCHASE
NAME STOCK WARRANTS PRICE
-------------- ---------- --------- -----------
Bradley S. Jacobs . 10,000,000 5,000,000 $35,000,000
Wayland R. Hicks . 100,000 -- 1,000,000
John N. Milne . 1,428,571 714,286 5,000,000
Michael J. Nolan . 571,429 285,715 2,000,000
Robert P. Miner . 285,714 142,857 1,000,000
Sandra E. Welwood . 100,000 50,000 350,000
Kurtis T. Barker . 100,000 -- 350,000
Daniel E. Imig . 5,000 -- 50,000
Joseph J. Kondrup, Jr. . 100,000 50,000 350,000
Kai E. Nyby . . 100,000 50,000 350,000
Richard A. Volonino . 100,000 50,000 350,000
Richard J. Heckmann . 20,000 -- 200,000
Gerald Tsai, Jr. . 240,000 -- 840,000
- ---------------
(1) In certain cases includes securities owned by one or more entities
controlled by the named holder.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors is divided into three classes. The term of office of
the first class (currently comprised of Mr. Tsai) will expire at the first
annual meeting of stockholders following December 18, 1997, the term of office
of the second class (currently comprised of Mr. DeFeo and Mr. Heckmann) will
expire at the second annual meeting of stockholders following such date, and the
term of office of the third class (currently comprised of Mr. Jacobs and Mr.
Milne) will expire at the third annual meeting of stockholders following such
date. At each annual meeting of stockholders, successors to directors of the
class whose term expires at such meeting will be elected to serve for three-year
terms and until their successors are elected and qualified.
46
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) reports that they file.
Based solely upon review of the copies of such reports furnished to the
Company and written representations from certain of the Company's executive
officers and directors that no other such reports were required, the Company
believes that during 1997 all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten-percent beneficial owners were
complied with on a timely basis, except that Mr. DeFeo, a director of the
Company, filed one Form 4 late.
47
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each director of the Company is paid up to $2,500 per day for each Board of
Directors' meeting such director attends, together with an expense
reimbursement. Messrs. DeFeo, Heckmann and Tsai have each been granted options
to purchase an aggregate of 20,000 shares of Common Stock at an exercise price
of $15.00 per share.
COMPENSATION OF CERTAIN OFFICERS
The Company's executive officers are being compensated, and each has been
compensated since joining the Company, in accordance with the terms of the
Employment Agreements described below.
The following table sets forth information concerning the compensation of
the Chief Executive Officer of the Company and each of the other executive
officers of the Company during the period August 14, 1997 (inception) through
December 31, 1997.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#)
-------------- ------------
Bradley S. Jacobs.................... . $97,039 --
Chief Executive Officer
Wayland R. Hicks..................... . 47,692(1) 450,000
President and Chief Operating Officer
John N. Milne........................ . 63,577 --
Chief Acquisition Officer
Michael J. Nolan..................... . 58,558 --
Chief Financial Officer
Robert P. Miner...................... . 50,192 --
Vice President, Finance
- -----------------------------------
(1) Mr. Hicks' employment with the Company commenced on November 14, 1997.
The following tables summarize the options granted in 1997 to Mr. Hicks,
the potential value of these options at the end of the option term (assuming
certain levels of appreciation of the
48
Company's Common Stock), and the total number of options held by such executive
officer as of December 31, 1997. None of the other executive officers of the
Company named in the Summary Compensation Table above has been granted options.
OPTION GRANTS IN 1997
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE
SECURITIES OPTIONS VALUE AT ASSUMED
UNDERLYING GRANTED TO EXERCISE RATE OF STOCK
OPTIONS EMPLOYEES PRICE PER EXPIRATION APPRECIATION RATE
NAME GRANTED IN 1997 SHARE DATE FOR OPTION TERM(1)
----- ---------- ------------ --------- ---------- -----------------------
5% 10%
---------- ----------
Wayland R. Hicks .... . 350,000(2) 38.7% $10.00 11/13/07 $2,201,131 $5,578,099
50,000(2) 5.5% $15.00 11/13/07 64,447 546,871
50,000(2) 5.5% $20.00 11/13/07 -- 296,871
- --------------------------------------
(1) These amounts are based on calculations at hypothetical 5% and 10% compound
annual appreciation rates prescribed by the Securities and Exchange
Commission and, therefore, are not intended to forecast possible future
appreciation, if any, of the Company's Common Stock price.
(2) These options are not currently vested. These options will vest one-third
in November 1998, one-third in November 1999 and one-third in November 2000.
These options were granted pursuant to the Company's 1997 Stock Option Plan.
VALUE OF OPTIONS AT DECEMBER 31, 1997
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997
----------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ------------- --------------- -----------------
Wayland R. Hicks................ -- 450,000 -- $3,475,000
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of the
executive officers of the Company. Certain information with regard to these
agreements is set forth below.
The agreements provide for base salary to be paid at a rate per annum as
follows: Mr. Jacobs ($290,000), Mr. Hicks ($400,000), Mr. Milne ($190,000), Mr.
Nolan ($175,000), and Mr. Miner ($150,000). The base salary payable to Mr.
Hicks is payable 50% in cash and 50% in Common Stock (valued at the average
closing sales price of the Common Stock during all trading days in the calendar
quarter preceding the quarter in which the payment is made). Shares of Common
Stock issued to Mr. Hicks are subject to certain restrictions on transfer as
described under Item
49
12--"Security Ownership of Certain Beneficial Ownership and Management--Certain
Agreements Relating to Securities Held by Officers." The base salary payable to
Messrs. Jacobs and Milne is subject to possible upward annual adjustments based
upon changes in a designated cost of living index. The agreements do not provide
for mandatory bonuses. However, the agreements provide that in addition to the
compensation specifically provided for, the Company may pay such salary
increases, bonuses or incentive compensation as may be authorized by the Board
of Directors. The agreements with Messrs. Jacobs and Milne provide for each such
executive to receive an automobile allowance of at least $700 per month. The
agreement with Mr. Hicks provides for the Company to reimburse him for certain
relocation expenses up to a maximum of $100,000.
The employment agreements with the following executives provide that the
term shall automatically renew so that at all times the balance of the terms
will not be less than the period hereinafter specified with respect to such
executive: Mr. Jacobs (five years), Mr. Milne (five years), Mr. Nolan (three
years) and Mr. Miner (three years). The employment agreement with Mr. Hicks
provides for a term extending until November 2000. Under each of the agreements,
the Company or the employee may at any time terminate the agreement, with or
without cause, provided that if the Company terminates the agreement, the
Company is required to make severance payments to the extent described in the
following paragraph.
The employment agreements with Messrs. Jacobs and Milne provide that the
executive is entitled to severance benefits in the event that (i) his employment
agreement is terminated by the Company without Cause (as defined in the
employment agreement), (ii) the executive terminates his employment agreement
for Good Reason (as defined in the employment agreement) or because of a breach
by the Company of its obligations thereunder, (iii) his employment is terminated
as a result of death or (iv) the Company or the executive terminates the
employment agreement due to the disability of the executive. The severance
benefits include (i) a lump sum payment equal to five times the sum of the
executive's annual base salary at the time of termination plus the highest
annual bonus paid to the executive in the preceding three years and (ii) the
continuation of the executive's benefits for such specified period. The
employment agreement with Mr. Hicks provides that the executive is entitled to a
severance payment in the amount of $1 million in the event that his employment
agreement is terminated by the Company without Cause (as defined in the
employment agreement) or he terminates his employment for Good Reason (as
defined in the employment agreement). The employment agreements with the other
officers provide that the executive is entitled to severance benefits of up to
three months' base salary in the event that the executive's employment agreement
is terminated without Cause (as defined in the employment agreement). The
employment agreements with Messrs. Jacobs and Milne provide that if any portion
of the required severance payment to the executive constitutes an "excess
parachute payment" (as defined in Section 280G of the Internal Revenue Code of
1986, as amended (the "Code")), the executive is entitled to receive a payment
sufficient on an after-tax basis to offset any excise tax payable by the
executive pursuant to Section 4999 of the Code. Any payment constituting an
"excess parachute payment" would not be deductible by the Company.
50
Each of the agreements provides that all options at any time to be granted
to the executive will automatically vest upon a change of control of the Company
(as defined in the agreement).
Pursuant to the employment agreement with Mr. Hicks, Mr. Hicks has been
granted options to purchase an aggregate of 450,000 shares of Common Stock. For
information concerning these options, see "--Compensation of Certain Officers."
The agreement with Mr. Hicks provides that at each annual meeting of the
stockholders of the Company which occurs during the term of the agreement and at
which Mr. Hicks' term as director would be scheduled to expire, the Company will
nominate Mr. Hicks for re-election as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
At the time the employment agreements with Messrs. Jacobs and Milne were
approved by the Board of Directors, the sole members of the Board were Messrs.
Jacobs and Milne. No compensation committee interlocks with other companies have
existed.
51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
GENERAL
The table below and the notes thereto set forth as of March 11, 1998,
certain information concerning the beneficial ownership (as defined in Rule 13d-
3 under the Securities Exchange Act of 1934) of the Company's Common Stock by
(i) each director and executive officer of the Company and (ii) all executive
officers and directors of the Company as a group. Except as indicated in the
table, the Company does not know of any stockholder that is the beneficial owner
of more than 5% of the outstanding Common Stock of the Company. For purposes of
the table, each executive officer is deemed to be the beneficial owner of all
shares of Common Stock that may be acquired upon the exercise of the Warrants
held by such officer. The Warrants are currently exercisable at an exercise
price of $10.00 per share (representing an aggregate exercise price of $61.4
million, assuming the exercise of all Warrants held by executive officers).
NUMBER OF SHARES
OF COMMON STOCK PERCENT
BENEFICIALLY OF COMMON
NAME OWNED(1)(2) STOCK OWNED
- ---- ----------------- ---------------
Bradley S. Jacobs 15,000,100(3)(4) 39.1%
Wayland R. Hicks 100,000(5) *
John N. Milne 2,142,857(6) 6.3%
Michael J. Nolan 857,244(7) 2.5%
Robert P. Miner 428,571(8) 1.3%
Ronald M. DeFeo 22,000(9) *
Richard J. Heckmann. 40,000(10) *
Gerald Tsai, Jr. 310,000(11) *
All executive officers and directors as a group
(8 persons). 18,900,772(12) 47.8%
- --------------------------
* Less than 1%.
(1) Unless otherwise indicated, each person has sole investment and voting power
with respect to the shares indicated. For purposes of this table, a person
or group of persons is deemed to have "beneficial ownership" of any shares
as of a given date which such person has the right to acquire within 60 days
after such date. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on a given date,
any security which such person or persons has the right to acquire within 60
days after such date is deemed to be outstanding for the purpose of
computing the percentage ownership of such person or persons, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
52
(2) In certain cases, includes securities owned by one or more entities
controlled by the named holder.
(3) Consists of 10,000,100 outstanding shares and 5,000,000 shares issuable
upon the exercise of currently exercisable Warrants.
(4) Mr. Jacobs has certain rights relating to the disposition of the shares and
Warrants owned by each of the other officers of the Company (as described
below under "--Certain Agreements Relating to Securities Held by
Officers"). By virtue of such rights, Mr. Jacobs is deemed to share
beneficial ownership (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934) of the shares owned by the other officers of the
Company. The shares that the table indicates are owned by Mr. Jacobs do not
include the shares with respect to which Mr. Jacobs is deemed to share
beneficial ownership as aforesaid. Including such shares, Mr. Jacobs is
deemed the beneficial owner of an aggregate of 19,133,672 shares of Common
Stock (comprised of 12,790,814 outstanding shares and 6,342,858 shares
issuable upon the exercise of outstanding Warrants).
(5) Does not include 450,000 shares issuable upon the exercise of options
(which are not currently exercisable) granted to Mr. Hicks. See Item 10--
"Executive Compensation--Compensation of Certain Officers." Also does not
include any shares that the Company is required to pay Mr. Hicks as part of
his base salary as described under Item 10--"Executive Compensation--
Employment Agreements."
(6) Consists of 1,428,571 outstanding shares and 714,286 shares issuable upon
the exercise of currently exercisable Warrants.
(7) Consists of 571,529 outstanding shares and 285,715 shares issuable upon the
exercise of currently exercisable Warrants.
(8) Consists of 285,714 outstanding shares and 142,857 shares issuable upon the
exercise of currently exercisable Warrants.
(9) Consists of 2,000 outstanding shares and 20,000 shares issuable upon the
exercise of currently exercisable options.
(10) Consists of 20,000 outstanding shares and 20,000 shares issuable upon the
exercise of currently exercisable options.
(11) Consists of 290,000 outstanding shares and 20,000 shares issuable upon
exercise of outstanding options.
(12) Consists of 12,697,914 outstanding shares, 6,142,858 shares issuable upon
the exercise of currently exercisable Warrants (which Warrants provide for
an exercise price of $10.00 per share, representing an aggregate exercise
price of $61.4 million assuming exercise of all the Warrants held by
executive officers), and 60,000 shares issuable upon the exercise of
currently exercisable options.
CERTAIN AGREEMENTS RELATING TO SECURITIES HELD BY OFFICERS
Prior to the Company's initial public offering, the officers of the Company
purchased Common Stock (and in certain cases Warrants) from the Company in
private placements, as described under Item 10--"Directors and Executive
Officers of the Registrant--Capital Contributions by Officers of Directors."
All shares of Common Stock and Warrants purchased
53
by the officers of the Company prior to the Company's initial public offering
(and any shares of Common Stock acquired upon exercise of such Warrants) are
referred to as the "Private Placement Securities."
Each officer of the Company (other than Mr. Jacobs and Mr. Hicks) has
entered into an agreement with the Company and Mr. Jacobs that provides that (i)
if Mr. Jacobs sells any Private Placement Securities that he beneficially owns
in a commercial, non-charitable transaction, then Mr. Jacobs is required to use
his best efforts to sell (and has the right to sell subject to certain
exceptions) on behalf of such officer a pro rata portion of such officer's
Private Placement Securities at then prevailing prices, and (ii) except for
sales that may be required to be made as aforesaid, the officer shall not
(without the prior written consent of the Company) sell or otherwise dispose of
the Private Placement Securities owned by such officer (subject to certain
exceptions for charitable gifts). The foregoing provisions of the agreements
terminate in September or October 2002.
Each officer of the Company (other than Mr. Jacobs and Mr. Hicks) has also
agreed pursuant to such agreements that the Company, in its sole discretion, may
(i) prior to September 1, 2005, repurchase the Private Placement Securities
owned by such officer in the event that such officer breaches any agreement with
the Company or acts adversely to the interest of the Company and (ii) repurchase
such Private Placement Securities without any cause (provided that such
repurchase right without cause will lapse with respect to one-third of the
securities on the first, second and third anniversaries of the date of such
agreements). The amount to be paid by the Company in the event of a repurchase
will be equal to the amount originally paid by such officer for such securities
plus an amount representing a 10% annual return on such amount. See Item 10--
"Directors and Executive Officers of the Registrant--Capital Contributions by
Officers of Directors" for information concerning the amounts paid by such
officers of the Company for the Private Placement Securities owned by them.
Mr. Hicks has agreed that (i) he will not transfer any Private Placement
Securities purchased by him until November 1998 and (ii) he will not transfer
any shares of Common Stock that are hereafter issued to him as compensation
pursuant to his employment agreement for a one-year period following the date of
issuance. See Item 10--"Directors and Executive Officers of the Registrant--
Employment Agreements."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has from time to time purchased equipment from Terex
Corporation ("Terex") and may do so in the future. Ronald M. DeFeo, a director
of the Company, is the chief executive officer, and a director, of Terex. During
1997, the Company purchased approximately $750,000 of equipment from Terex.
54
See Item 10--"Directors and Executive Officers of the Registrant--Capital
Contributions by Officers of Directors" for information concerning the purchase
by officers of the Company of certain securities of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
Report of Independent Auditors
Consolidated Balance Sheet --December 31, 1997
Consolidated Statement of Operations for the period from
August 14, 1997 (Inception) to December 31, 1997
Consolidated Statement of Stockholders' Equity for the period
from August 14, 1997 (Inception) to December 31, 1997
Consolidated Statement of Cash Flows for the period from
August 14, 1997 (Inception) to December 31, 1997
Notes to Consolidated Financial Statements
(a)(2) Schedule II Valuation and Qualifying Accounts
Other schedules have been omitted as they are not applicable or the
required or equivalent information has been included in the financial statements
or the notes thereto.
(a)(3) Exhibits
Unless otherwise indicated, each exhibit is incorporated by reference to
the correspondingly numbered exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-39117).
Exhibit
Number Description of Exhibit
- ------ ----------------------
3(a) Amended and Restated Certificate of Incorporation of the Company, in
effect as of the date hereof
3(b) By-laws of the Company, in effect as of the date hereof
4 Form of Common Stock Certificate
10(a) $155 Million Revolving Credit Facility, dated as of December 24, 1997,
between the Company, various financial institutions, and Bank of America
National Trust and Savings Association, as agent (incorporated by
reference to the correspondingly
55
numbered Exhibit to the Registrant's Registration Statement on Form S-1,
Registration No. 333-45605)
10(b) 1997 Stock Option Plan++
10(c) Form of Warrant Agreement(1)
10(d) Form of Private Placement Purchase Agreement entered into by certain
officers of the Company in connection with purchasing shares and
warrants from the Company(2)
10(e) Form of Subscription Agreement for September 1997 Private Placement(3)
10(f) Form of Indemnification Agreement for Officers and Directors of the
Company++
10(g) Employment Agreement between the Company and Bradley S. Jacobs, dated
as of September 19, 1997++
10(h) Employment Agreement between the Company and John N. Milne, dated as
of September 19, 1997++
10(i) Employment Agreement between the Company and Michael J. Nolan, dated
as of October 14, 1997++
10(j) Employment Agreement between the Company and Robert P. Miner, dated as
of October 10, 1997++
10(k) Stock Purchase Agreement, dated as of October 24, 1997, among the
Company and the shareholders of Mercer Equipment Company+
10(l) Stock Purchase Agreement, dated as of October 24, 1997, among the
Company and the shareholders of Bronco Hi-Lift Inc.+
10(m) Stock Purchase Agreement, dated as of October 24, 1997, among the
Company and Coran Enterprises, Inc., Monterey Bay Equipment Rentals,
Inc., James M. Shade, Carol A. Shade, James M. Shade and Carol Anne
Shade, Trustees under the James M. Shade and Carol A. Shade Trust
Agreement dated September 14, 1982, Randall Shade and Corey Shade.+
10(n) Stock Purchase Agreement, dated as of October 24, 1997, among the
Company and the shareholders of Rent-It Center, Inc.+
10(o) Stock Purchase Agreement, dated as of October 20, 1997, among the
Company and A&A Tool Rentals & Sales, Inc., Joseph E. Doran, Patrick J.
Doran, and A&A Tool Rentals & Sales, Inc. Employee Stock Ownership
Plan.+
10(p) Agreement and Plan of Merger, dated as of October 23, 1997, among the
Company, UR Acquisition Subsidiary, Inc. and J&J Rental Services, Inc.+
10(q) Convertible Note dated October 24, 1997
10(r) Subscription Agreement dated November 14, 1997, between Wayland R.
Hicks and the Company
10(s) Agreement dated November 14, 1997, between the Company and Wayland R.
Hicks++
10(t) Purchase Agreement, dated as of January 22, 1998, among the Company,
United Rentals of Canada, Inc., Access Rentals, Inc., Reinhart Leasing,
LLC and the Stockholders of Access Rentals, Inc. (incorporated by
reference to Exhibit 10(t) to the Registrant's Registration Statement on
Form S-1, Registration No. 333-45605)+
10(u) Stock Purchase Agreement, dated as of January 13, 1998, among the
Company, Mission Valley Rentals, Inc., Charles F. Journey and Connie J.
Journey (incorporated
56
by reference to Exhibit 10(u) to the Registrant's Registration Statement
on Form S-1, Registration No. 333-45605)+
10(v) Stock Purchase Agreement, dated as of January 22, 1998, among the
Company, United Rentals of Canada, Inc. and BNR Equipment Limited and
Affiliates (incorporated by reference to Exhibit 10(v) to the
Registrant's Registration Statement on Form S-1, Registration No. 333-
45605)+
10(w) Form of U.S. Purchase Agreement for the public offering completed by the
Company on March 11, 1998 (incorporated by reference to Exhibit 1(a) to
the Registrant's Registration Statement on Form S-1, Registration No.
333-45605)
10(x) Form of International Repurchase Agreement for the public offering
completed by the Company on March 11, 1998 (incorporated by reference to
Exhibit 1(b) to the Registrant's Registration Statement on Form S-1,
Registration No. 333-45605)
10(y) Form of U.S. Purchase Agreement for the Company's initial public
offering (incorporated by reference to Exhibit 1(a) to the Registrant's
Registration Statement on Form S-1, Registration No. 333-39117)
10(z) Form of International Purchase Agreement for the Company's initial
public offering (incorporated by reference to Exhibit 1(b) to the
Registrant's Registration Statement on Form S-1, Registration No. 333-
39117)
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 to the Registrant's Registration Statement on Form S-1, Registration
No. 333-45605)
- ------------------------------------------
+ Filed without exhibits and schedules (to be provided supplementally upon
request of the Commission).
++ This document is a management contract or compensatory plan or arrangement
(1) The Company issued a warrant in this form to the following officers of the
Company (or in certain cases to an entity controlled by such officer) for
the number of shares indicated: Bradley S. Jacobs (5,000,000); John N. Milne
(714,286); Michael J. Nolan (285,715); Robert P. Miner (142,857); Sandra E.
Welwood (50,000); Joseph J. Kondrup, Jr. (50,000); Kai E. Nyby (50,000); and
Richard A. Volonino (50,000).
(2) Each officer of the Company who purchased securities of the Company prior
to December 18, 1997, other than Messrs. Jacobs and Hicks, entered into a
Private Placement Purchase Agreement in this form (modified, in the case of
Messrs. Barker and Imig, to reflect the fact that said officers did not
purchase warrants) with respect to the shares of Common Stock and warrants
purchased by such officer from the Company as described under Item 10--
"Directors and Executive Officers of the Registrant--Capital Contributions
by Officers and Directors."
(3) Each purchaser of shares of Common Stock in the Company's September 1997
private placement entered into a Subscription Agreement in this form with
respect to the shares purchased.
(b) Reports on Form 8-K
57
No reports on Form 8-K were filed by the registrant during the fourth
quarter of 1997.
58
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.
UNITED RENTALS, INC.
Date: March 12, 1998 By: Michael J. Nolan
-----------------------------
Michael J. Nolan
Chief Financial Officer
Pursuant to the requirements of the Securities 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
- ---------- ----- ----
Bradley S. Jacobs Chairman of the Board March 12, 1998
- -------------------
Bradley S. Jacobs of Directors and Chief
Executive Officer
(Principal Executive Officer)
John N. Milne Vice Chairman of the Board March 12, 1998
- ------------------- of Directors, Chief
John N. Milne Acquisition Officer,
Secretary
and Director
Michael J. Nolan Chief Financial Officer March 12, 1998
- ------------------- (Principal Financial Officer)
Michael J. Nolan
Sandra E. Welwood Vice President, Corporate March 12, 1998
- --------------------- Controller
Sandra E. Welwood (Principal Accounting Officer)
59
Ronald M. DeFeo Director March 12, 1998
- ----------------------
Ronald M. DeFeo
Richard J. Heckmann Director March 12, 1998
- ----------------------
Richard J. Heckmann
Gerald Tsai, Jr. Director March 12, 1998
- ----------------------
Gerald Tsai, Jr.
60