UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-13663
UNITED RENTALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 06-1493538
- --------------------------- ------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Four Greenwich Office Park, Greenwich, Connecticut 06830
- -----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 622-3131
--------------
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.
X Yes No
----- -----
As of May 11, 1998 there were 33,623,715 shares of the registrant's Common
stock, $.01 par value outstanding.
UNITED RENTALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
INDEX
PAGE
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PART I FINANCIAL INFORMATION
Item 1 Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 (unaudited)................................. 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 1998 (unaudited)........................... 4
Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 1998,
(unaudited)....................................................... 5
Consolidated Statement of Cash Flows for the Three
Months Ended March 31, 1998 (unaudited)........................... 6
Notes to Unaudited Consolidated Financial Statements.............. 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 12
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds......................... 20
Item 6 Exhibits and Reports on Form 8-K.................................. 21
Signatures........................................................ 22
UNITED RENTALS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31 DECEMBER 31
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents $ 54,785,007 $ 68,607,528
Accounts receivable, net of
allowance for doubtful accounts
of $3,813,000 in 1998 and
$1,161,000 in 1997 31,443,000 7,494,636
Inventory 14,933,813 3,827,446
Prepaid expenses and other assets 10,006,519 2,966,822
Rental equipment, net 140,743,703 33,407,561
Property and equipment, net 11,900,686 2,272,683
Intangible assets, net of
accumulated amortization
of $1,235,000 in 1998 and
$241,000 in 1997 186,314,455 50,533,736
------------ ------------
$450,127,183 $169,110,412
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 28,149,318 $ 5,697,830
Debt 26,494,068 1,074,474
Deferred income taxes 544,820 198,249
Accrued expenses and other
liabilities 10,305,699 4,409,828
------------ ------------
Total liabilities 65,493,905 11,380,381
Commitments and contingencies
Stockholders' equity:
Preferred stock--$.01 par value,
5,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock--$.01 par value,
75,000,000 shares authorized in
1998 and 1997,33,313,708 in 1998
and 23,899,119 in 1997 shares
issued and outstanding 333,137 238,991
Additional paid-in capital 381,629,839 157,457,418
Retained earnings 2,671,973 33,622
Accumulated translation adjustments (1,671) --
------------ ------------
Total stockholders' equity 384,633,278 157,730,031
------------ ------------
$450,127,183 $169,110,412
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
Revenues:
Equipment rentals $26,779,850
Sales of rental equipment 2,983,191
Sales of new equipment, merchandise and other
revenues 9,427,125
-----------
Total revenues 39,190,166
Cost of revenues:
Cost of equipment rentals, excluding depreciation 11,221,504
Depreciation of rental equipment 4,583,832
Cost of rental equipment sales 1,639,431
Cost of new equipment and merchandise sales
and other operating costs 7,591,891
-----------
Total cost of revenues 25,036,658
-----------
Gross profit 14,153,508
Selling, general and administrative expenses 7,806,931
Non-rental depreciation and amortization 1,086,424
-----------
Operating income 5,260,153
Interest expense 1,172,718
Other (income) expense (380,703)
-----------
Income before provision for income taxes 4,468,138
Provision for income taxes 1,829,787
-----------
Net income $ 2,638,351
===========
Basic earnings per share $0.10
===========
Diluted earnings per share $0.09
===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
COMMON STOCK
------------------------
NUMBER ADDITIONAL ACCUMULATED
OF PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS
----------- ----------- ------------ ----------- ------------
Balance,
December 31, 1997 23,899,119 $238,991 $157,457,418 $ 33,622 --
Issuance of
common stock 9,537,375 95,374 223,971,193
Translation
adjustments $ (1,671)
Conversion of
convertible note 14,814 148 199,852
Cancellation of
common stock (137,600) (1,376) 1,376
Net income 2,638,351
----------- ----------- ------------ ----------- ------------
Balance,
March 31, 1998 33,313,708 $ 333,137 $381,629,839 $2,671,973 $ (1,671)
=========== =========== ============ =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
UNITED RENTALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,638,351
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amortization 5,670,256
Gain on sale of rental equipment (1,343,760)
Deferred taxes 1,422,898
Changes in operating assets and
liabilities:
Accounts receivable (474,469)
Inventory (2,918,253)
Prepaid expenses and other assets (4,917,023)
Accounts payable 9,560,512
Accrued expenses and
other liabilities (2,064,894)
-------------
Net cash provided by operating
activities 7,573,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of rental equipment (12,860,888)
Purchases of property and equipment (5,315,132)
Proceeds from sales of rental
equipment 2,983,191
In-process acquisition costs (758,771)
Purchases of other companies (138,170,090)
-------------
Net cash used in investing
activities (154,121,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net of issuance costs 206,456,306
Proceeds from debt 149,576,408
Repayments of debt (222,652,100)
Payment of debt financing costs (655,063)
-------------
Net cash provided by financing
activities 132,725,551
-------------
Net decrease in cash and
cash equivalents (13,822,521)
Cash and cash equivalents at
beginning of period 68,607,528
-------------
Cash and cash equivalents at
end of period $ 54,785,007
=============
The accompanying notes are an integral part of these consolidated financial
statements.
6
UNITED RENTALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CON'T
THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
Supplemental disclosure of cash flow
information:
Cash paid during the period:
Interest $ 1,111,819
=============
Income taxes $ 106,500
=============
Supplemental disclosure of non cash
investing and financing activities:
During the period ended March 31, 1998
a convertible note in the principal
amount of $200,000 was converted into
14,814 shares of common stock.
The Company acquired the net assets
and assumed certain liabilities
other companies as follows:
Assets, net of cash acquired 279,808,752
Liabilities assumed (123,821,390)
Less:
Amounts paid in common stock and
warrants (17,817,272)
-------------
Net cash paid $ 138,170,090
=============
The accompanying notes are an integral part of these consolidated financial
statements.
7
UNITED RENTALS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION
The Consolidated Financial Statements of United Rentals, Inc. and its
subsidiaries (the "Company") included herein are unaudited and, in the opinion
of management, such financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to a fair statement of the
results of the interim period presented. Interim financial statements do not
require all disclosures normally presented in year-end financial statements,
and, accordingly, certain disclosures have been omitted. Results of operations
for the three month period ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998. The
Consolidated Financial Statments included herein should be read in conjunction
with the Company's Consolidated Financial Statements and related Notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS NO.
130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a primary financial statement. The Company adopted SFAS No. 130 during the
period ended March 31, 1998. The adoption of SFAS No. 130 did not have a
material effect on the consolidated financial position, results of operations or
cash flows of the Company. SFAS No. 131 establishes a new method by which
companies will report operating segment information. This method is based on
the manner in which management organizes the segments within a company for
making operating decisions and assessing performance. The Company continues to
evaluate the provisions of SFAS No. 131 and, upon adoption, the Company may
report operating segments. The Company is required to adopt SFAS No. 131 by
December 31, 1998.
2. COMMON STOCK
On March 11, 1998, the Company completed a public offering of
8,625,000 shares of Common Stock (the "Offering"). The net proceeds to the
Company from the Offering were approximately $207.4 million (after deducting the
underwriting discount and estimated offering expenses). The Company used $132.7
million of
8
the net proceeds from the Offering to repay all outstanding indebtedness under
the Company's credit facility and used the balance of such net proceeds for
acquisitions.
The purchase agreement relating to the acquisition of one company
acquired provides that the stock consideration paid by the Company in connection
with such acquisition is subject to adjustment based upon the trading prices of
the common stock during the 60-day period which commenced December 18, 1997. In
accordance with such provisions, the Company canceled 137,600 shares of common
stock issued by the Company in connection with such acquisition.
3. ACQUISITIONS
During the three months ended March 31, 1998, the Company completed
the acquisition of 19 equipment rental companies having an aggregate of 66
rental locations in 16 states and Ontario, Canada.
The aggregate consideration paid by the Company for the acquisitions
completed during the three months ended March 31, 1998 was $165.0 million and
consisted of approximately $147.2 million in cash, 912,375 shares of Common
Stock and warrants to purchase an aggregate of 30,000 shares of Common Stock.
In addition, the Company repaid or assumed outstanding indebtedness of the
companies acquired during the three months ended March 31, 1998 in the aggregate
amount of $98.5 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 being limited to (i) Cdn$4.0 million with respect
to one acquisition and (ii) an amount based on the results of a single store
with respect to the other acquisition).
These acquisitions have been accounted for as purchases and,
accordingly, the results of their operations have been included in the Company's
results of operations from their respective acquisition dates. The purchase
prices have been allocated to the assets acquired and liabilities assumed based
on their respective fair values at their respective acquisition dates.
The Company has not completed its valuation on all of its purchases
and the purchase price allocations are subject to change when additional
information concerning asset and liability valuations are completed.
The following table summarizes, on an unaudited pro forma basis, the combined
results of operations of the Company for the three months ended March 31, 1998
as though each acquisition described above was made on January 1, 1998.
9
THREE MONTHS ENDED
MARCH 31, 1998
------------------
Revenues $ 46,616,686
Net income 2,279,657
Basic earnings per share 0.09
Diluted earnings per share 0.07
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. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Numerator:
Net income $ 2,638,351
==================
Denominator:
Denominator for basic earnings
per share--weighted-average shares 26,278,462
Effect of dilutive securities:
Employee stock options 434,402
Warrants 3,731,044
------------------
Dilutive potential common shares
Denominator for diluted earnings
per share--adjusted weighted-
average shares 30,443,908
==================
Basic earnings per share $ 0.10
==================
Diluted earnings per share $ 0.09
==================
10
5. SUBSEQUENT EVENTS
Subsequent to March 31, 1998, the Company completed the acquisition of 14
equipment rental companies consisting of 35 rental sites. The aggregate
consideration paid by the Company for these acquisitions was $92.5 million and
consisted of approximately $85.9 million in cash, and 307,906 shares of Common
Stock. The Company also agreed in connection with one of the acquisitions to
pay the former owner additional amounts based upon specified future revenues not
to exceed $500,000. The Company funded a portion of the cash consideration for
these acquisitions with cash on hand and the balance with borrowings under the
Company's revolving credit facility.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion reviews the Company's operations for three months
ended March 31, 1998 and should be read in conjunction with the unaudited
Consolidated Financial Statements and related Notes thereto of the Company
included herein and the Consolidated Financial Statements and related Notes
thereto included in the Company's 1997 Annual Report on Form 10-K.
The following discussion includes statements that are forward-looking in
nature. These statements are generally identified by the inclusion of phrases
such as "the Company expects," "the Company anticipates," "the Company
believes," "the Company estimates," and other phrases of similar meaning.
Whether such statements ultimately prove to be accurate depends upon a variety
of factors that may affect the business and operations of the Company. Certain
of these factors are discussed under the caption Item 1 - "Business-Factors that
May Influence Results and Accuracy of Forward-Looking Statements" included in
the Company's 1997 Annual Report of Form 10-K. The information in such Annual
Report under such caption is incorporated by reference herein.
General
- -------
The Company commenced equipment rental operations in October 1997 by
acquiring six established equipment rental companies and acquired 33 additional
companies in the first five months of 1998 (through May 14, 1998). Of such
acquisitions, 19 were completed in the first quarter of 1998. Each of the
acquisitions completed by the Company to date has been accounted for as a
purchase.
The Company primarily derives revenues from the following sources: (i)
equipment rental (including additional fees that may be charged for equipment
delivery, fuel, repair of rental equipment, and damage waivers), (ii) the sale
of rental equipment, (iii) the sale of new equipment, and (iv) the sale of
related merchandise and parts.
Cost of operations consists primarily of depreciation costs associated with
rental equipment, the cost of repairing and maintaining rental equipment, the
cost of rental and new equipment sold, personnel costs, occupancy costs,
supplies, and expenses related to information systems. The Company records
rental equipment expenditures at cost and depreciates equipment using the
straight-line method over the estimated useful life (which ranges from 2 to 10
years), after giving effect to an estimated salvage value of 0% to 10% of cost.
Selling, general and administrative expense includes
12
advertising and marketing expenses, management salaries, and clerical and
administrative overhead.
Non-rental depreciation and amortization includes (i) depreciation expense
associated with equipment that is not offered for rent (such as vehicles,
computers and office equipment) and amortization expense associated with
leasehold improvements and (ii) the amortization of intangible assets. The
Company's intangible assets include goodwill, which represents the excess of the
purchase price of acquired companies over the estimated fair market value of the
assets acquired.
Consideration Paid For Acquisitions in First Quarter of 1998
- ------------------------------------------------------------
The aggregate consideration paid by the Company for the acquisitions
completed during the three months ended March 31, 1998 was $165.0 million and
consisted of approximately $147.2 million in cash, 912,375 shares of Common
Stock and warrants to purchase an aggregate of 30,000 shares of Common Stock.
In addition, the Company repaid or assumed outstanding indebtedness of the
companies acquired during the three months ended March 31, 1998 in the aggregate
amount of $98.5 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 being limited to (i) Cdn$4.0 million with respect
to one acquisition and (ii) an amount based on the results of a single store
with respect to the other acquisition).
Results of Operations
- ---------------------
Three months ended March 31, 1998
Revenues. Total revenues were $39.2 million for the three months ended
March 31, 1998. Equipment rental revenues accounted for 68.3% of such revenues.
Gross Profits. For the three months ended March 31, 1998 the gross profit
margin was (i) 41.0% from equipment rentals, (ii) 45.0% from sales of rental
equipment and (iii) 19.5% from sales of new equipment, merchandise and other
revenues.
Selling, General and Administrative Expense. For the three months ended
March 31, 1998 selling, general and administrative expense was $7.8 million or
19.9% of total revenues.
Non-rental Depreciation and Amortization. For the three months ended March
31, 1998 non-rental depreciation and amortization was $1.1 million or 2.8% of
total revenues.
Interest Expense. For the three months ended March 31, 1998
13
interest expense was $1.2 million. Interest expense principally related to
borrowings made under the Company's credit facility in order to fund a portion
of the purchase price of the acquisitions completed in 1998.
Income Taxes. The Company's effective income tax rate for the three months
ended March 31, 1998 was 41.0%.
Liquidity and Capital Resources
- -------------------------------
The Company completed an initial public offering ("IPO") of 8,050,000
shares of its Common Stock ("Common Stock") in December 1997 and completed a
second public offering of 8,625,000 shares of Common Stock (the "March
Offering") in March 1998. The estimated aggregate net proceeds to the Company
(after deducting the underwriting discounts and estimated offering expenses)
from such offerings were approximately $307.0 million ($ 99.6 million from the
IPO and $207.4 million from the March Offering). The Company used (i)
approximately $132.7 million of such net proceeds to repay indebtedness under
the Company's Credit Facility, (ii) approximately $90.3 million of such net
proceeds to fund the cash consideration paid for acquisitions completed in the
first quarter of 1998 and (iii) the balance of such net proceeds to fund a
portion of the cash consideration paid for acquisitions completed after the
first quarter of 1998. The increase in stockholders' equity at March 31, 1998
compared with December 31, 1997, primarily reflects the March Offering and the
issuance of an aggregate of 912,375 shares of Common Stock during the first
quarter of 1998 as part of the consideration for acquisitions.
The Company had cash-on-hand at the beginning of 1998 of approximately
$68.6 million, representing the net proceeds of the IPO not used to repay
indebtedness. During the first three months of 1998, the Company (i) generated
cash from operations of approximately $7.6 million, (ii) generated cash from the
sales of rental equipment of approximately $3.0 million and (iii) had net cash
from financing activities of approximately $132.7 million (principally
reflecting the March Offering). The Company used cash during the first three
months of 1998 for acquisitions (approximately 138.2 million), to purchase
rental equipment (approximately $12.9 million) and to purchase property and
equipment related to the Company's information technology system (approximately
$5.3 million). These acquisitions and purchases accounted for (a) the increase
in accounts receivable, inventory, rental equipment, property and equipment, and
intangible assets at March 31, 1998 compared with December 31, 1997, (b) the
increase in accounts payable, debt and accrued expenses and other liabilities at
March 31, 1998 compared with December 31, 1997 and (c) the decrease in cash at
March 31, 1998 compared with December 31, 1997.
14
The increase in prepaid expenses and other assets at March 31, 1998
compared with December 31, 1997 primarily reflected (i) and increase in prepaid
expenses relating to the Company's operations, (ii) deferred tax assets recorded
in connection with acquisitions and (iii) certain direct costs relating to
potential or pending acquisitions that were capitalized.
The Company has a Credit Facility with a group of financial institutions,
which enables the Company to borrow up to $300 million on a revolving credit
basis and permits a Canadian subsidiary of the Company (the "Canadian
Subsidiary") to directly borrow up to $40 million under the Credit Facility
(provided that the aggregate borrowings of the Company and the Canadian
Subsidiary do not exceed $300 million). Up to $10 million of the Credit
Facility is available in the form of letters of credit. The Credit Facility
terminates on March 30, 2001, at which time all outstanding indebtedness is due.
The amount of indebtedness outstanding under the Credit Facility was $16.9
million at March 31, 1998 and $99.4 million at May 14, 1998.
Borrowings by the Company under the Credit Facility accrue interest, at the
Company's option, at either (a) the Base Rate (which is equal to the greater of
(i) the Federal Funds Rate plus 0.5% and (ii) Bank of America's reference rate)
plus a margin ranging from 0% to 0.25% per annum or (b) the Eurodollar Rate
(which for borrowings by the Company is equal to Bank of America's reserve
adjusted eurodollar rate) plus a margin ranging from 1.125% to 2.125% per annum.
Borrowings by the Canadian Subsidiary under the Credit Facility accrue interest,
at such subsidiary's option, at either (x) the Prime Rate (which is equal to
Bank of America Canada's prime rate) plus a margin ranging from 0% to 0.25% per
annum, (y) the BA Rate (which is equal to Bank of America Canada's BA Rate) plus
a margin ranging from 1.125% to 2.125% per annum or (z) the Eurodollar Rate
(which for borrowing by the Canadian Subsidiary is equal to Bank of America
Canada's reserve adjusted eurodollar rate) plus a margin ranging from 1.125% to
2.125% per annum. The Company is also required to pay the banks an annual
facility fee equal to 0.375% of the banks' $300 million aggregate lending
commitment under the Credit Facility.
The Credit Facility contains certain covenants that require 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
15
other things, (i) incur additional indebtedness, (ii) permit liens to attach to
its assets, (iii) enter into operating leases requiring payments in excess of
specified amounts, (iv) declare or pay dividends or make other restricted
payments with respect to its equity securities (including the Common Stock) or
subordinated debt, (v) sell assets, (vi) make acquisitions unless certain
financial conditions are satisfied, (vii) invest more than a specified amount in
foreign subsidiaries or have more than a specified amount of its consolidated
assets owned by foreign subsidiaries, and (viii) engage in any line of business
other than the equipment rental industry. The Credit Facility provides that the
failure by any two of Messrs. Jacobs, Milne, Nolan and Miner to continue to hold
executive positions with the Company for a period of 30 consecutive days
constitutes an event of default under the Credit Facility unless replacement
officers satisfactory to the lenders are appointed. The Credit Facility is also
subject to other customary events of default. The obligations of United
Rentals, Inc. under the Credit Facility are secured by substantially all of its
assets, the stock of its United States subsidiaries and a portion of the stock
of a Canadian subsidiary. The obligations of the Canadian Subsidiary under the
Credit Facility are guaranteed by United Rentals, Inc. and secured by
substantially all of the assets of the Canadian Subsidiary and the stock for the
subsidiaries of the Canadian Subsidiary.
The Company's principal existing source of cash are (i) borrowings under
the Credit Facility and (ii) 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, and (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.
The Company estimates that equipment expenditures for its existing
locations will be in the range of $65 million to $70 million over the next 12
months. In addition, the Company expects that it will be required to make
equipment expenditures in connection with new acquisitions. The Company cannot
quantify at this time the amount of such equipment expenditures.
16
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 is seeking to acquire companies
of varying size,including the acquisition of smaller companies to complement
existing or anticipated locations and combinations with relatively large
companies that have an established presence in one or more regions. The Company
expects that cash required for future acquisitions and start-up locations will
be provided by a combination of borrowings under the Credit Facility, cash
generated from operations, and future debt or equity financings. There can be no
assurance that any such future debt or equity financings will be available or,
if available, will be on terms satisfactory to the Company.
The Company is in the process of developing three start-up locations. The
Company estimates that the aggregate costs associated with such start-up
locations will be in the range of $2.5 million to $3.5 million (including
expenditures of approximately $250,000 incurred to date). The Company believes
that cash generated from operations and borrowings under the Credit Facility
will be sufficient to fund these costs without additional debt or equity
financings.
The Company has commenced an offering of $250 million of Senior
Subordinated Notes. These securities have not been registered under the
Securities Act of 1933 (the "Act") and, accordingly, may not be offered or sold
in the United States absent registration or an applicable exemption from the
registration requirements of the Act. The Company expects to use the net
proceeds from this offering, if completed, to repay the outstanding indebtedness
under the Credit Facility and for future acquisitions, capital expenditures and
general corporate purposes. There can be no assurance, however, that the
Company will complete this offering in the near term, if at all, or that the
size of the offering will not change.
The Company has recently installed a new integrated information technology
system. The new system is currently operational at 83 of the Company's existing
locations, and the Company expects that the system will be operational at the
remaining existing locations by June 1998. The cost of installing such system
was approximately $7.4 million. The Company's software vendors have advised the
Company that the system is year 2000 compliant.
Fluctuations in Operating Results
- ---------------------------------
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
17
(with rental activity tending to be lower in the winter); changes in general
economic conditions in the Company's markets; the timing of acquisitions and the
opening of start-up locations and related costs; the effect of the integration
of acquired businesses and start-up locations; the timing of expenditures for
new equipment and the disposition of used equipment; and price changes in
response to competitive factors.
The Company is continually involved in the investigation and evaluation of
potential acquisitions. In accordance with generally accepted accounting
principles, the Company capitalizes certain direct out-of-pocket expenditures
(such as legal and accounting fees) relating to potential or pending
acquisitions. Indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, are expensed as
incurred. The Company's policy is to charge against earnings any capitalized
expenditures relating to any potential or pending acquisition that the Company
determines will not be consummated. There can be no assurance that the Company
in future periods will not be required to incur a charge against earnings in
accordance with such policy, which charge, depending upon the magnitude thereof,
could adversely affect the Company's results of operations.
The Company will be required to incur significant start-up expenses in
connection with establishing each start-up location. Such expenses may include,
among others, pre-opening expenses related to setting up the facility, training
employees, installing information systems and marketing. The Company expects
that in general start-up locations will initially operate at a loss or at less
than normalized profit levels. Consequently, the opening of a start-up location
may negatively impact the Company's margins until the location achieves
normalized profitability.
There may be a lag between the time that the Company purchases new
equipment and begins to incur the related depreciation and interest expenses and
the time that the equipment begins to generate revenues at normalized rates. As
a result, the purchase of new equipment, particularly equipment purchased in
connection with expanding and diversifying the Company's rental equipment, may
periodically reduce margins.
General Economic Conditions And Inflation
- -----------------------------------------
The Company's operating results may be adversely affected by (i) changes in
general economic conditions, including national, regional and local changes in
construction and industrial activity, (ii) increases in interest rates that may
result in a higher cost of capital to the Company, or (iii) adverse weather
conditions that may decrease construction and other industrial activity.
Although the Company cannot accurately anticipate the
18
effect of inflation on its operations, the Company believes that inflation has
not had, and is not likely in the foreseeable future to have, a material impact
on its results of operations.
Recently Issued Accounting Standards
- ------------------------------------
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." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a
primary financial statement. The Company adopted SFAS No. 130 during the period
ended March 31, 1998. The adoption of SFAS No. 130 did not have a material
effect on the consolidated financial position results of operations or cash
flows of the Company. SFAS No. 131 establishes a new method by which companies
will report operating segment information. This method is based on the manner in
which management organizes the segments within a company for making operating
decisions and assessing performance. The Company continues to evaluate the
provisions of SFAS No. 131 and, upon adoption, the Company may report operating
segments. The Company is required to adopt SFAS No. 131 by December 31, 1998.
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PART II OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
Sale of Unregistered Securities
Set forth below is certain information concerning sales by the Company of
unregistered securities during the first quarter of 1998. The issuances by the
Company of the securities sold in the transaction referenced below were not
registered under the Securities Act of 1933, pursuant to the exemption
contemplated by Section 4(2) thereof for transactions not involving a public
offering.
SHARES
MONTH ISSUED
- ----- ----------------------
January 804,875
March 122,314
----------------------
Total 927,189
======================
Of the shares indicated above, (i) 912,375 shares were issued as partial
consideration in connection with six acquisitions and (ii) 14,814 shares were
issued upon conversion of a convertible note.
Use of Proceeds From IPO
At December 31, 1997, the remaining net proceed from the Company' initial
public offering was $65.8 million. During the first quarter of 1998, the
Company used approximately $557,000 of such net proceeds to pay expenses of the
offering and used the balance for acquisitions. See Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Consideration Paid for Acquisitions in First Quarter of 1998". None of the
payments described in this paragraph represented a direct or indirect payment
to (i) directors, officers or general partners of the Company or to their
associates, (ii) persons owning 10% or more of any class of equity securities of
the Company or (iii) affiliates of the Company.
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(1) Exhibit 10.1 - Second Amended and Restated Credit Agreement
dated as of March 30, 1998, between the Company, various
financial institutions, Bank of America Canada, as Canadian
agent, and Bank of America National Trust and Savings
Association, as U.S. agent.
(2) Exhibit 10.2 - Form of Amendment No. 1 to Private Placement
Purchase Agreement (1).
(3) Exhibit 27 - Financial Data Schedule
(4) Exhibit 99.1 - Information that appears in the Company's Report
on Form 10-K for the year ended December 31, 1997 under
Item 1 -"Business - Factors that May Influence Future Results
and Accuracy of Forward - Looking Statements."
__________________
(1) The Company entered into an agreement in this form with each of Mr. Milne,
Mr. Nolan and Mr. Miner. This agreement amends the agreement filed as
Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
(b) Reports on Form 8-K:
(1) Form 8-K and Form 8-K/A - Dated January 13, 1998, Items 5 and
7. The Form 8-K/A includes (a) financial statements for the
following acquired companies (i) Access Rentals, Inc. and
subsidiary and affiliate, (ii) BNR Group of Companies, and
(iii) Mission Valley Rentals, Inc.; and (b) pro forma
consolidated financial statements of the Company.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNITED RENTALS, INC.
Dated: May 14, 1998 By: Michael J. Nolan
------------ --------------------
Michael J. Nolan
Chief Financial Officer
(Principal Financial Officer)
Dated: May 14, 1998 By: Sandra E. Welwood
------------ --------------------
Sandra E. Welwood
Vice President,
Corporate Controller
(Chief Accounting Officer)
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